Future Dividends Research Articles

Deriving equity risk premium using dividend futures

In this paper I present a simple stock price decomposition model using the dividend discount model and dividend futures. The main contribution of this paper is the use of dividend futures which represent the risk-adjusted expectations of future dividends. This allows for the calculation of the implied equity risk premium and the decomposition of stock price movements into individual components. Due to the use of daily market data, this method can take into account the structural changes associated with falling interest rates and the Covid-19 pandemic. I empirically show the risk premium development of the S&P 500 Index and Euro Stoxx 50 Index in the last decade.

The effect of annual reports tone complexity on firms' dividend policy: evidence from the United States

PurposeThis paper investigates the impact of annual reports complexity (associated with tone complexity) on dividend policy and value of dividend policy.Design/methodology/approachThis paper uses the variable complexity provided by the textual analytics software (Diction 7.0) as the proxy for annual reports' tone complexity. The data covered non-financial American firms from years 2011–2019. The pooled ordinary least squares (OLS) regression and the instrumental variable regression are used to test the study’s arguments.FindingsThe findings suggest that the signaling theory of dividends holds in the United States. Firms with more complex annual reports tend to distribute more dividends, mainly in environment of high information. When information asymmetry is high, managers would use dividends as a tool to mitigate information asymmetry. Furthermore, the findings suggest that dividend policy has a stronger impact on firm value, especially when the tones of annual reports are highly complex. These findings support the previous results, namely, that managers would opt for dividend policy as a signaling tool for its positive impact on firm value. The results are robust to potential endogeneity issues and alternative proxies for both dividend policy and information asymmetry.Practical implicationsThe results demonstrate that the dividends' signaling theory holds in the United States, where the findings cannot be generalized to all markets; However, the findings of this research can be of use to potential and current investors, users of annual reports and decision makers as well.Originality/valueThe paper highlights the effect of the tone complexity of annual reports (using 10K text analytics) on the value of dividend policy and dividend policy itself in a developed economy. Understanding this relation will enable stakeholders to forecast future dividends, choose more appropriate valuation methods and hence restore investors' faith.

Accounting Information and Dividend Pay-Out in Nigerian Listed Oil and Gas Firms

Dividend pay-out policy plays an important role in firm’s decision to determine the amount to be declared as dividend. The study aim to analyse the impact of accounting information on the dividend pay-out of listed oil and gas firms in the Nigerian Stock Exchange. The study employs the use of secondary data obtained from annual reports and accounts. The population of the study is ten oil and gas firms listed in the Nigeria Stock Exchange, the sample of the study ten oil and gas firms and the period covered by the study is from 2015-2019. The data is panel in nature and regression was used to analyse the data. The result shows profitability is having a positive and significant relationship on dividend pay-out of the listed oil and gas firm in Nigeria. Whereas, liquidity revealed a negative and insignificant relationship. On the other hand, firm size was found to be negative and significant influence on the listed oil and gas firms in Nigeria. Finally, a positive and insignificant relation was found respectively. This implies that individual investor who prefers high dividend should invest on profitable company, while management should announce the dividend after considering their profit. Also, Investors who are trying to predict future dividends will therefore need to get some relevance and useful information on the firm to invest in. Furthermore, Managers may also use the study when determining the dividend pay-out since they will be given relevance information for decision making.

Improved Dividend Estimation from Intraday Quotes.

Liquid financial markets, such as the options market of the S&P 500 index, create vast amounts of data every day, i.e., so-called intraday data. However, this highly granular data is often reduced to single-time when used to estimate financial quantities. This under-utilization of the data may reduce the quality of the estimates. In this paper, we study the impacts on estimation quality when using intraday data to estimate dividends. The methodology is based on earlier linear regression (ordinary least squares) estimates, which have been adapted to intraday data. Further, the method is also generalized in two aspects. First, the dividends are expressed as present values of future dividends rather than dividend yields. Second, to account for heteroscedasticity, the estimation methodology was formulated as a weighted least squares, where the weights are determined from the market data. This method is compared with a traditional method on out-of-sample S&P 500 European options market data. The results show that estimations based on intraday data have, with statistical significance, a higher quality than the corresponding single-times estimates. Additionally, the two generalizations of the methodology are shown to improve the estimation quality further.

