Do Stock Prices Move too Much to be Justified by Changes in Dividends? Evidence from Real Estate Investment Trusts

46 Pages Posted: 22 Mar 2009 Last revised: 14 Apr 2010

See all articles by Tobias Muhlhofer

Tobias Muhlhofer

University of Miami - Department of Finance

Andrey Ukhov

Cornell University

Multiple version iconThere are 2 versions of this paper

Date Written: November 18, 2009


A central issue in asset pricing is whether asset prices move too much in relation to cash flows. We take advantage of the existence of two parallel markets for a set of cash flows to show that better measurement of cash flows can dramatically improve the performance of a dynamic dividend discount model. We apply the model to returns on Real Estate Investment Trusts (REITs) and REIT dividends. We use a unique data set of directly held commercial real estate and augment information in REIT dividends with information from cash flows from this parallel market. The addition of this information leads to a significant improvement in the performance of a traditional dividend discount model. First, when REIT dividends are supplemented with direct property dividends, innovations in cash flows and economic news explain approximately 24% of REIT return variation. This is higher than the approximately one-fifth of variation explained in the stock market as reported in the classic study by Cutler, Poterba and Summers (1989). Second, we apply a dividend discount model to REITs, using out-of-sample estimation, unlike previous literature. When only information from REIT dividends is used, the model performs somewhat better than was previously found for the stock market (Campbell and Shiller (1988b)), which is congruous with the nature of REITs and the information content of their dividends. The results, however, further improve dramatically when information from direct property cash flows is added to the model. These findings suggest that the performance of dividend pricing models improves greatly with better measurement of cash flows, and thus contribute to the resolution of the excess volatility puzzle.

Keywords: Dividend Pricing Models, Excess Volatility, Cash Flows, Vector Autoregression, Real Estate Investment Trusts

JEL Classification: G12, G14, G17, G29

Suggested Citation

Muhlhofer, Tobias and Ukhov, Andrey, Do Stock Prices Move too Much to be Justified by Changes in Dividends? Evidence from Real Estate Investment Trusts (November 18, 2009). Available at SSRN: or

Tobias Muhlhofer (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States


Andrey Ukhov

Cornell University ( email )

Ithaca, NY 14853
United States

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