The Impact of Dividends, Debt and Investment on Valuation Models

Abstract

The reliability of a basic earnings and equity model of value is tested using 8,287 cases drawn from UK industrial and commercial firms reporting during 1987-1995. A respecification of this model is used to investigate the value relevance of dividends, capital structure and capital expenditure. Both the dividend and capital expenditure signals appear to be significant and the impact of the former is surprisingly strong. There is no convincing evidence that equity value is affected by the level of debt. Further investigation of dividends confirms that they are less influential in large firms or in firms with high return on equity. Copyright Blackwell Publishers Ltd 1997.

Searching for value relevance of book value and earnings: a case of premium versus discount firms

“…The association studies typically model these relationships either in the spirit of residual income (Ohlson 1995;Rees 1997;Hand and Landsman 2005), or the option-style valuation framework (Burgstahler and Dichev 1997;Wysocki 1998;Ashton et al 2003).…”

“…Despite the conceptual differences, both theoretical frameworks are often translated into the same empirical model, whereby equity market value is regressed on book value, earnings and, often, additional control variables (Rees 1997;Burgstahler and Dichev 1997;Hand and Landsman 2005). In the RIV context, this is normally achieved through such simplifying assumptions as constant growth rates for earnings and book value (Rees 1997), or linear information dynamics of the formation of expectations (Ohlson 1995;Hand and Landsman 2005).…”

“…In the RIV context, this is normally achieved through such simplifying assumptions as constant growth rates for earnings and book value (Rees 1997), or linear information dynamics of the formation of expectations (Ohlson 1995;Hand and Landsman 2005). The same empirical model is also often attained through the option-style framework, where the adaptation value is proxied by book value of equity, while earnings proxy for the recursion value (Burgstahler and Dichev 1997).…”

The Valuation of European Financial Firms

“…The reasons for excluding financial firms, property companies or investment trusts are not always clearly stated, although Rees (1997Rees ( , p. 1123 explaining the cross-sectional variation in the market-to-book ratio (and produce coefficients which are not inconsistent with theoretical predictions) for financial firms (Ohlson, 1995).…”

“…A second model also differentiates between that proportion of earnings distributed as dividends and that retained. Following Rees (1997) and Fama and French (1998), this is interpreted as a partitioning of earnings into relatively permanent and relatively transitory components. The models are deflated by book value to mitigate heteroscedasticity.…”