Journal of Financial Economics

1 (1974) 1-Z.

Q North-Holland

Publishing Company

THE EFFECTS OF DIVIDEND YIELD AND DIVIDEND POLICY ON COMMON STOCK PRICES AND RETURNS* Fischer BLACK and Myron SCHOLES
Graduate School of Business, University of Chicago, Chicogo, III. 60637, U.S.A.

Received August 1973, revised version received October 1973

This paper suggests that it is not possible to demonstrate, using the best available empirical methods, that the expected returns on high yield common stocks differ from the expected returns on low yield common stocks either before or after taxes. A taxable investor who concentrates his portfolio in low yield securities cannot tell from the data whether he is increasing or decreasing his expected after-tax return by so doing. A tax exempt investor who concentrates his portfolio in high yield securities cannot tell from the data whether he is increasing or decreasing his expected return. We argue that the best method for testing the effects of dividend policy on stock prices is to test the effects of dividend yield on stock returns. Thus the fact that we cannot tell, using the best available methods, what effects dividend yield has on stock returns implies that we cannot tell what effect, if any, a change in dividend policy will have on a corporations stock price.

1. Introduction Traditionally, it has been argued that a corporation can influence the price of its shares by changing its dividend policy. The most common argument is that the corporation can increase the value of its shares by increasing its payout ratio. The feeling is that investors prefer a dollar of dividends to a dollar of capital gains, because a bird in the hand is worth more than one in the bush. Therefore, investors will bid up the prices of the common stock of companies that pay generous dividends, relative to similar companies that pay smaller dividends. Graham and Dodd (1951) are perhaps the best known proponents of this point of view. Miller and Modigliani (1961) point out that if the corporation does not let its dividend policy affect its investment decisions, and if we ignore taxes and transactions costs, a corporations dividend policy should not affect the value of its shares at all. Their approach suggests, however, that the existence of differential taxes on income and capital gains should make the shares of corpora*This work was supported in part by Wells Fargo Bank and by the Ford Foundation. We are grateful for comments on earlier drafts by Eugene Fama. Robert Hager-man, Michael Jensen, Robert Merton, Merton Miller, Franc0 Modigliani, and Jack Treynor.

F. Black, M. Scholrs,Effects ofdivihd

yield on stock prices

tions that pay low dividends more desirable, and thus that a corporation can increase the value of its shares by reducing its payout ratio. There is a third argument, hinted at by Miller and Modigliani, which suggests that dividend policy should not matter. They say (1961, p. 43 1) : If, for example, the frequency distribution of corporate payout ratios happened to correspond exactly with the distribution of investor preferences for payout ratios, then the existence of these preferences would clearly lead ultimately to a situation whose implications were different in no fundamental respect from the perfect market case. Each corporation would tend to attract to itself a clientele consisting of those preferring its particular payout ratio, but one clientele would be entirely as good as another in terms of the valuation it would imply for the firm. Let us assume that a corporation can always choose any dividend policy it wants without changing its investment policy, because it has other sources and uses of funds that are good substitutes for dividends. Ifcorporations are generally aware of the demands of some investors for high dividend yields, and the demands of other investors for low dividend yields, then they will adjust their dividend policies to supply the levels of yield that are most in demand at any particular time. As a result, the supply of shares at each level of yield will come to match the demand for shares at that level of yield, and investors as a group will be happy with the available range of yields. After equilibrium is reached, no corporation will be able to affect its share price by changing its dividend policy. We call this the supply effect. In other words, if a corporation could increase its share price by increasing (or decreasing) its payout ratio, then many corporations would do so, which would saturate the demand for higher (or lower) dividend yields, and would bring about an equilibrium in which marginal changes in a corporations dividend policy would have no effect on the price of its stock. This will be true even if we take into account all kinds of institutional factors such as differential taxes on income and capital gains, differential costs of personal and corporate sale of stock, and trust instruments that allow only the dividends from common stock held in trust to be distributed to the income beneficiary. In fact, there are some classes of investors that might logically prefer high dividend yields, other things being equal, and other classes of investors that might logically prefer low dividend yields. In the first group are (a) corporations, because they generally pay higher taxes on realized capital gains than on dividend income, (b) certain trust funds in which one beneficiary receives the dividend income and the other receives the capital gains, (c) endowment funds from which only the dividend and interest income may be spent, and fd) investors who are spending from wealth and who find it cheaper and easier to receive dividends than to sell or borrow against their shares. In the second class are principally investors who pay higher taxes if they receive dividends than if they receive an

F. Black, M. .%koh, E..ects of dti&bd

yield on stock prices

equivalent increase in capital gains. In addition, there is a large group of investors who are tax exempt, and who have no reason to prefer dividends to capital gains, and who may therefore be indifferent to the dividend yield of the shares they hold. If other things could be held equal, we would expect to find the first group of
investors holding common stocks with relatively high dividend yields, and the second group holding common stocks with relatively low dividend yields. The third group would tend to hold both kinds of common stocks. But other things cannot be held equal. We will show that it is not possible to construct a high yield portfolio and a low yield portfolio whose returns are perfectly correlated. So it is not possible to give an investor a choice between two portfolios whose returns are perfectly correlated, where one has a high yield and the other has a low yield. There are systematic differences between high yield and low yield stocks, as we will show later in the paper, that ensure that an investor who concentrates his portfolio in high yield stocks (or low yield stocks) will hold a portfolio that is not as well diversified as a portfolio that could be constructed containing both high and low yield stocks. We call this the diversification effect. If the tax effect, the supply effect, and the diversification effect were the principal factors affecting the returns on stocks with different levels of dividend yield, we would expect to find a moderate preference for dividends on the part of some investors, a moderate aversion to dividends on the part of other investors, and an attempt by corporations to choose dividend policies that satisfy the aggregate demand for high and low yield stocks. Nevertheless, the number of companies with generous dividend policies would appear from casual observation to bc far grcatcr than the number of investors who have logical reasons for prcfcrring dividends to capital gains. If these factors were the only important ones, and if both corporations and investors acted rationally, WC would expect to find a far larger number of companies paying a small dividend or no dividend at all, to satisfy the demands of the large number of investors who prefer capital gains to dividends for tax reasons. From this point of view, it seems that either corporations or investors arc not acting rationally. Either investors are demanding dividends in spite of the cost in terms of higher taxes, or corporations are failing to reduce their dividends, even when this would increase the price of their shares because of increased demand by tax-paying investors. Some might argue that the Internal Revenue Service wont allow corporations to reduce their dividends in many cases, and that these corporations appear to act foolishly only because they are prevented from cutting their dividends. But the laws that forbid unreasonable accumulation of capital in a corporation are easy to circumvent for most companies. A company need only show legitimate investment uses for its retained earnings. If it has no way to invest its income in new plants and the like, it can usually invest some in buying back its own common stock, and it can invest large amounts in buying other businesses, in whole

