The Dividend Discount Model in the Long-Run: A Clinical Study

Journal of Applied Finance, Vol. 15, No. 2, Fall/Winter 2005

21 Pages Posted: 15 Dec 2005

See all articles by Stephen R. Foerster

Stephen R. Foerster

University of Western Ontario - Richard Ivey School of Business

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business

Abstract

Finance professionals frequently value assets using fundamental valuation methods which discount the expected cash flows received by investors. Using information on the share price, dividend payments and earnings for a single firm over a period of more than 120 years, we compare the actual share price to the expected price - calculated using several of the most commonly used fundamental valuation methods. Since these methods depend on the estimation of inputs - such as the discount rate and growth rate - we discuss the sensitivity of the expected prices to different estimation techniques and the relevant assumptions across various economic conditions. Over our entire sample period, we find that dividend-based models perform well at explaining actual prices; they perform better than commonly used earnings-based models (such as the Fed Model).

Keywords: Dividend Discount Model, Valuation

JEL Classification: G21, G35

Suggested Citation

Foerster, Stephen R. and Sapp, Stephen G., The Dividend Discount Model in the Long-Run: A Clinical Study. Journal of Applied Finance, Vol. 15, No. 2, Fall/Winter 2005, Available at SSRN: https://ssrn.com/abstract=869545

Stephen R. Foerster (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1255 Western Road
London, Ontario N6G 0N1
Canada
519-661-3726 (Phone)
519-661-3485 (Fax)

Stephen G. Sapp

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada
519-661-3006 (Phone)
519-661-3959 (Fax)

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