Earnings, Dividend Policy, and Present Value Relations: Building Blocks of Dividend Policy Invariant Cash Flows

29 Pages Posted: 23 Aug 2000 Last revised: 20 Jul 2022

See all articles by Bruce N. Lehmann

Bruce N. Lehmann

University of California, San Diego; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT)

Date Written: April 1991

Abstract

In a Modigliani-Miller world, price equals the risk-adjusted present value of future dividends and dividend policy is irrelevant for asset pricing. This paper searches for cash flows with two characteristics: asset prices can be calculated from their present values and they are invariant with respect to dividend policy. Residual income measures with these features are identified under two assumptions: dividend policy does not alter risk premiums and income earned from investments associated with dividend policy includes capital gains and losses. These results hold for otherwise arbitrary risk premiums in the general no-arbitrage approach to the valuation of uncertain income streams.

Suggested Citation

Lehmann, Bruce, Earnings, Dividend Policy, and Present Value Relations: Building Blocks of Dividend Policy Invariant Cash Flows (April 1991). NBER Working Paper No. w3676, Available at SSRN: https://ssrn.com/abstract=235670

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