F. Black, M. Scholes, Effects of dividend yield on stock prices

or in part. And a company that is periodically issuing new securities to raise capital will certainly have no trouble with the IRS if it reduces its dividend; it can simpiy issue fewer securities to balance the increase in its retained earnings. There is another factor, that we call the *uncertainty effect, that may help explain why investors and corporations act the way they do. As we will attempt to show in this paper, it is not possible to demonstrate, using the best available empirical methods, that the returns on high yield securities are different from the returns on low yield securities either before taxes or after taxes. A taxable investor who concentrates his portfolio in low yield stocks may have no way of knowing whether he is increasing or decreasing his expected after-tax return by so doing. The evidence we will present is perfectly consistent with the hypothesis that low yield stocks have lower expected after-tax returns, even for an investor in a 70% tax bracket, than high yield stocks. Such an investor does know, however, that concentrating his portfolio in low yield stocks is likely to increase its risk by reducing its level of diversification, and is likely to involve increased transactions costs, because he will have to replace stocks of companies that experience large increases in yield. The uncertainty in the effects of dividend yield on stock returns is so great that the taxable investor holding a market portfolio* does not even know that it would improve his expected return to eliminate just the one highest yield stock from his portfolio. In this situation, he may well decide to adopt a simple portfolio strategy that does not take dividend yield into account at all. Similarly, a tax exempt investor has no way of knowing how to shift the dividend yield of his portfolio to increase its expected return. In the light of the probable costs in terms of loss of diversification and higher turnover, he may dccidc to ignore dividend yield entirely. If investors act as if dividend yield is not important in constructing their portfolios (because they dont know how to take it into account), then changes in dividend yield will not affect their portfolio decisions. A change in the yield of a stock, whether caused by changes in the dividend or changes in the price of the stock, will not cause investors to change their decisions to buy, hold, or sell the stock. Thus there will be no mechanism by which changes in a corporations dividend policy can influence the price of its stock. A corporation may then ignore the effects of its dividend policy on its stock price. Even if there is some true effect of dividend policy on stock price, the evidence presented below suggests that we have no way of knowing what that effect is. The evidence is consistent with the hypothesis that increasing the dividend increases the stock price, and it is consistent with the opposite hypothesis that increasing the dividend reduces the stock price. Given the great uncertainty about the direction and magnitude of the effects of its dividend policy on its stock price, the corporation may decide to ignore the effects of dividend policy on its stock price. It may, for example, decide to reduce its dividend whenever it needs money for promising new investment projects, without worrying that the dividend reduction will cause a drop in its stock price.

F. Block, M. Scholes. Effects of diuidend yield on stock prices

It is possible, of course, that a decrease in a corporations dividend will cause a temporary fall in the stock price, because of the information effect of changes in dividends. The market may tend to interpret a cut in the dividend as a signal that the directors of the corporation expect troubled times ahead. If the troubled times do not materialize, the effect will only be temporary.And this sort of effect can be minimized if the directors make it clear that they are cutting the dividend to provide funds for investment rather than to prevent financial difficulties during a period of reduced earnings. Thus the uncertainty effect can be stated as follows. Investors are ignorant of the direction and magnitude of the effects of dividend yield on portfolio returns, either before or after taxes, so they may decide to ignore yield in making portfolio decisions. Corporations are ignorant of the direction and magnitude of the permanent effects of dividend yield on stock prices, so they may decide to ignore any such effects in making decisions on the financial policies of the corporation.

2. A new methodology There have been many attempts in recent years to test whether or not the dividend policy of a corporation affects the price of its shares, but these tests have never been satisfactory. Most authors have used cross-sectional tests, which attempt, in effect, to comparc the prices of the shares of companics that differ only in dividend policy. One problem with such tests is that it is very difficult to control for variables other than dividend policy, and it is very difficult to get accurate estimates of the significance of results obtained from cross-sectional regressions. Most important, though, is the fact that it is hard to tell whether a relationship found in a cross-sectional regression is a causal relationship, or if it is, in which direction the causality runs. For example, the simplest form of such a cross-sectional test is to do a regression of price-earnings ratio on dividend-payout ratio. If one finds that higher payout ratios are associated with higher price-earnings ratios, this does not mean that a company that increases its payout ratio will tend to increase its pricexarnings ratio. It may simply mean that the types of companies that usually have high price-earnings ratios usually have high dividend-payout ratios. For example, companies in low risk industries may tend to have both high priceearnings ratios and high payout ratios. Or companies having a year in which earnings are abnormally low may tend to have both high priceSee. for example, Gordon and Shapiro (1956). Gordon (1959). Friend and Puckett (1964). and Diamond (1967). For discussions of the problems of cross-sectional tests and the use of time series methods to solve these problems in another context, see Miller and Scholcs (1972) and Black et al. (1972).

F. Black, M. Schhs.

Eflecfs of

dh&nd yield on

stock prices

earnings ratios and high payout ratios. No matter how many additional variables are included in a cross-sectional regression, it is always difficult to interpret the causal relationships among the variables.3 We have developed a methodology that avoids many of the difficulties of cross-sectional regression. We have applied the methodology here to the study of the effects of dividend policy on the value of a companys shares, but we believe that the same methodology can be used effectively to study the effects of many other variables of interest to corporate financial officers on the value of a companys shares. We begin by noting that there are two ways to state any hypothesis about dividend policy. We can state the effect in terms of the price of the companys shares, or in terms of the expected return on the companys shares, where return is defined as including both capital gains and dividends. For example, if we believe that increasing a companys dividend will increase the price of its shares, then we can say this in either of two ways: (a) Increasing (b) Increasing shares. the dividend the dividend will increase will reduce the price of a companys the expected return shares.

on a companys

While most previous work has been aimed at testing the hypothesis in form (a), we have tested it in form (b).4 In addition to restating the hypothesis about dividend policy in form (b), we hnvc made USC of an cxpandcd form of the capital asset pricing model. The original capital asset pricing model says that the expected return on any security should bc a linear function of its j?, as follows:

m,) =

~+LmJ-W,,

(1)

