The Aggregate Change in Shares and the Level of Stock Prices
46 Pages Posted: 21 Apr 1999
Date Written: January 25, 1999
The average change in shares of equity is negatively correlated with estimates of the equity premium calculated using the dividend-ratio model of Campbell and Shiller, as well as with a variant of the model written in terms of the earnings-price ratio. This correlation is consistent with corporations issuing equity when it is a relatively inexpensive source of finance and repurchasing equity when it is a relatively good investment. However, when the retirement of shares resulting from mergers are included, the average change in shares is no longer significantly correlated with the equity premium.
JEL Classification: G14, G35
Suggested Citation: Suggested Citation