Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-25T08:23:06.917Z Has data issue: false hasContentIssue false
  • English
  • Français

On the Dividend Capitalization Model Under Uncertainty

Published online by Cambridge University Press:  19 October 2009

Nils H. Hakansson
Get access Rights & Permissions [Opens in a new window]

Extract

Consider an economy consisting of individuals and firms with the following characteristics: all individuals are rational in the von Neumann- Morgenstern sense and non-neutral toward risk; the dividend streams of some firms are certain, while the dividend streams of the other firms are uncertain; and the economy is equipped with perfect financial markets. In this economy, as we show in the present paper, the value of each firm with a certain dividend stream depends only on the dividend stream itself and the set of future interest rates—i.e., the market value of such firms is independent of the attitudes toward risk and the level of wealth of any individual. However, the value of each firm with an uncertain dividend is, with one exception, not independent of anything: it depends not only on the firm's own dividend stream, the set of future interest rates, and (all) individuals' risk attitudes, but also on the wealth levels of these individuals and on the dividend streams of all other firms with uncertain dividends even when these streams are stochastically independent. The exception occurs when the individuals have exponential utility functions of money. In this case, the market value of each firm with uncertain dividends is independent of other dividend streams and of individual wealth levels if these variables are statistically independent of the firm's dividends. Exponential utility functions of money, of course, are not considered empirically plausible.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 4 , Issue 1 , March 1969 , pp. 65 - 87
Copyright
Copyright © School of Business Administration, University of Washington 1969

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

1.Arrow, Kenneth, Aspects of the Theory of Risk Bearing (Helsinki: Yrjö Jahnssonin Säätiö, 1965).Google Scholar
2.Bernoulli, Daniel, “Exposition of a New Theory on the Measurement of Risk” (transl. Louise Sommer), Econometrica, January 1954.CrossRefGoogle Scholar
3.Chen, Houng-Yhi, “Valuation Under Uncertainty,” Journal of financial and Quantitative Analysis, September 1967.CrossRefGoogle Scholar
4.Gordon, Myron, The Investment, Financing, and Evaluation of the Corporation (Homewood, Ill.: Irwin, 1962).Google Scholar
5.Hakansson, Nils, “An Induced Theory of the Firm Under Risk,” to appear.Google Scholar
6.Hakansson, Nils, “Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions,” to appear.Google Scholar
7.Hakansson, Nils, “Optimal Investment and Consumption Strategies Under Risk, or Uncertain Lifetime, and Insurance,” forthcoming in International Economic Review.Google Scholar
8.Hakansson, Nils, “Risk Disposition and the Separation Theorem in Portfolio Selection,” forthcoming in Journal of Financial and Quantitative Analysis.Google Scholar
9.Hirshleifer, Jack, “On the Theory of Optimal Investment Decision,” Journal of Political Eaonomy, August 1958.CrossRefGoogle Scholar
10.Lerner, Eugene, and Carleton, Willard, “Financing Decisions of the Firm,” Journal of Finance, May 1966.CrossRefGoogle Scholar
11.Lintner, John, “Optimal Dividends and Corporate Growth Under Uncertainty,” Quarterly Journal of Economics, February 1964.CrossRefGoogle Scholar
12.Robichek, Alexander, and Myers, Stewart, “Conceptual Problems in the Use of Risk Adjusted Discount Rates,” Journal of Finance, December 1966.CrossRefGoogle Scholar
13.Robichek, Alexander, Optimal Financing Decisions (New York: Prentice-Hall, 1965).Google Scholar
14.Robichek, Alexander, “Valuation of the Firm: Effects of Uncertainty in a Market Context,” Journal of Finance, May 1966.CrossRefGoogle Scholar
15.Pratt, John, “Risk Aversion in the Small and in the Large,” Econometrica, January–April, 1964.CrossRefGoogle Scholar
16.von Neumann, John, and Morgenstern, Oskar, Theory of Games and Economic Behavior (Princeton, N. J.: Princeton University Press, 1947).Google Scholar