The problems in the intcrprctation of cross-scctionnl tests of this sort are described in dctnil by Friend and Puckett (1964). It is sometimes argued that (a) and (b) are not equivalent. because a change in the price of a stock can occur without any change in its expected return. In the cast of companies that pay dividends, it is particularly clear that a change in stock price must mean a change in expected return. if the new price relationship is to bc maintained. Imagine a corporation that holds only short term paper paying 10%. and pays out 5% in the form of dividends. It reinvests its 5% retained earnings in short term paper, so its price per share grows at 5% per year. Its total return is 10% per year. Now Ict it start paying out all of its income in dividends. If the price per share is unchanged, then the return will continue to be 10% per year and the price will remain constant from then on. But if the ratio of price to income goes up from 10: 1 to say 20: 1. and stays at 20: 1, the return will fall to 5%. The only way an increase in the ratio of price to income to 20: I immcdiatcly can be consistent with the original 10% return is if the price starts rising from its new level at an accelerating rate. But this would mean a continually increasing ratio of price to income, which is clearly unsustainable. This example can be generalized to show that if WC rule out unlimited speculative bubbles, an increase in the price of a dividendpaying stock must be associated with a decrease in its expected return. and vice versa. For derivations of different forms of the capital asset pricing model, and references to the original papers in the field, see Sharpe (1970). Fama and Miller (1972). and Jensen (1972).

F. Block, M. Schoth, Ef/rs

of diui&nd yield on stock prices

where the symbols are defined as E(&) = the expected return on security i,

E&j R=
Br =

the expected return on the market portfolio,6 the riskless short term interest rate,
the covariance between R, and l?,,,, divided by the variance of 8,.

This relationship was derived assuming, among other things, that (i) there are no institutional factors such as taxes that might affect investors* demands for different securities, and (ii1 the supplies of a11 securities are given. The relationship described by eq. (1) breaks down if we drop assumption (i). For example, Brennan (1970a, 1970b) has shown that in the presence of differential taxes on dividends and capital gains, securities with high dividend yields will have higher expected returns (before taxes) than securities with low dividend yields. But if we drop both assumption (i) uttd assumption (ii), eq. (1) remains valid. As described in the introduction, if corporations are able to change the relative supplies of shares at different levels of dividend yield to match investors demands for shares at each level of dividend yield, then they will change their dividend policies until there is no longer any advantage in making further chnngcs. At this point, eq. (1) will describe the expected returns on different securities. We would like to find out whcthcr eq. (1) holds equally for stocks at all levels of dividend yield. If WC find that high yield stocks tend to have higher expected returns than eq. (1) predicts, then WC would like to know whether this is due to the cffccts of the dividend yield itself or the cllicts of some other factor that is correlated with dividend yield. For example, it might bc that high yield stocks tend to bc low risk stocks, so that any tendency WC find for high yield stocks to have higher expected returns than eq. (I) predicts might bc simply a rcflcction of a tendency for low risk stocks tu have higher expected returns than eq. (I) predicts. Since we believe that there is a relation between dividend yield and risk, our tests are designed to sort out these two possibilities.

3. Creating efficient and unbiased tests Let us suppose that dividend yield is related to expected return on stocks, and that the relationship is linear. Then we can rewrite eq. (1) as follows: E(aJ = R+

[~!X~rn)-RlBi+ ~,(6,-6m)/~mv

(2)

where 6, stands for the dividend yield on stock i, and 5, stands for the dividend yield on the market. We would like to develop efficient and unbiased estimators
The market portfolio in this model is the portfolio containing all assets.

F. Black. M. Scholes, Efects of dividend yield on stock prices

for the constant yi _ If yi turns out to be significantly different from zero, then we will have evidence that dividend policy matters; while if y, turns out to be insignificantly different from zero, we will have evidence that dividend policy may not matter. One further modification in the equation to be tested is necessary. Black et al. (1972) have given evidence that eq. (1) has not described expected returns adequately in the postwar period, and that the following equation seems to fit the data better than eq. (1):

Et%)=

YO+ [E&)-

volPrv

where y. is significantly greater than the short term interest rate. One possible explanation for this is that a corporations systematic risk (/Ii) is correlated with its dividend yield (6,), and that if a dividend yield term were included, the value of y. would again be equal to the short term interest rate. In other words, Black, Jensen, and Scholes have found evidence that high B securities tend to be overvalued, and low /I securities tend to be undervalued. One possible interpretation of this result is that high /I stocks tend to be low yield stocks, and what is really happening is that low yield stocks are overvalued, and high yield stocks are undervalued. If this were the case, then the result would be associated with corporate dividend policy rather than with factors such as capital structure that affect the /I of a corporations common stock. If the result found by Black, Jensen and Scholcs is not associatedwith dividend policy, but is due to some other factor, then our tests will have to be designed so as not to pick up an artificial association with dividend policy. If we used eq. (2) to estimate y,, and if there is a correlation bctwccn the 0 and the yield of a corporation, then WC would probably find that y, is significantly different from zero, but this would be a manifestation of a factor other than dividend policy. In order to allow for an indcpcndcnt test for a dividend policy effect, then, we will combine cqs. (2) and (3) into eq. (4):

EC&) =

YO+[%~)-

rolPr+ Y~~-W~Y.

(4)

In this form, we can estimate y. and yi separately. If we find that y. is greater than R and that y, is different from zero, then we will interpret this as evidence of two effects, the second being associated with dividend policy. If we find that y0 is not different from R, and that yr is different from zero, then we will interpret this as evidence that the previously discovered effect is simply a reelection of a dividend policy effect. And finally, if we find that y. is different from R, but y, is not different from zero, then we will interpret this as evidence that there may be no dividend policy effect.
This is explored under one set of assumptions by Brennan (1970a, 1970b).

