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We develop a model for dividend dynamics and allow investors to learn about model parameters over time. The model predicts 31.3% of the variation in annual dividend growth rates during 1976-2013. W...
We develop a model for dividend dynamics and allow investors to learn about model parameters over time. The model predicts 31.3% of the variation in annual dividend growth rates during 1976-2013. When investors' beliefs about the persistence of dividend growth rates increase, dividend-to-price ratios increase, and short-horizon expected returns decrease after controlling for dividend-to-price ratios. These findings are consistent with investors' preferences for early resolution of uncertainty. We embed learning about dividend dynamics in an equilibrium asset pricing model. The model predicts 22.8% of the variation in annual stock index returns. Learning accounts for forty-percent of that 22.8%.