Endogenous Dividend Dynamics and the Term Structure of Dividend Strips

46 Pages Posted: 26 Nov 2012

See all articles by Robert S. Goldstein

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)

Frederico Belo

INSEAD; University of Minnesota; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2012

Abstract

Many leading asset pricing models predict that the term structure of expected returns and volatilities on dividend strips are upward sloping. Yet the empirical evidence suggests otherwise. This discrepancy can be reconciled if EBIT dynamics are combined with a dynamic capital structure strategy that generates stationary leverage ratios. This combination endogenously determines dividend dynamics that are cointegrated with EBIT, implying that long-horizon dividend strips are no riskier than long-horizon EBIT strips. This capital structure policy also implies that shareholders have their position 'managed', creating stock volatility that is higher than long-horizon dividend volatility (i.e., excess volatility).

Suggested Citation

Goldstein, Robert S. and Belo, Frederico and Collin-Dufresne, Pierre, Endogenous Dividend Dynamics and the Term Structure of Dividend Strips (March 15, 2012). Netspar Discussion Paper No. 03/2012-040, Available at SSRN: https://ssrn.com/abstract=2180777 or http://dx.doi.org/10.2139/ssrn.2180777

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Frederico Belo

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

University of Minnesota ( email )

19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Pierre Collin-Dufresne (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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