F. Black,

M. Schoks. Effects of dividend yield on stock prices

To get relatively efficient estimators for y. and y1 , we want to make use of all of the information available. That information will consist of the returns over a long period of time on a number of different securities. One way to make use of the information would be to interpret eq. (4) as a cross-sectional regression equation, and to use the coefficients of the regression as estimators for y. and yl. This would be similar to the approach taken by Brennan (1970a, 1970b). Unfortunately, such a cross-sectional test would be subject to various kinds of bias, and it would be virtually impossible to get adequate tests of the signicance of the coefficients, because the assumptions underlying the usual significance tests are not satisfied. To avoid these problems, (a) We construct estimate. a portfolio we use the following whose expected strategy: is the quantity we want to

return

(b) To avoid bias, we select stocks for the portfolio only information that was available at that time.

at each point in time using

(c) To get an efficient estimator, we select a portfolio with the smallest possible variance of return, subject to conditions (a) and (b). Thus we get a portfolio whose expected return is equal to the quantity we want to estimate, and that has the minimum variance of return, The mean return on the portfolio will be an unbiased estimator of its expected return. and the standard error of estimate of the mean return will be an unbiased estimator of the accuracy of our estimate of the portfolios expected return. Since the variance of the portfolio return is as small as possible, the standard error of estimate of the expected portfolio return will bc as small as possible. If we knew the values of PI and S, for every security, and if we knew the covariance matrix au for the security returns, the nppiication of this method to the estimation of ye and y, in eq. (4) would be straightforward. The required weights X, for the estimation of ye would bc the solution to: minimize : %XJjaij, I,X,E(J?,) = yo. for (5), we have: Yl(SJ,ts,--&f))/&f = ye. (6) (5)

sub.ject to: Substituting

from eq. (4) in the constraint Yo(z,x,)+rE(a,)-Yy,l(C,X*~,)+

Fama and MacBeth (1973) have shown that there is a way of doing a sequence of crosssectional regressions and then analyzing the sequence of coefficients that is equivalent to the time series tests done by Black et al. (1972) and the tests in this paper. For a discussion of some of the problems encountered in the usual simpler kind of cross-sectional regression, see Miller and Scholes (1972) and Black et al. (1972). The essence of the problem is that the observations used in the regression are assumed to be independent when they are not in fact independent. This biases the estimated standard error of estimate of the coefficients.

10

F. Black, hf. Schoies, EBccrJ of diviahd yieki on stock prices

This will be satisfied for all values of yt and E(R,) only if eqs. (7) are satisfied, X,X,= 1, (7)

&X&G = 0, &X&i3 = 6M.

The second two eqs. in (7) say that the portfolio B will be equal to zero, and that the portfolio dividend yield will be equal to the dividend yield on the market. Substituting eqs. (7) for the constraint in (5). we have: minimize: subject to: Z,X,Xiaij, x,X, = 1,

Introducing Lagrange multipliers A,, no, and vO, this becomes: minimize: C,,XIX,a,, -21,(Z,X~,)-22n,(I:,X~,-S,) -2v,(Z,X,1). (9)

Setting the derivatives with respect to X, equal to zero, we have: Z,X,a,/4&-lr0dfvg = 0. (10)

Eqs. (10) and (7) form a system of eqs. (I 1) defining the weights X, (and the Lagrange multipliers I,, x0, and vo) for the most efficient unbiased estimator of Yo* S,X,a,, = Joflr+o~,+ v3,

x,x, =
&X,BI &X,6,

1,

= 0, = sy.

(11)

Similarly, the weights that give the most efficient estimator for Y, are given
by the following equations:

ZjXjUjj = M,+0,+

vi,

z,x, =

0,

wg, = 0,
z,x,s, = sy.
portfolio

(12)

If we knew ulj, B,, and 6, in advance, eqs. (12) would give us the most efficient estimator for yl. But we do not know b,,, /I,, and 6, in advance, so

F. Black, M. Sckoles, Effects of divihd

yield on stock prices

11

we must make estimates of these, and must thus be satisfied with only an approximately efficient estimator for yl. In addition, in order to avoid bias as in condition (b) above, we must make sure that our estimates of o,,, /I,, and 6, for any point in time make use only of information available at that point in time. 4. Estimating the weights for a portfolio estimator We see now that we must use two steps to construct a portfolio with minimum variance of return whose expected return is equal to yi . First, we must estimate the quantities uu, /I#, and 6, for the components of the portfolio, and second, we must use eqs. (12) to estimate the weights X, that we apply to the components to construct the portfolio. To make it easier to make the first series of estimates, we can use as our components not the individual securities, but a set of intermediate portfolios. These intermediate portfolios can be constructed not only to make it easier to get unbiased estimates of u,,. /I,, and 6,. but also to help ensure that eqs. (12) will not be singular. Thus they are constructed to have a wide range of values of b,, and a wide range of values of /I,, and relatively low correlation between 6, and /I,. We used monthly data on dividends, prices, and returns for every common stock listed on the New York Stock Exchange at any time in the period January 1926 to March 1966. The information was compiled by the Center for Research in Security Prices of the University of Chicago; a detailed description of the file is given in Fisher and Lorie (1964). Prior to 1950, we used yields on 90-120 day dealer commercial paper as given in the Federal Reserve Bulletin, for our interest rates. From 1950 on, we used the yields on one month finance paper given in Salomon Brothers & Hutzlers An analytical record of yields and yield spreads. We decided, rather arbitrarily, to construct 25 intermediate portfolios. The number of intermediate portfolios could be larger or smaller without changing the results significantly. Each portfolio changes its composition over time: stocks enter and leave the portfolio each year, and stocks that are delisted from the Exchange are dropped from the portfolio in the month in which they are delisted. Nevertheless, the portfolios are chosen so that their relevant characteristics (a,,, /Ii, and 6,) change slowly through time. The first step in constructing the 25 intermediate portfolios is to use 5 years of data to estimate j? and dividend yield for all of the securities in the universe that have at least 5 years of history. Actually, we use the full 5 years only in estimating /I; we used the dividends paid in the last year of the five years, and the price at the end of the fifth year, in estimating the dividend yield of a security. We then ranked the securities on estimated yield from maximum to minimum, and divided them into 5 groups. Within each of these groups, we ranked the

