Market Capitalization, Corporate Payouts, and Expected Returns

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