Seminar with Paulo Maio, Hanken School of Economics
Upcoming Finance Seminar with Paulo Maio, Hanken School of Economics
Paulo Maio will be presenting two papers:
1. Dividend yields, dividend growth, and return predictability in the cross-section of stocks
There is a generalized conviction that variation in dividend yields is exclusively related to expected returns and not to expected dividend growth - e.g. Cochrane's presidential address (Cochrane (2011)). We show that this pattern, although valid for the stock market as a whole, is not true for small and value stocks portfolios where dividend yields are related mainly to future dividend changes. Thus, the variance decomposition associated with aggregate dividend yields (commonly used in the literature) has important heterogeneity in the cross-section of equities. Our results are robust for different forecasting horizons, econometric methodology used (direct long-horizon regressions or first-order VAR), and also confirmed by a Monte-Carlo simulation.
2. The long-run relation between returns, earnings, and dividends
This paper focuses on the predictive ability of the aggregate earnings yield for market returns and earnings growth by imposing the restrictions associated with a present-value relation. By estimating a variance decomposition for the earnings yield based on weighted long-horizon regressions for the 1872-1925 and 1926-2010 periods, I find a reversal in return/earnings growth predictability: in the earlier period, the bulk of variation in the earnings yield is predictability of earnings growth, while in the modern sample the driving force is return predictability. When the variance decomposition is based on a first-order VAR the results in the modern sample are qualitatively different, i.e., the restrictions imposed by the first-order VAR are not validated by the data. Therefore, in the post-1926 period what drives aggregate financial ratios are expectations about future discount rates rather than future cash flows, irrespective of the financial ratio (dividend yield or earnings yield) being used.