12

F. Black, M. Sckoks, Efects of dividendyield on stock prices

securities on estimated /I from maximum to minimum, and divided the group into 5 subgroups. Thus we obtained 25 groups of securities, differing widely in both yield and @. Each of the intermediate portfolios was started by investing an equal amount of money in each security in one of these 25 groups. Since we used 5 years of data in constructing the groups, the intermediate portfolios begin in the 6th year. Each portfolio contains the same securities for a year, except that securities had to be dropped from the portfolio if they were delisted from the New York Stock Exchange during the year. Each month, we readjust the amounts of money in each security so that every portfolio starts the month with an equal amount of money in each security in the portfolio. At the end of a year, we revise the lists of securities in the intermediate portfolios. We drop off the first year of data, and add data from the 6th year. Using the resulting 5 years of data, we make new estimates of /I and yield for each security in our new universe, which now consists of all securities with at least 5 years of history on the New York Stock Exchange at the end of year 6. We rank the securities again on estimated yield, divide them into 5 groups, rank each group on estimated p, and divide it into 5 subgroups. Thus we obtain 25 new groups of securities to be used in the intermediate portfolios during the 7th year. We repeat this process each year, always using the previous 5 years of data to rank stocks on yield and /?, and obtain a new list of stocks for each of the 25 portfolios. Note that the selection of stocks for each portfolio is made using only information that was available at the time for which the selection is made. The 25 portfolios arc revised each year bccausc the characteristics of the stocks in the univcrsc do change over time In particular, their ps and their yields change over time. By revising the 25 portfolios each year, we can ensure that their characteristics are relatively stable, even though the characteristics of individual stocks arc changing. We started with about 40 years of data, and we used the first five years to obtain the initial lists of stocks for our intermediate portfolios. Thus we end up with 35 years of monthly returns (and dividend yields) on each of the 25 intermediate portfolios. Now we can use the intermediate portfolios as if they were securities, and apply the method described in the previous section to construct a single portfolio estimator for yt . But first, we need estimates of ail, /3*,and 6, for the intermediate portfolios. We used the first five years of data on the intermediate portfolios to estimate these quantities for the sixth year of the intermediate portfolios, which will be the first year of the final portfolio. We estimated the p, for a portfolio by regressing its return on the market return, after subtracting the interest rate from . . both returns. In esttmatmg a,,, we assumed that the diagonal elements ull are equal to ~:umm+urrr where u,, is the estimated variance of the market return

F. B&k,

M. Scholrs. Effects of dividindyield on stock prices

13

and a,, is a constant residual variance term. We assumed that the off-diagonal elements cIj (with i # j) are equal to j?J3jc,,.9 We used as our market portfolio an equally weighted portfolio of all the securities in our universe. We estimated 6, by dividing the dividends paid on portfolio i in the fifth year by the value of the portfolio at the end of the fifth year. We used these estimates, together with eq. (12) derived in the previous section, to get the weights X, to be applied to the intermediate portfolios in constructing the first year of the final portfolio. After a year, we drop off the first of the 5 years of data on the intermediate portfolios, add the latest year, make new estimates of ui,, pi, and 6i, and calculate new values of the weights Xi. Thus the weights to be applied to the intermediate portfolios are revised each year. This ensures that the characteristics of the final portfolio will be even more stable than the characteristics of the intermediate portfolios. Note again that all of the information used in constructing the final portfolio at any point in time was available at that time. This rules out almost all of the possible biases in using the final portfolio as an estimator for yr. In fact, once we have constructed the final portfolio, we can forget about how we obtained it. We can show that it is a good estimator for y1 , simply by observing its properties. We will find that it consists of long positions in high yield securities, and short positions in low yield securities, with the total long position approximately equal in value to the total short position. We will also find that the portfolio has a /? that is approximately equal to zero. Finally, we will find that the variance of the return on the final portfolio is very small. If stocks with high yields have significantly different expcctcd returns than stocks with the same lcvcls of /I but low yields, then the mean return on this portfolio will be significantly dilfcrcnt from zero. And if the cffcct changes significantly in direction or magnitude over time, the mean return on the portfolio will bc significantly different in diffcrcnt subpcriods. It is true that there are some arbitrary features to the methods used in constructing the final portfolio, such as the use of 5 years of history in making estimates, and the revision of the estimates every year. Thus the final portfolio we obtain may not be the most efficient possible estimator of yI . But WC bclievc that it is close to the most etficicnt estimator. We tried a number of variations on this method, but were unable to obtain a more ctficient estimator. The discussion in this section has emphasized the estimation of y, , but exactly parallel methods were used to estimate yo. 5. Empirical results

The first step in our estimation procedure is the construction of 25 intermediate portfolios by ranking stocks on both dividend yield and /I, using the
9Wc used this method of estimating the covariance matrix because the estimate errors of the elements of the estimated covariancc matrix itself turned out to be extremely high.

14

F. B&k.

M. Schoks, Effects of dividend yield on stock prices

methods described in the preceding section. Our initial analysis will be confined to the post-war period (March 1947 to February 1966). During this period, the risk levels of stocks and portfolios [see Black et al. (1972)] and the tax laws have been relatively stable. The monthly excess returns on the 25 portfolios are obtained by subtracting the interest rate from the monthly returns. The market excess return is taken to
Table 1 Summary

statistics on 25 intermediate portfolios, 1947-1966.

Portfolio number (1)

Yield class (2) I I : I 1 0.0107 0.0115 0.0103 0.0098 0.0099 0.0127 0.0018 0.0116 0.0110 0.0100 0.0116 0.0121 0.0108 0.0114 0.0094 0.0114 0.0110 0.0099 0.0103 0.0087 0.0107 0.0131 0.0110 0.011 I 1.22 1.04 0.96 0.80 0.70 1.20 1.08 0.90 0.79 0.57 1.19 1.05 Z:Z 0.56 1.31 1.09 0.94 0.79 0.60 1.66 1.50 1.36 1.12 0.97 - 0.0025 0.0002 -0.0001 0.0011 0.0022 -0.ooo4 0.0000 0.0017 0.0024 0.0038 -0.0014 O.ooO6 0.0009 0.0036 0.0033 - 0.0028 -0.0009 -0.0003 0.0016 0.0022 - o.cn74 - 0.0032 - 0.0039 -0.0012 O.COO4 -2.1 0.2 -0.1 1.3 2.6 -0.3 0.0 2.4 3.7 4.8 - 1.5 0.8 1.1 4.0 3.2 -2.8 -1.0 -0.3 1.4 2.0 -4.4 -2.4 -3.0 -1.0 0.3 0.93 0.94 0.94 0.93 0.90 0.95 0.96 0.96 0.95 0.88 0.96 0.96 0.94 0.90 0.82 0.96 0.95 0.92 0.88 0.81 0.93 0.94 0.94 0.93 0.92 0.067 0.071 0.071 0.071 0.071 0.061 0.061 0.061 0.059 0.060 0.053 0.053 0.053 0.053 0.051 0.044 0.043 0.044 0.043 0.043 0.01 I 0.016 0.023 0.024 0.027

