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The Gordon‐Shapiro Dividend Growth Formula and Inflation
Author(s) -
Lally Martin
Publication year - 1988
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1988.tb00144.x
Subject(s) - economics , dividend , inflation (cosmology) , valuation (finance) , earnings , econometrics , earnings growth , percentage point , real interest rate , keynesian economics , monetary policy , accounting , finance , physics , theoretical physics
The share valuation model which discounts expected dividends is widely accepted in the finance literature. Beyond some point a constant growth rate in expected ividends is assumed. The accepted specification of this growth rate involves a constant retention rate for earnings, and is valid under no inflation. This paper derives the corresponding nominal formula under inflation using a retention rate defined in terms of inflation accounted earnings, and shows that its real counterpart is the accepted formula. It is also shown under inflation that the nominal formula using a retention rate defined in terms of historic cost earnings is considerably more complicated, and that a major error in share valuation results from mistakenly assuming the accepted formula to be valid in nominal terms with a retention rate defined in terms of inflation accounted earnings.