The Dividend Displacement Property and the Substitution of Anticipated Earnings for Dividends in Equity Valuation

THE ACCOUNTING REVIEW, Vol 72, No 1, January 1997

Posted: 30 Oct 1996

See all articles by Stephen H. Penman

Stephen H. Penman

Columbia Business School - Department of Accounting

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Abstract

The paper demonstrates empirically that GAAP earnings have properties to serve as a substitute for dividends in equity valuation analysis. Dividends reduce subsequent GAAP earnings, and "intrinsic" equity prices calculated by forecasting earnings are thus reduced by current dividends. This is in accordance with the Miller and Modigliani principle -- the displacement property -- which states that the payment of dividends reduces prices, dollar for dollar. Further, the paper demonstrates that if this displacement is accommodated in calculating equity prices from forecasted GAAP earnings, those prices exhibit the dividend irrelevance property, that is, calculated prices are insensitive to future dividends. The accommodation involves adding the displacement value of dividends to earnings forecasts. Forecasted GAAP earnings cannot be substituted for dividends, dollar for dollar, but the two are substitutes in the sense that the replacement value of expected dividends reduces forecasted earnings, dollar for dollar.

JEL Classification: G12, G35, M41, M44

Suggested Citation

Penman, Stephen H. and Sougiannis, Theodore, The Dividend Displacement Property and the Substitution of Anticipated Earnings for Dividends in Equity Valuation. THE ACCOUNTING REVIEW, Vol 72, No 1, January 1997. Available at SSRN: https://ssrn.com/abstract=2785

Stephen H. Penman (Contact Author)

Columbia Business School - Department of Accounting ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
2,679
PlumX Metrics