6 7 8 9 10 II 12 13 14 15 16 17 18 19 20 21 22 23 24 25

II II II II 11 III III 111 III 111 IV IV IV IV IV V V V V V

0.0109

be an equally weighted average of the excess returns on all the stocks in our universe. The summary statistics for the regression of the excess return on each of the 25 portfolios on the excess return on the market are given in table 1. In constructing these portfolios, the stocks were divided into 5 classes on yield, and each yield group was divided into 5 subclasses on j3. The class and subclass

F. Black. M. Schotes, Eflects of diuiahd yield on stock prices

IS

numbers are given in columns (2) and (3). The estimated mean excess return for each portfolio is given in column (4). The estimated slope and intercept for each regression are given in columns (5) and (6), and the f-statistic on the intercept is given in column (7). The estimated correlation coefficient for each regression is given in column (S), and the realized average yield on each portfolio is given in column (9). The realized yield on a portfolio is defined as the sum of the dividends on the portfolio for a year, divided by the value of the portfolio at the beginning of the year, averaged over the sample period. We can see that the portfolios had the properties that they were constructed to have. The portfolio yields range from an average of 0.07 in class I to 0.02 in class V. Within each yield class, the ranking of the portfolio Bs is exactly as predicted. Recall that the stocks were selected for these portfolios using only information that was available at the time they were selected, so the method of construction does not guarantee these properties. Note also that there is little correlation between realized yield and fl, except in yield class V. [Compare columns (5) and (9).] The mean excess return and the a of a portfolio do seem to depend on its p, when yield is held constant. [The relation between these three quantities was shown by Black et al. (1972).] When /I is held constant, however, neither the mean excess return nor the a of a portfolio seems to depend on its yield. For example, portfolios 2, 7, and 12 all have about the same values of /I, 11, and a, but they have different dividend yields. Although we believe that the significance lcvcls on the coefficients obtained by doing cross-sectional rcgrcssions on data such as thcsc arc biased upward, we did such a regression to see what the results would be. When we ran fl on fl and 3, the cocfficicnt on fi had a I-value of 4.2, while the coefftcient on 5 had a t-value of only 1.3. Even though the significance is biased upward, the coefftcient of the dividend yield does not appear signiflcantly dilTcrcnt from zero. While the data given in table 1 refer to the 25 intermediate portfolios in the post-war period, the portfolios were constructed starting in 1931. As indicated in the preceding section, the next step in constructing our portfolio estimator is to estimate Q,,, 8,. and 6, for the 25 portfolios, using data for the period 19311936. We use these estimates to construct weights for the portfolio estimator for 1936-1937, using eq. (12). We repeat this procedure each year, always using the latest five years of data to estimate B,,, PI, and 6,. Thus we obtain a different set of weights for the 25 intermediate portfolios in each year. The weights for selected years are shown in table 2. The weights on high yield portfolios tend to be positive, while the weights on the low yield portfolios tend to be negative. In each year, the sum of the weights is zero, the weighted sum of the estimated values of p, is zero, and the weighted sum of the estimated values of 6, is equal to the estimated value of 6,. Because The values of the coefficients of j? and 6 in this regression were 0.0028 and 0.0149. The r 1 was 0.46.

16

F. Black,

M. Scholes,

Efects

of dividend yield on stock prices

Table 2 Weights on the 25 intermediate portfolios to give the portfolio for y, in selected years. Portfolio number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 4 25 Year 1950 0.26 0.15 0.13 0.10 0.07 0.12 0.09 0.06 0.02 -0.10 0.07 0.03 0.00 0.00 -0.05 estimator

1935 0.11 0.09 0.06 0.06 0.04 0.07 0.05 0.04 0.00 - 0.06 0.04 0.00 -0.02 - 0.05 - 0.06 0.00 -0.03 -0.04 -0.07 -0.09 -0.01 -0.02 - 0.02 -0.04 -0.0X

1940 0.16 0.13 0.08 0.04 0.00 0.11 0.05 0.02 -0.01 - 0.06 0.09 0.06 0.01 -0.08 -0.11 0.02 -0.04 -0.04 - 0.08 -0.12 -0.02 -0.03 - 0.03 -0.07 -0.10

1945 0.25 0.18 0.12 0.08 0.07 0.10 0.05 0.03 0.00 -0.03 0.02 -0.01 -0.05 -0.05 -0.10 0.1

1955 0.16 0.16 0.13 0.11 0.10 0.10 0.09 0.08 0.06 0.03 0.06 0.05 0.02 -0.01 -0.01 -0.01 -0.03 -0.03 -0.06 -0.08 -0.08 -0.09 -0.21 -0.29 -0.26

1960 0.22 0.16 0.13 0.09 0.06 0.13 0.10 0.07 0.04 0.01 0.06 0.04 0.02 0.00 -0.04 0.03 -0.01 -0.04 - 0.07 -0.14 -0.05 -0.13 -0.1s -0.23 -0.27

1965 0.27 0.13 0.12 0.06 0.04 0.14 0.09 0.05 -0.01 -0.06 0.05 0.03 -0.0 -0.07 -0.08 0.1 -0.06 -0.11 -0.16 0.04 -0.08 -0.12 -0.17 -0.22

I 0.01 - 0.06
-0.13 -0.22 0.00 -0.04 - 0.09 -0.09 -0.14

0.02 -0.01
-0.04 -0.09 -0.15 -0.03 -0.06 -0.21 -0.22 -0.26

I 0.02

--

--

Table 3 The portfolio estimators for y, (panel A) and y. (panel B). Putwl A Period 1936-66 1947-66 1936-46 1947-56 1957-66 1940-45 a, = 9, o.cGo9 0.0009 0.0011 0.0002 0.0016 0.0018 r. 0.94 0.90 0.54 0.19 0.99 0.34 B, -0.01 0.08 -0.01 0.11 -0.14 0.15 6, 0.044 0.047 0.036 0.054 0.040 0.05 1 6, 0.048 0.049 0.046 0.060 0.038 0.052

Panel B Period 1936-66 1947-66 1936-46 1947-56 1957-66 aa = & 0.0060 0.0073 0.0033 0.0067 0.0065 t. 3.02 3.93 0.72 2.55 2.37 Bo 0.02 0.03 -0.01 0.12 0.10 60 0.048 0.049 0.046 0.060 0.038 8 O.U48 0.049 0.046 0.060 0.038

F. Black. M. Scholes, Eflects of dividend yield on stock prices

17

these estimates are subject to error, however, the /I of the portfolio estimator may not be exactly equal to zero, and its yield may not be exactly equal to the yield on the market. The portfolio estimator for y,, is constructed similarly, using eq. (11). The two portfolio estimators are constructed from 1936 to 1966. Because the actual /3s of the portfolio estimators are not always exactly zero, we do a regression of the return on each portfolio estimator against the return on the market, using data for the entire period. This helps remove the effects of a positive or negative average p for the period. Then we take the as from these regressions as our estimates of yt and y,, . Writing 8, and K,, for the returns on the portfolio estimators, the regressions take the form :

RI-R = ai+j?i(Bm-R)+q.

