Market Capitalization, Corporate Payouts, and Expected Returns

53 Pages Posted: 19 Mar 2018 Last revised: 17 Jun 2018

See all articles by Bong-Gyu Jang

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH)

Bong-Soo Lee

Florida State University

Hyun-Tak Lee

Risk Management Institute (RMI), National University of Singapore (NUS)

Date Written: June 10, 2018

Abstract

This paper examines the present value framework that links market capitalization to non-dividend cash flows (i.e., share repurchases and issuances) beyond the conventional price–dividend relationship. We show that total (dividend plus non-dividend) cash flows can account for a large fraction of both price and return variations by using tests of cross-equation restrictions on vector autoregression (VAR), impulse response functions, and variance decomposition of unexpected returns. These results come from the fact that total cash flow shocks exhibit a strong negative correlation with payout yield shocks. Non-dividend cash flows help to reconcile our findings with previous literature that prices move substantially relative to dividends.

Keywords: Asset Pricing; VAR; Impulse Response Function; Variance Decomposition

JEL Classification: C12; C32; G12

Suggested Citation

Jang, Bong-Gyu and Lee, Bong-Soo and Lee, Hyun-Tak, Market Capitalization, Corporate Payouts, and Expected Returns (June 10, 2018). Available at SSRN: https://ssrn.com/abstract=3141038 or http://dx.doi.org/10.2139/ssrn.3141038

Bong-Gyu Jang

Pohang University of Science and Technology (POSTECH) ( email )

77 Cheongam-ro
Pohang
Korea, Republic of (South Korea)

Bong-Soo Lee

Florida State University ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-4713 (Phone)

HOME PAGE: http://www.cob.fsu.edu/fin/display_faculty_info.cfm?pID=401

Hyun-Tak Lee (Contact Author)

Risk Management Institute (RMI), National University of Singapore (NUS) ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

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