Do Cash Distributions Justify Share Prices?

Abstract

We ask whether corporations pay out the cash that shareholders anticipate and find consistent evidence. We study the firms traded on the NYSE, the AMEX, and the Nasdaq in 1926 to 2004. Over 30-year investment horizons, corporate cash distributions are commensurate with initial stock prices, assuming the contemporaneous risk-free rates and the risk premiums assessed in the literature. Perhaps more important, riskier stocks pay out more cash during the subsequent years, although with greater volatility. Moreover, terminal stock prices decline in importance as the investment horizon grows longer. Relative to their prices, however, very large firms appear to pay too much cash, and tiny firms too little.