(13)

Thus we take a, = 9,. The regression statistics and yields For the estimators for the full period and for several subperiods are given in table 3. From table 3, we see that for the entire period and for every subperiod, the estimate of yr is insignificantly different from zero. This means that the expected returns on high yield securities are not significantly different from the expected returns on low yield securities, other things equal. Since the return on the portfolio estimator for y, is equal to the difference between the return on a well-diversified high yield portfolio and the return on a well-diversified low yield portfolio, it means that even highly diversified portfolios at different levels of yield do not have significant dilfcrenccs in mean return. Since ?, is not significantly different from zero for the whole period or for any of the subpcriods WC looked at, WC cannot say either that high yield stocks tend to have higher returns than low yield stocks or that high yield stocks tend to have lower returns than low yield stocks. The value of y, is approximately I /o per year, and that is nowhere near the lcvcl that would make it statistically significant. Thus the data arc consistent with true values of y, that arc very ditrcrcnt in economic terms. The true value of y, might easily be - I /oper year, which would mean that high yield stocks have lower expected returns than low yield stocks of equal risk. This would be consistent with a preference for dividends on the part of investors. Or the true value of y, might easily be 3% per year, which would be consistent with a great aversion for dividends on the part of investors because of their tax disadvantages or for other reasons. In other words, we cannot reject any of a number of very different hypotheses that have been proposed. Since this analysis was designed to give the most eficient test of these hypotheses, it follows that the investor has little to go on in deciding how to take yield into account in making his investment decisions. He doesnt even know whether high yield stocks have higher or lower expected returns than low yield stocks with
The fact that in table 3, each of the subperiods we picked had a positive value of 9, was a mere accident. If we had chosen different subperiods, we would have found some negative values of 9,.

18

F. Black,

M. Sckoles,

Efects

of aYvi&nd yield on stock prices

the same risk. So it might make sense for him simply to ignore yield in making his investment decisions. The period 1940 to 1945 is shown separately, because income tax rates were increased sharply in this period. One could argue that if tax factors cause high yield stocks to have lower prices, and thus higher returns, than low yield stocks, the increase in income tax rates would have caused a decline in the prices of high yield stocks, and thus a negative a for the portfolio estimator for yI in that period. It turns out, however, that the a is positive and is not significantly different from zero. From panel B in table 3, we see that the results found by Black et al. (1972) cannot be due to differential returns on securities with different dividend yields. The estimator for y0 is significant for the total period and for the post-war period. Thus low j3 stocks seem to have as that are significantly greater than zero, and high j? stocks seem to have as that are significantly less than zero. 6. Dividend policy and stock prices We have been unable to show that differences in dividend yield lead to differences in stock returns. This implies that we are unable to show that dividend policy affects stock prices. If an increase in a companys dividend tended to increase the price of its stock, then we would expect to find high yield stocks selling at high prices and offering low returns. The only circumstance under which this reasoning would not hold would be if the increase in the payout
Table 4 Dividend yield and payout by yield Yield class I II III IV V Dividend yield 0.059 0.052 0.045 0.038 0.04
class.

Payout 0.78 0.63 0.59 0.55 0.43

ratio increased the price of the stock SO much that its yield actually fell. In this case, we would expect to find that high yield stocks tend to have lower payout ratios than low yield stocks. To test for this possibility, we constructed a new data file by taking annual earnings and dividend information from the Compustat file from 1950 to 1970 and monthly returns from the University of Chicago and ISL data files from 1946 to 1970. The resulting file contained data on 1050 New York Stock Exchange firms.

F. Black. M. &ho&s, Effects of divi&mi yield on stock prices

19

We constructed 25 portfolios, using the methods described in the preceding sections, ranking on dividend yield and 8. The resulting portfolios ran from 1951 to 1970. For each portfolio, we calculated an average payout ratio over all the stocks in the portfolio. We then calculated the average dividend yield and payout ratio for the portfolios in each yield class. The results are given in table 4. They indicate that high yield portfolios do, in fact, have high payout ratios, and that increasing a companys payout ratio does not increase the price of its stock so much that its yield is decreased. Thus the results we obtained for dividend yields carry over to payout ratios as well. Stocks with high payout ratios do not have returns that are significantly different from the returns on stocks with low payout ratios. The portfolio estimator for a payout ratio factor is taken to be the same as the portfolio estimator for the dividend yield factor. We are simply thinking of dividend yield as an instrumental variable for payout ratio, so the portfolios constructed to have different levels of dividend yield are thought of as portfolios constructed to have different levels of payout ratio. The results in tables l-3 are thus interpreted as applying to payout ratio as well as to dividend yield.

7. Portfolio strategy for an investor Our evidence does not allow us to show significant differences between the returns on high yield stocks and the returns on low yield stocks. In our analysis, we measured the returns without taking into account any taxes that the investor might pay on dividends or realized capital gains. Thus the analysis has direct implications for the tax-exempt investor. It implies that a tax-exempt investor may not gain significantly by emphasizing high yield stocks over low yield stocks, other things being equal. Furthermore, we used a rather elaborate procedure for separating high yield stocks from low yield stocks, while holding other factors constant. Using our procedure, one could shift a portfolio toward higher yield stocks or lower yield stocks without increasing its risk very much. But using more informal methods, an investor would have a tendency to increase the risk of a portfolio substantially while trying to change its yield, because he would make his portfolio less well diversified. So there are two reasons why a tax-exempt investor might not pay attention to dividends in trying to maximize his expected return for a given level of risk. First, dividend yield does not have a consistent impact on expected return, so increasing the average yield of a portfolio will cause it to have higher returns in some periods, but lower returns in other periods. And second, attempts to maximize or minimize the yield in a portfolio are likely to lead to a badly diversified portfolio, so that the expected return on the portfolio, given its level of risk, will be lower than it might be with a better diversified portfolio.

