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Rangvid, Jesper; Schmeling, Maik; Schrimpf, Andreas (2010)
Publisher: Institut for Økonomi, Aarhus Universitet
Languages: English
Types: Unknown
Subjects: dividend yield, predictability, international stock markets, value, growth, idiosyncratic volatility, HG
The common perception in the literature is that current dividend yields are uninformative
about future dividends, but contain some information about future stock returns. In this
paper, we show that this finding reverses when looking at a broad panel of countries outside
the U.S.. In particular, we demonstrate that aggregate dividend growth rates are highly
predictable by the dividend yield and that dividend predictability is clearly stronger than
return predictability in medium-sized and smaller countries that account for the majority of
countries in the world. We show that this is true both in the time-series dimension (time
variation in dividend yields strongly predicts future dividend growth rates) and in the cross-
country dimension (sorting countries into portfolios depending on their lagged dividend yield
produces a spread in dividend growth rates of more than 20% p.a.). In an economic assessment
of this finding, we show that cash flow predictability is stronger in smaller and medium-
sized countries because these countries also have more volatile cash flow growth and higher
idiosyncratic return volatility.

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