Ruin and Dividend Measures in the Renewal Dual Risk Model

In this manuscript we consider the dual risk model with financial application, where the random gains occur under a renewal process. We particularly work the Erlang(n) case for common distribution of the inter-arrival times, from there it is easy to understand that our method or procedures can be generalised to other cases under the matrix-exponential family case. We work several and different problems involving future dividends and ruin. We also show that our results are valid even if the usual income condition is not satisfied. In most known works under the dual model, the main target under study have been the calculation of expected discounted future dividends and optimal strategies, where the dividend calculation have been done on aggregate. We can find works, at first using the classical compound Poisson model, then some examples of other renewal Erlang models. Knowing that ruin is ultimately achieved, we find important that dividends should be evaluated on an individual basis, where the early dividend contribution for the aggregate are of utmost importance. From our calculations we can really see how much important is the contribution of the first dividend. Afonso et al. (Insur Math Econ, 53(3), 906–918, 2013) had worked similar problems for the classical compound Poisson dual model. Besides that we find explicit formulae for both the probability of getting a dividend and the distribution of the amount of a single dividend. We still work the probability distribution of the number of gains to reach a given upper target (like a constant dividend barrier) as well as for the number of gains down to ruin. We complete the study working some illustrative numerical examples that show final numbers for the several problems under study.

Option pricing under a Markov-modulated Merton jump-diffusion dividend

In this paper, the valuation of European option is investigated when the discrete dividends are described by Markov-modulated Merton jump-diffusion process. According to the dividend discount theory, we regard the stock price as the net present value of all future dividends. The regime switching Esscher transform is applied to determine a risk-neutral measure. The closed form solution of European option is obtained under the condition that the dividend payments are announced in advance. Numerical simulations for the European call option prices are provided.

Does stock trading volume signal future dividends? Evidence from Iberian firms

In the study we test the theory that financial markets can provide relevant information about forthcoming corporate events. More specifically, we examine the ability of trading volume to predict dividend changes in a sample of 880 dividend announcements from Iberian firms for the period 2005–2018. We document evidence of a positive and significant relation between unusually high volume and subsequent dividend changes. The results based on panel data regressions with control variables for firm size, profitability measures, volatility and average turnover using both pooled OLS method and fixed effects method are robust. Our results are of special interest to those investors that exhibit a higher preference for dividends.

The efficiency of banks and stock performance: Evidence from Saudi Arabia

The aim of this study is to extend the literature by extensively investigating the efficiency of banks in Saudi Arabia and examining its relationship with stock performance through relying on six measures of efficiency (three price efficiencies and three technical efficiencies). This study employs the data envelopment analysis (DEA) on all listed Saudi commercial banks over the period 2006–2018 ensuring the robustness of the results, and the multiple-regression analysis method is used to empirically test the impact of the efficiency changes on bank stock returns. The results indicate that Saudi banks are more technically efficient, and their price efficiencies are more volatile. Furthermore, changes in bank efficiency are positively related to stock performance; however, these positive relationships are only statistically significant with the changes in profit and scale efficiency measures implying that investors pay much attention to the improvement in bank profitability and future dividends.

Uncertainty, sentiments and time-varying risk premia

Why are stock prices much more volatile than the underlying dividends? The excess volatility of prices can in principle be attributed to two different causes: time-varying discount rates for expected future dividends, arising from variation in risk premia; or the irrational exuberance of investors, bidding prices up and down even in the absence of changes in the underlying value of the asset. No consensus has so far emerged among economists as to the prevalence of one or the other source of price variation. I propose in this paper a novel way to approach this problem, by identifying changes in the uncertainty faced by investors regarding the fundamental value of an asset and exploiting the different response in prices that such changes in uncertainty would generate through sentiments or risk premia. I then apply this framework to the S&P 500 index from 1872 till 2019: the positive correlation found between uncertainty and prices (or, equivalently, the negative correlation between uncertainty and implied risk premia) is not compatible with rational investors' behavior and suggests instead the presence of a significant sentiments component in stock prices.

A Stochastic Gordon-Shapiro Formula with Excess Volatility

Share prices fluctuate far more than dividends. In contemporary lit- erature, this excess volatility is usually discussed involving the Camp- bell-Shiller present value identity. In our view, it is more appropriate to model future dividends and prices explicitly as random variables. We refer to excess volatility if the coefficient of dispersion for share prices is higher than for dividends. It is often presumed that excess volatility could be properly expli- cated by time-varying discount factors. However, we will show that this idea is logically inconsistent as long as one uses deterministic dis- count factors. This even holds if one assumes more complex stochastic structures of the dividends, such as AR(2) processes. We therefore propose stochastic discount factors and show that our model is free of arbitrage, the transversality condition is met and prices are unique. Finally, we try to consolidate our approach with the Lucas Model. Here, it is shown on the one hand that in this model the cost of capital cannot be stochastic. Moreover, the equity premium puzzle can no longer be replicated, but rather a realistic value for risk aversion is obtained. Finally, we change the Lucas model such that stochastic capital costs are also possible.