20

F. Black. M. &holes, Effects of dividendyield on stock price3

It turns out that the same is true of an investor in a high tax bracket. We can see this most clearly by assuming that capital gains taxes are zero, and that the tax on dividends is SO%, and then calculating the portfolio estimator for yl, on an after-tax basis. The portfolio estimator for y1 on an after-tax basis, under the assumption that dividends are reduced by 50%. will be closely related to the portfolio estimator for yI on a before-tax basis. The construction of the 25 intermediate portfolios will not be affected. The estimates of o,~ and fl, will be virtually unchanged for every five year period. The estimates of d1 and by will be cut in half. Looking at eq. (12), we see that if the only change in the coefficients is to cut the ai and the anI in half, the after-tax solution can be obtained from the beforetax solution simply by multiplying II~ by 2. The weights X, and the values of 1, and v1 are unchanged. Thus the after-tax portfolio estimator will be identical with the before-tax portfolio esumaror, except that its yield will be cut in half. Its mean will be reduced by half the average value of a,, and the standard error of estimate of its mean will be unchanged. For the full period (1936-1966), the mean of the before-tax portfolio estimator as shown in table 3 was 0.0009 per month, or approximately 0.001 per month. The dividend rate on the market portfolio was 0.048 per year, or 0.004 per month. Subtracting half of the dividend rate from the mean of the before-tax portfolio estimator, we find that the after-tax portfolio estimator is -0.001 per month. It happens to have the same value as the bcforc-tax portfolio estimator, but the opposite sign. It is clear that the mean of the after-tax portfolio estimator is not significantly diffcrcnt from zero either. (We get about the same result if we work with any of the subpcriods of the cntirc period, also.) Thus even an investor in a high tax brnckct can ignore yield in maximizing the expected return on his portfolio for a given level of risk. If he tries to emphasize stocks with low yields, he will find that he does not consistently improve his after-tax returns. In some periods, his after-tax returns will be higher, while in other periods, his after-tax returns will be lower. But unless he is very careful, he will find that he increases the risk of his portfolio significantly, by causing it
to be less well diversified. So he is likely to reduce the expected return on his portfolio for a given level of risk. It is true that if an investor knew exactly how dividends affect common stock yields, and if the cost of maintaining a portfolio with a given dividend yield were zero, it would be advantageous for him to take the yield effect into account when constructing his portfolio. If the known yield effect were small, and the loss of

F. Black. hf. Scholes. Eflects of dividend yield on stock prices

21

diversification incurred by emphasizing high or low yield stocks were large, then he might shift his portfolio only slightly in the direction of higher or lower yield. But the yield effect would always cause him to make some shift in his portfolio. However, the direction and magnitude of the yield effect are not known, and there is no prior reason for believing that it should have a certain direction and magnitude. There appear to be many investors who prefer dividends to capital gains, possibly for reasons other than maximizing the expected after-tax returns on their portfolios. There are many other investors who prefer capital gains, for tax reasons. And there are many investors who ignore dividend yield in making investment decisions. So there is neither theoretical nor empirical justification for choosing any specific non-zero value for the mean of the yield factor. The evidence in this paper does not imply that an investor in any tax bracket should take yield into account in choosing his portfolio strategy. An investor who is trying to maximize his expected after-tax return for a given level of risk may ignore dividends and concentrate instead on improving his portfolio diversification. It is much more likely that he can reduce his risk by improving his diversification than that he can increase his expected return by emphasizing stocks with a given level of dividend yield.

8. Dividend policy for B corporation

Perhaps the most important implications of these findings arc for corporate dividend policy. WC have found that a corporation that incremcs its dividend can cxpcct that this will have no dclinitc cllcct on its stock price. The price may chnngc temporarily in rcsponsc to ;I change in the dividend, bccausc the market may bclicvc that the change indicntcs something about the probable future course of earnings. If it bccomcs clear that the change was not made because of any change in estimated future earnings, this temporary cfTcct should disappear. Thus a corporation may want to choose its dividend policy under the assumption that changes in dividend policy will have no permanent effect on its stock price. If it has a continuing need for new capital, then a reduction in its dividend would be a very incxpensivc way of providing that capital. If it believes that the tax disadvantages of dividends outweigh in its shareholders minds any reasons they may have for prcfcrrin g dividends, then it can do the majority a favor by reducing its dividends.

Refcrenccs Black, F., M.C. Jensen and M. Scholes, 1972. The capital asset pricing model: Some empirical tests. in: M.C. Jensen, ed., Studies in the theory of capital markets (Praegcr, New York) 79-124. Brcnnan. M.J., 1970a, Investor taxes. market equilibrium and corporate finance. Ph.D. Thesis (M.I.T.. Cambridge, Mass.).

22

F. Biack. M. Skkoles,Efccfs of dividendyield on stock prices

Brennan, M J.. 1970b. Taxes. market valuation and corporate financial policy, National Tax Journal 23.417-427. Diamond, J.J.. 1967, Earnings distribution and the evaluation of shares: Some recent cvidcncc, Journal of Financial and Quantitative Analysis 2.14-29. Fama. E.F. and J.D. MacBeth. 1973. Risk, return and equilibrium: Empirical tests. Journal of Political Economy 81.607-634. Fama. E.F. and M.H. Miller, 1972. The theory of finance (Holt, Rinehart & Winston, New York). Fisher. L. and J. Lorie. 1964. Rates of return on investments in common stocks. Journal of Business 37,1-21. . Friend, I. and M. Puckett. 1964. Dividends and stock prices. American Economic Review 54, 656-682. Gordon, M.J.. 1959. Dividends, earnings, and stock prices, Review of Economics and Statistics 41.99-105. Gordon, M.J. and E. Shapiro, 1956. Capital equipment analysis: The required rate of profit, Management Science 3,102-l 10. Graham, B. and D.L. Dodd, 1951, Security analysis (McGraw-Hill, New York). Jensen, M.C.. 1972. The foundations and current state of capital market theory, The Bell Journal of Economics and Management Science 3,357-398. Miller, M. and F. Modigliani. 1961, Dividend policy, growth, and the valuation of shares, Journal of Business 34.411433. Miller, M.H. and M. Scholes. 1972, Rates of return in relation to risk: A reexamination of some recent findings, in: M.C. Jensen, ed., Studies in the theory ofcapital markets (Praegcr, New York) 47-75. Sharpe. W.F., 1970. Portfolio theory and capital markets (McGraw-Hill, New York).