Stock Return Variation and Expected Dividends: A Reinterpretation

Posted: 11 Feb 1998

See all articles by Peter Andrew Hecht

Peter Andrew Hecht

Harvard Business School

Tuomo Vuolteenaho

Arrowstreet Capital, LP; National Bureau of Economic Research (NBER)

Date Written: January 15, 1998

Abstract

Kothari and Shanken (1992) argue that stock return variation can, to a large extent, be explained by rational revisions of future dividend expectations. Kothari and Shanken arrive at this conclusion based on the explanatory power of a regression of returns on lagged dividend yield, contemporaneous and future dividend growth rates, and future returns. This regression nests a truncated, first order approximation of the definition of return. Hence, the explanatory power is high by construction and has only minimal economic interpretations. Our reinterpretation has implications for other studies that use future variables to explain past returns. The explanatory variables are difficult to interpret, and these models may misidentify the main source of return variation. By decomposing the regressions, we clarify the roles of the explanatory variables.

JEL Classification: E44, G10, G12, G14, G35

Suggested Citation

Hecht, Peter Andrew and Vuolteenaho, Tuomo, Stock Return Variation and Expected Dividends: A Reinterpretation (January 15, 1998). Available at SSRN: https://ssrn.com/abstract=58670

Peter Andrew Hecht (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States
(617) 495-6171 (Phone)
(617) 496-7357 (Fax)

Tuomo Vuolteenaho

Arrowstreet Capital, LP ( email )

44 Brattle St., 5th Floor
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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