Preceding Dividend as a signal of Future Dividends: Evidence from Chinese Commercial Banks

Dividend policy is a prime concern of all stakeholders for it represents major cash outflow. There are two major underlying considerations for present study; first, academicians have spent more than five decades now and used various theoretical and empirical models to explore and study nature of determinants of dividend policy; but the issue is yet unresolved and open for further discussion. Second, majority of extant studies used data from developed economies to understand dividend myth. In addition, from available studies, the study on dividend policy of non-financial sector takes large area in pie. The present study is based on model after considering all factors to address dividend policy of commercial banks in emerging markets. Secondary data is used for statistical analysis the empirical results indicate significant relationship of provisioning against non-performing loans (LNPNPL), total assets (LNTA) and return on assets (ROA) on dividend payout ratio. LNPNPL significantly and negatively causes dividend policy, this indicates that banks with higher level of risk pay less dividends. Similarly, ROA significantly and positively explains variations in dividend payout ratio. The positive relationship tells that banks with higher returns (profitable banks) pay higher dividends. The negative and significant relation (causal) between LNTA and dividend payout indicates that Chines banks pay less dividends as they grow bigger in size. Other variables of model indicate insignificant relationships. Findings support existing literature but the size of bank has significant but inverse relationship with dividend policy. The findings are instrumental for investors aspiring for dividend income.

A Deep Neural Network Algorithm for Semilinear Elliptic PDEs with Applications in Insurance Mathematics

In insurance mathematics, optimal control problems over an infinite time horizon arise when computing risk measures. An example of such a risk measure is the expected discounted future dividend payments. In models which take multiple economic factors into account, this problem is high-dimensional. The solutions to such control problems correspond to solutions of deterministic semilinear (degenerate) elliptic partial differential equations. In the present paper we propose a novel deep neural network algorithm for solving such partial differential equations in high dimensions in order to be able to compute the proposed risk measure in a complex high-dimensional economic environment. The method is based on the correspondence of elliptic partial differential equations to backward stochastic differential equations with unbounded random terminal time. In particular, backward stochastic differential equations—which can be identified with solutions of elliptic partial differential equations—are approximated by means of deep neural networks.

Assessment of Financial Performance of Agricultural Cooperative Unions: The Case of West Harerghe Zone, Oromia Region, Ethiopia

Financial statement analysis involves comparing cooperative union performance and evaluating trends in the unions’ financial position over time. Managers use financial statement analysis to identify situations demanding attention; potential lenders use financial analysis to determine whether the union is creditworthy; and stockholders use financial analysis to help predict future earnings, dividends, and free cash flow. This study is conducted on Assessment of Financial performance of Agricultural Cooperative unions: the Case of West Harerghe zone, Oromia region, Ethiopia. The general objective of this study was to evaluate financial performance of agricultural cooperative union. For this study, the researchers used both primary and secondary sources of data taken from purposively selected two cooperative unions (i.e. Burka Galeti and Chercher Oda bultum) since they do have audited financial statements out of five unions found in western Haraghe. The study also used FGD and interview with fiancé managers and employees of the union for further explanation. Based on the financial statement analysis the researchers found that the agricultural cooperatives are efficient and effective in asset utilization, activity and debt equity management ratios. However, the financial statement analysis showed that the current asset ratio is below the industry standard that cannot cover its short term liabilities form its current asset section of the balance sheet. Moreover, the profitability ratio of the unions revealed that the agricultural cooperative unions are efficient to make profit but the margin of profit is below 25% that cannot make the union successful to cover all the incidental costs that are borne within short and long-term periods. The OLS model revealed that quick, fixed asset turnover, total asset turnover, inventory turnover and gross profit margin ratios are significantly and positively affecting ROA. As a result, the researchers recommend that the agricultural cooperative unions are expected to improve its effective and efficient management of the day to day activities of the union. Furthermore, the unions are expected to higher managers who have the caliber to manage each and every activities of the union and who are visionary to bring success for the unions.

The extensive margin and US aggregate fluctuations: A quantitative assessment

We report empirical evidence indicating that US net business formation has recently turned more volatile, procyclical and persistent. To study these stylized facts, we estimate a DSGE model with endogenous entry and exit. Business units feature heterogeneous productivity and they shut down if the present value of expected future dividends falls below the current liquidation value. The model provides a better fit than a constant exit rate model with the fluctuations of US business formation. The introduction of the extensive margin amplifies the effects of technology and risk-premium shocks, and reduces the procyclicality of firm-level production. The main sources of variability of the US aggregate fluctuations during the Great Recession are countercyclical technology shocks, persistent adverse risk-premium shocks, and expansionary monetary policy shocks.

Leaning against the wind policy and animal spirits in a general equilibrium model

AbstractWe introduce a general equilibrium model with sticky prices and flexible wages. People live over two periods, investing and working in period 1, and consuming in period 2. In the financial market, some investors are informed about the fundamental stock value, while the rest are not, and trust their gut feeling (animal spirits). The informed investors are risk‐averse, and the correlated animal spirits of the uninformed ones affects the stock market equilibrium thus producing an irrational bubble. We find that central bank's leaning against the wind policy is effective in controlling the bubble, if the uninformed investors discount their animal spirits anticipation of future dividends. Moreover, the paper shows that an irrational bubble may have similar effects on stock market prices as a rational bubble.

