Another unsolved puzzle in economics is the

#Dividend puzzle

studied first by Fischer Black(1976), which evolves from the Modigliani-Miller theorems.

Considere well known models for equilibrium in capital markets like the CAPM or the Fama-French 4-factor model. In the latter, return $r_i$ of any asset $i$ is explained by the risk of $i$ towards given portfolios: $$r_i=R_f+\beta_3(K_m-R_f)+b_s\cdot\mathit{SMB}+b_v\cdot\mathit{HML}+\alpha$$ where $R_f$ is the risk-free return rate, and $K_m$ is the return of the market portfolio. $SMB$ and $HML$ are given portfolios (for futher information see here).

Besides these models for equilibrium, return $r_i$ can be calculated by Discounted Dividend Models (DDM) like the Gordon-Groth-Model, which do not aim on the whole market. The valuation of a single share is determined by discounting all further dividends, taking into account increasing dividends in the future: $$ P_i= \sum_{t=1}^{\infty} {D_0} \frac{(1+g)^{t}}{(1+r_i)^t}$$ where $P$ is the observable stock price, $g$ the infinite growth rate of dividend payments and $D_0$ the value of current dividend payment (absolute value). Adjusting the formula gives the adequate $r_i$.

The problem

The dividend a corporation pays, should not affect its valuation. Its clear for equilibrium models, since there is no term in the formula representing dividend payments. Lets look at the Gordon-Growth model: Dividends (and their growth rate) are included within the formulas, but what happens around the payment day? The price of the share drops on the ex-dividend date exactly by the amount of the dividend (besides transaction costs or taxes). It just drops the whole range of possible stock prices by that amount.

Empirical studies show (a good overview can be found here), that investors reward dividend-paying companies with higher valuation. Its evaluated by many researchers in the fields behavioral finance, asymmetric information, or taxes, but its not fully explained yet.

Another unsolved puzzle in economics is the

Dividend puzzle

studied first by Fischer Black(1976), which evolves from the Modigliani-Miller theorems.

Considere well known models for equilibrium in capital markets like the CAPM or the Fama-French 4-factor model. In the latter, return $r_i$ of any asset $i$ is explained by the risk of $i$ towards given portfolios: $$r_i=R_f+\beta_3(K_m-R_f)+b_s\cdot\mathit{SMB}+b_v\cdot\mathit{HML}+\alpha$$ where $R_f$ is the risk-free return rate, and $K_m$ is the return of the market portfolio. $SMB$ and $HML$ are given portfolios (for futher information see here).

Besides these models for equilibrium, return $r_i$ can be calculated by Discounted Dividend Models (DDM) like the Gordon-Groth-Model, which do not aim on the whole market. The valuation of a single share is determined by discounting all further dividends, taking into account increasing dividends in the future: $$ P_i= \sum_{t=1}^{\infty} {D_0} \frac{(1+g)^{t}}{(1+r_i)^t}$$ where $P$ is the observable stock price, $g$ the infinite growth rate of dividend payments and $D_0$ the value of current dividend payment (absolute value). Adjusting the formula gives the adequate $r_i$.

The problem

The dividend a corporation pays, should not affect its valuation. Its clear for equilibrium models, since there is no term in the formula representing dividend payments. Lets look at the Gordon-Growth model: Dividends (and their growth rate) are included within the formulas, but what happens around the payment day? The price of the share drops on the ex-dividend date exactly by the amount of the dividend (besides transaction costs or taxes). It just drops the whole range of possible stock prices by that amount.

Empirical studies show (a good overview can be found here), that investors reward dividend-paying companies with higher valuation. Its evaluated by many researchers in the fields behavioral finance, asymmetric information, or taxes, but its not fully explained yet.

Another unsolved puzzle in economics is the

#Dividend puzzle

studied first by Fischer Black(1976), which evolves from the Modigliani-Miller theorems.

Considere well known models for equilibrium in capital markets like the CAPM or the Fama-French 4-factor model. In the latter, return $r_i$ of any asset $i$ is explained by the risk of $i$ towards given portfolios: $$r_i=R_f+\beta_3(K_m-R_f)+b_s\cdot\mathit{SMB}+b_v\cdot\mathit{HML}+\alpha$$ where $R_f$ is the risk-free return rate, and $K_m$ is the return of the market portfolio. $SMB$ and $HML$ are given portfolios (for futher information see here).

Besides these models for equilibrium, return $r_i$ can be calculated by Discounted Dividend Models (DDM) like the Gordon-Groth-Model, which do not aim on the hold market. The valuation of a single share is determined by discounting all further Dividends, taking into account increasing dividends in the future: $$ P_i= \sum_{t=1}^{\infty} {D_0} \frac{(1+g)^{t}}{(1+r_i)^t}$$ where $P$ is the observable stock price, $g$ the infinite growth rate of dividend payments and $D_0$ the value of current dividend payment (absolute value). Adjusting the formula gives the adequate $r_i$.

The problem

The dividend a corporation pays, should not affect its valuation. Its clear for equilibrium models, since there is no term in the formula representing dividend payments. Lets look at the Gordon-Growth model: Dividends (and their growth rate) are included within the formulas, but what happens around the payment day? The price of the share drops on the ex-dividend date exactly by the amount of the dividend (besides transaction costs or taxes). It just drops the whole range of possible stock prices by that amount.

Empirical studies show (a good overview can be found here), that investors reward dividend-paying companies with higher valuation. Its evaluated by many researchers in the fields behavioral finance, asymmetric information, or taxes, but its not fully explained yet.

Another unsolved puzzle in economics is the

#Dividend puzzle

studied first by Fischer Black(1976), which evolves from the Modigliani-Miller theorems.

Considere well known models for equilibrium in capital markets like the CAPM or the Fama-French 4-factor model. In the latter, return $r_i$ of any asset $i$ is explained by the risk of $i$ towards given portfolios: $$r_i=R_f+\beta_3(K_m-R_f)+b_s\cdot\mathit{SMB}+b_v\cdot\mathit{HML}+\alpha$$ where $R_f$ is the risk-free return rate, and $K_m$ is the return of the market portfolio. $SMB$ and $HML$ are given portfolios (for futher information see here).

Besides these models for equilibrium, return $r_i$ can be calculated by Discounted Dividend Models (DDM) like the Gordon-Groth-Model, which do not aim on the whole market. The valuation of a single share is determined by discounting all further dividends, taking into account increasing dividends in the future: $$ P_i= \sum_{t=1}^{\infty} {D_0} \frac{(1+g)^{t}}{(1+r_i)^t}$$ where $P$ is the observable stock price, $g$ the infinite growth rate of dividend payments and $D_0$ the value of current dividend payment (absolute value). Adjusting the formula gives the adequate $r_i$.

The problem

The dividend a corporation pays, should not affect its valuation. Its clear for equilibrium models, since there is no term in the formula representing dividend payments. Lets look at the Gordon-Growth model: Dividends (and their growth rate) are included within the formulas, but what happens around the payment day? The price of the share drops on the ex-dividend date exactly by the amount of the dividend (besides transaction costs or taxes). It just drops the whole range of possible stock prices by that amount.

Empirical studies show (a good overview can be found here), that investors reward dividend-paying companies with higher valuation. Its evaluated by many researchers in the fields behavioral finance, asymmetric information, or taxes, but its not fully explained yet.