A Dynamic Approach to the Dividend Discount Model

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Authors
Lazzati, Natalia
Menichini, Amilcar
Subjects
Dividend Discount Model
Gordon Growth Model
Real Options
Long-Run Growth
Dynamic Programming
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Date of Issue
2015-09-04
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World Scientific
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Abstract
We derive a dynamic model of the firm with endogenous investment and leverage ratio within the framework of the dividend discount model (DDM). Our valuation model incorporates two relevant components, namely, managerial flexibility and long-run growth. We dispense with any utility specification capturing the pre- ferences of shareholders and obtain closed-form solutions for the firm problem. A standard parameterization suggests that the value of the real options and long-run growth opportunities can easily represent more than 8% and 10% of share price, respectively. We also find that these two components of the stock price are both complements and countercyclical. We finally identify industries where valuation models that do not incorporate these features can lead to considerable underpricing of securities.
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Article
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The article of record as published may be found at https://doi.org/10.1142/S0219091515500186
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https://hdl.handle.net/10945/37021
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Lazzati, Natalia, and Amilcar A. Menichini. "A dynamic approach to the dividend discount model."�Review of Pacific Basin Financial Markets and Policies�18.03 (2015): 1550018.
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This publication is a work of the U.S. Government as defined in Title 17, United States Code, Section 101. Copyright protection is not available for this work in the United States.
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