Stock Market and No-Dividend Stocks
51 Pages Posted: 16 Feb 2018 Last revised: 10 Feb 2020
Date Written: February 2020
We develop a model of the aggregate stock market featuring both dividend-paying and no-dividend stocks within a familiar, parsimonious consumption-based equilibrium framework. We find that such a simple feature leads to profound qualitative implications that support several empirical regularities on the stock market which leading consumption-based asset pricing models have difficulty in reconciling. We show that the presence of no-dividend stocks in the stock market leads to a lower correlation between the stock market return and aggregate consumption growth rate, a non-monotonic and even a negative relation between the stock market risk premium and its volatility, and a downward sloping term structure of equity risk premia. We also find that no-dividend stocks command lower mean returns, but have higher return volatilities and higher market betas than comparable dividend-paying stocks, consistently with empirical evidence. We provide straightforward intuition for all these results and the underlying economic mechanisms at play.
Keywords: Stock market, no-dividend stocks, dynamic asset pricing, incomplete information, stock market correlation with consumption, market risk premium-volatility relation, term structure of equity premia
JEL Classification: G12
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