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A TEST OF A RISK‐ADJUSTED DIVIDEND CAPITALIZATION MODEL: THE CASE OF LIQUIDATING FIRMS
Author(s) -
Skantz Terrance R.,
Marchesini Roberto
Publication year - 1992
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1992.tb00783.x
Subject(s) - dividend payout ratio , dividend , dividend policy , financial economics , capital asset pricing model , capitalization , dividend yield , business , econometrics , market capitalization , economics , valuation (finance) , actuarial science , stock market , finance , paleontology , linguistics , philosophy , horse , biology
In this paper a direct test of the descriptive validity of the dividend capitalization model is described using the capital asset pricing model (CAPM) to specify the required rate of return. The sample comprises thirty‐five voluntarily liquidating firms for which publicly available records of liquidating dividends are available. The sample provides a novel basis for testing the dividend capitalization model since: (1) the firms' risk does not change because of investment activity, (2) the decision horizon for stock valuation purposes is clearly the period over which cash dividends are paid to shareholders, and (3) it is unnecessary to estimate dividend growth rates or terminal stock values. Results are generally consistent with a market that values these stocks by applying a risk‐adjusted dividend capitalization model.