Dividends, prices and the present value model: firm level evidence

Recent stock price movements have led to a re-examination of the present value model. Typically, empirical Studies have employed a long span of US stock market index data, and have attributed a failure to detect cointegration to the presence of bubbles. This study considers UK firm-level data,and implements panel unit root and cointegration tests. Recent panel tests that allow for cross-sectional dependence control for factors such as bubbles that may result in temporary deviations from the long-run price-dividend relationship. The panel test results largely support the present value model, yielding evidence of cointegration between real prices and dividends.