The Value Relevance of Dividends, Book Value and Earnings

New York University Dept. of Accounting Working Paper No. 99-3

31 Pages Posted: 1 Sep 1999

See all articles by Richard P. Brief

Richard P. Brief

New York University

Paul Zarowin

New York University (NYU) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: August 5, 1999

Abstract

This paper compares the value relevance of book value and dividends versus book value and reported earnings. Our work is motivated by recent research including Ohlson (1995), Feltham and Ohlson (1995), Bernard (1995), Burgstahler and Dichev (1997), Collins, Maydew and Weiss (1997), Barth, Beaver and Landsman (1998) and Hand and Landsman (1999).

We justify modeling price in terms of book value and dividends in two ways. First, using Modigliani and Miller's (1959) argument, dividends may have a stronger correlation with permanent earnings than reported earnings. Second, we derive a model of price in terms of book value and dividends from basic analytical relationships.

Three sets of findings are reported. First, overall, the variables, book value and dividends, have almost the same explanatory power as book value and reported earnings. Second, for firms with transitory earnings, dividends have greater explanatory power than earnings but book value and earnings have about the same explanatory power as book value and dividends.

Most important, when earnings are transitory and book value is a poor indicator of value, dividends have the greatest explanatory power of the three variables. The value relevance of dividends is confirmed further in statistical tests using holdout samples.

JEL Classification: M41, G12, G35

Suggested Citation

Brief, Richard P. and Zarowin, Paul, The Value Relevance of Dividends, Book Value and Earnings (August 5, 1999). New York University Dept. of Accounting Working Paper No. 99-3. Available at SSRN: https://ssrn.com/abstract=173629 or http://dx.doi.org/10.2139/ssrn.173629

Richard P. Brief (Contact Author)

New York University ( email )

44 West 4th Street
Room 8-160
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212-998 0488 (Phone)
212-995-4003 (Fax)

Paul Zarowin

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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