Dividend Policy Irrelevancy and the Construct of Earnings

22 Pages Posted: 27 Jul 2013

See all articles by Zhan Gao

Zhan Gao

Lancaster University

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Adam J. Ostaszewski

London School of Economics

Date Written: June/July 2013

Abstract

This paper analyzes the characteristics of earnings in valuation settings where the dividend policy is irrelevant to equity value. The paper first demonstrates an equivalent characterization of dividend policy irrelevancy (DPI) in a general linear dynamic. It then proceeds to show how DPI leads to ideal and practical constructs of earnings and examines their analytical properties. We further demonstrate that earnings properties can be used to deduce the core approach in practical equity valuation – namely, measures of growth in expected earnings explain the price to forward earnings ratio. However, unlike dividends, free cash flow cannot generally be claimed to be irrelevant to value.

Keywords:  equity valuation, dividend policy, earnings, information dynamics

Suggested Citation

Gao, Zhan and Ohlson, James A. and Ostaszewski, Adam J., Dividend Policy Irrelevancy and the Construct of Earnings (June/July 2013). Journal of Business Finance & Accounting, Vol. 40, Issue 5-6, pp. 673-694, 2013. Available at SSRN: https://ssrn.com/abstract=2298965 or http://dx.doi.org/10.1111/jbfa.12019

Zhan Gao (Contact Author)

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom
44-1524-593-151 (Phone)

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

Adam J. Ostaszewski

London School of Economics ( email )

Houghton Street
GB-London WC2A 2AE
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
810
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information