The Role of Future Earnings and Dividends in Security Valuation: A Reexamination of the Fundamental Links

Posted: 10 Jun 1996

See all articles by Daniel W. Collins

Daniel W. Collins

University of Iowa - Department of Accounting

Kevin J. Den Adel

University of Iowa - Department of Accounting

Date Written: May 1996

Abstract

This paper examines the usefulness of future earnings and future dividends in security valuation. Our tests involve calculating intrinsic value estimates for Ohlson's (1995) earnings capitalization model and the traditional dividend discount model, and then using these intrinsic value estimates to explain cross-sectional variation in observed prices. Cross-sectional regression results are inconclusive when both positive and negative earnings realizations are used in calculating the earnings capitalization model intrinsic value estimate. Both the earnings capitalization model and dividend discount model explain a significant portion of observed stock price variation, but neither clearly dominates the other. However, when negative earnings realizations are excluded, the earnings intrinsic value estimates clearly dominate the dividend intrinsic value estimates in explaining observed prices. Decomposition analysis suggests that the advantage of the earnings capitalization model over the dividend discount model is due to the reinvested earnings component of aggregate future earnings.

JEL Classification: G12, M41, G35

Suggested Citation

Collins, Daniel W. and Den Adel, Kevin John, The Role of Future Earnings and Dividends in Security Valuation: A Reexamination of the Fundamental Links (May 1996). Available at SSRN: https://ssrn.com/abstract=2642

Daniel W. Collins (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Kevin John Den Adel

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

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