Investors’ Expectations, Price-Dividend Dependence and P/E Ratio for Common Stock: Specifics of Well-Developed Markets and Emerging Markets
It is well known that a role of dividend payments as a criterion for the effectiveness of portfolio investments increases with the rise in their time horizon. The comparison of share price performance and dividend payments in more than a hundredyear retrospective had allowed to find out the phenomenon of anomalous volatility for stock prices. The result had a powerful influence on the concept of risky asset evaluation. The authors of the paper proposed to study time series of stock prices and dividend payments in a somewhat different frame of reference. The aim of the paper is to examine investors’ perception of growth prospects for equities based on the investigation of share price dynamics compared to annual dividend payments. The proposed theoretical model uses an original procedure of continuously growing dividend discounting with arbitrary investment period. The research deals, but not limited to, with the shares of American and Russian corporations from 1985 till 2016. The central issue of the research is to compare the observed price-dividend dependence for the share with the one corresponding to classical dividend discount model assuming that the growth of dividend is uniform and the period of investment is infinite. The result of the analysis carried out is that both in well-developed and in emerging markets authors' technique allows to gain an insight (for many securities) into the primary motive for “representative shareholder” to evaluate a security: is it an income from share price growth or a willingness to receive stock dividends. Similar diagnostics is of undoubted interest for portfolio management; it is more exact for developed markets that have longer history and are less volatile. We show in the paper that the proposed method makes it possible to define the concept of earnings shares and growth shares more concretely.
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