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Earnings Distribution and the Valuation of Shares: Some Recent Evidence*

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  • Diamond, James J.

Abstract

Questions have been raised in recent years concerning the interpretation of previous studies purporting to show that distributed earnings have had a consistently greater impact on equity prices than have retained earnings. Miller and Modigliani have convincingly argued that if capital markets are perfect and rational behavior of market participants is assumed, the price-earnings ratio of the shares of a firm with a given investment policy should be invariant to alternative earnings-payout ratios. They also point out, however, that with the present tax subsidy on capital gains and the existence of substantial brokerage fees and flotation costs, dividend policy might be expected to have an effect on share prices, even though the amount and direction of this effect is an empirical matter and not determinable a priori.

Suggested Citation

  • Diamond, James J., 1967. "Earnings Distribution and the Valuation of Shares: Some Recent Evidence*," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(1), pages 15-30, March.
    • Handle: RePEc:cup:jfinqa:v:2:y:1967:i:01:p:15-30_01
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    Cited by:

    1. Mian Sajid Nazir & Muhammad Musarrat Nawaz, 2012. "Corporate Payout Policy and Market Capitalization: Evidence from Pakistan," Journal of Economics and Behavioral Studies, AMH International, vol. 4(6), pages 331-343.
    2. Duy T. Nguyen & Mai H. Bui & Dung H. Do, 2019. "The Relationship Of Dividend Policy and Share Price Volatility: A Case in Vietnam," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 123-136, May.

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