Testing Asset Pricing Theory on Six Hundred Years of Stock Returns: Prices and Dividends for the Bazacle Company from 1372 to 1946

Abstract

We test asset pricing theory using the Bazacle company of Toulouse, the earliest documented shareholding corporation. We collect share prices and net dividends from its foundation in 1372 to its nationalization in 1946. We find a real average dividend yield of 5% per annum and no long-term price growth. Stationary dividends and stock prices enable us to directly study how prices relate to expected cash flows, without relying on rates of return. An asset pricing model with persistent dividends and a time-varying risk correction is not rejected by the data. Moreover, variations in expected future dividends explain between one-sixth and one-third of variations in prices. Finally, we find a downward-sloping term structure of the risk premium.

Keywords: asset pricing, history of finance, consumption risk

JEL Classification: G12, N13, N23