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LONG‐TERM AND SHORT‐TERM CAUSAL RELATIONS BETWEEN DIVIDENDS AND STOCK PRICES: A TEST OF LINTNER'S DIVIDEND MODEL AND THE PRESENT VALUE MODEL OF STOCK PRICES
Author(s) -
Sung Hyun Mo,
Urrutia Jorge L.
Publication year - 1995
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.1475-6803.1995.tb00560.x
Subject(s) - dividend , economics , econometrics , stock (firearms) , disequilibrium , dividend yield , error correction model , term (time) , financial economics , dividend policy , cointegration , finance , physics , mechanical engineering , medicine , quantum mechanics , engineering , ophthalmology
In this paper we test the joint implications for the intertemporal behavior of stock prices and dividends expressed in the Lintner dividend model and the present value model of stock prices. We use macro data corresponding to quarterly S&P 500 index prices and dividends for January 1930–December 1990. The methodology used is the error correction model (ECM), which allows testing for long‐term and short‐term relations between the two variables. Results from the ECM indicate that a long‐term equilibrium relation exists between dividends and stock prices, and that an error correction mechanism is at work when a disequilibrium exits between the two variables. Stock prices and dividends also influence each other in the short term. Finally, the results show that dividends and stock prices exhibit a contemporaneous causal relation.