The determinants of stock prices: evidence from the United Kingdom stock market Available to Purchase

Draws together existing research on capital markets to understand how dividend/price ration and dividend growth predict movements in share prices. Analyses data from the UK stock market from January 1995 to December 1996 to test out two hypotheses ‐ the first, that there are no significant lag effects from stock price determinants (dividend/price ratio or dividend growth) to real stock returns; the second being the “information hypothesis” of dividends, which predicts that unexpected changes in dividend payments (for example, an increase in dividend payout ratio) may “signal” changes in future returns to investors, thereby leading to higher returns. Points out that this second hypothesis is consistent with the efficient market hypothesis. Analyses the movements in stock returns using Granger causality tests and finds that dividend/price ratio predicts real stock returns for the UK stock market, and that there is a strong relationship between real stock returns and dividend yields. Argues that this is consistent with the “information hypothesis”.