The Long-Run Persistence of Dividend Policy

Dividend policy is not set de novo each year, but dividends are smoothed from one year to another. This smoothing leads to a short-term persistence in dividend policy. In this paper, we investigate the persistence of a dividend policy in the long run by using a unique sample of firms listed on the Brussels Stock Exchange (BSE) since 1824. The imprinting theory argues that firms develop certain persistent characteristics at important moments in their life cycle. Our investigation provides evidence that the initial dividend policy, measured at a firm’s first listing, has an effect on the future dividend policy. This effect persists for many years but decreases over the firm’s life cycle. However, a new stable slowly changing persistent component in dividend policy is formed.

Speculative Stock Price and Inadequacy of the Implied Cost of Capital as a Proxy for Expected Return

The implied cost of capital (ICC), the internal rate of return that equates speculative stock price to discounted expected future dividends, includes a mispricing-driven component in addition to expected return. The estimated relation of a mispricing-associated factor (X) with ICC is thus a potentially biased estimate of X’s relation with expected return because it captures X’s relation with both expected return and the mispricing-driven component. The sign of X’s relation with the mispricing-driven component switches between undervalued and overvalued stocks. It is unfeasible to calibrate the sign and magnitude of X’s relation with the mispricing-driven component. Existing methods do not seem able to address the bias resulting from X’s relation with the mispricing-driven component. Therefore, ICC is an inadequate proxy for expected return when examining the relation of a mispricing-associated factor with expected return, which evidence based on eleven mispricing-associated factors shows to be the case.

Stock prices and dividends: A South African perspective

ABSTRACTThe present value model (PVM) is considered a cornerstone of financial theory and practice, yet the limited empirical tests thereof have produced varying results depending on the method used. In addition, these tests have focused principally on developed countries, with little knowledge of the validity of the PVM for developing markets. This study employs firm-level data and advanced panel unit root and cointegration tests to assess the PVM for South Africa using a sample of firms that have consistently paid dividends over the period 1999 to 2018. The results largely support the assertion of the model that the stock price is a function of future dividends but the relationship does not move in perfect harmony.

The Impact of Federal Reserve's Conventional and Unconventional Monetary Policies on Equity Prices

I estimate the effects of the Federal Reserve's forward guidance and large-scale asset purchases, along with the effects of interest rate changes under conventional policy, on the U.S. equity market, and assess the reasons for stock price responses. Although the overall stock market respond meaningfully to a surprise change in the federal funds rate with a high level of statistical significance, a heterogeneity in responses is observed among different sectors in the stock market. In contrast, forward guidance is found to have relatively homogeneous effects on sector-wise stock market performance. Such effects are large in magnitude and highly statistically significant. However, large-scale asset purchases exhibit minimal effects on equity price movements. The present value of future excess returns emerged as the most important channel through which the surprise changes in the federal funds rate as well as forward guidance and large-scale asset purchases affect current equity prices. The present value of future dividends and the real interest rates are found to make minor contributions the propagation of policy shocks. However, the relative contribution of future dividends, real interest rates and excess returns vary across sectors.

Usefulness of comprehensive income reporting for dividend policy in the polish listed companies

This study examines the strength and character of relationship between dividend policy and comprehensive income in Polish manufacturing companies. We formulated two research questions:1) does comprehensive income determine the ability to pay out a dividend?2) what is the key role of comprehensive income in shaping a dividend policy?To receive the answers to these questions, we put a research hypothesis stating that in the Polish listed companies a positive relationship between comprehensive income and dividend policy can be observed.The research was conducted among the companies operating in the manufacturing sector (4xx of the Warsaw Stock Exchange (the WSE) classification). The analytical period is between 2009–2017 and reflects the current legal status of the financial reporting of public companies in Poland. Finally, our analysis comprised 83 manufacturing companies and 664 observations.The study procedure was carried out in two stages. The first stage was to show the results of empirical research conducted among the analysed companies and regarding the variability of comprehensive income in comparison to net income (consequently other comprehensive income). At the second stage, we presented the results of investigation on the strength and character of an impact of comprehensive income on dividends. For that purpose, two research methods were used. Firstly, we calculated the Pearson’s correlation coefficients between comprehensive income (and net income) and future dividend ratios, as well as the other company’s performance and tested for significance using the t-Student test. Secondly, we used regression analysis and two one-equation models built for comprehensive income and net income. Moreover, we used descriptive statistics, t- Student test, and F-test.The conducted research allowed us to draw two main conclusions: 1) there was a positive character of dependence between comprehensive income and future dividend, however, the correlation between them was very weak; 2) the impact of comprehensive income on future dividend ratio was positive, but we noted no statistical significance.