Common Divisors, Payout Persistence, and Return Predictability

23 Pages Posted: 8 Dec 2009

See all articles by John G. Powell

John G. Powell

Massey University - Department of Finance Banking and Property

Jing Shi

Macquarie University

Tom Smith

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Robert E. Whaley

Vanderbilt University - Finance

Abstract

In the finance and accounting literature, the use of a common divisor in the dependent and independent variables of ordinary least-squares regressions is commonplace. What goes less recognized, however, is that their use induces spurious correlation between the regression variables and invalidates standard testing procedures. This paper analyses the common divisor problem by outlining analytical results concerning the expected R2 and providing a simulation procedure that generates test statistics from which critical values can be drawn. To illustrate the procedure, we re-investigate payout yield return predictability findings that have appeared in the literature and show that the results are spurious.

Suggested Citation

Powell, John G. and Shi, Jing and Smith, Tom M. and Whaley, Robert E., Common Divisors, Payout Persistence, and Return Predictability. International Review of Finance, Vol. 9, No. 4, pp. 335-357, December 2009, Available at SSRN: https://ssrn.com/abstract=1517464 or http://dx.doi.org/10.1111/j.1468-2443.2009.01095.x

John G. Powell

Massey University - Department of Finance Banking and Property ( email )

Private Bag 11 222
Massey University
Palmerston North, 4442
New Zealand

Jing Shi

Macquarie University ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/jing-shi

Tom M. Smith

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert E. Whaley

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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