Accession Number : AD0630986
Title : RISK AND REQUIRED RETURN ON EQUITY,
Corporate Author : RAND CORP SANTA MONICA CALIF
Personal Author(s) : Arditti,Fred D.
Report Date : MAR 1966
Pagination or Media Count : 37
Abstract : With the average dividend yield plus the average growth rate in earnings identified as the required return on equity, then from the statistical results presented the conclusion is that the second and third moments of the probability distribution are reasonable risk measures while the market correlation coefficient of returns is not. The regressions involving the dividend-earnings ratio show that it is negatively and significantly related to the required return. Investors like high dividend-payouts. The debt-equity ratio appeared in all regressions with a negative sign. The explanation is that some other risk variables which are positively correlated with the required return but negatively correlated with the debt-equity ratio have been omitted. Most of the information about any probability distribution is contained in its first three moments. It seems plausible to assume that all the information relating to income is included in the regressions. The omitted variables must relate to some nonincome information. With the same line of reasoning, that the first three moments contain all the income information, the argument is ruled out that the dividend -payout affects the stock price because it yields additional information about future earnings. There remain two possible explanations. The first is that the market 'irrationally' likes dividends. The second is that the net effect of brokerage fees, negates the argument that all investors can freely sell stock to augment the current dividend stream.
Descriptors : (*ECONOMICS, THEORY), (*DISTRIBUTION(ECONOMICS), PROBABILITY), MATHEMATICAL MODELS, MONEY, ANALYSIS OF VARIANCE, STATISTICAL ANALYSIS
Subject Categories : Economics and Cost Analysis
Distribution Statement : APPROVED FOR PUBLIC RELEASE