Abstract
This paper investigates the presence of cointegration between stock prices and
dividends for a panel of 56 large UK companies.  Using new techniques which
account for integrated processes in a panel context we demonstrate that stock
prices and dividends are cointegrated, with an implied common discount rate of
5.8%. 

1 Introduction
This paper examines the relationship between share prices and share dividends.  Most financial
textbooks point out that in a well-functioning capital market these two variables should be related
(e.g. Brealey and Myers, 1986); the present value of the share should be equal to the dividend
1
stream discounted by the return earned on securities of comparable risk.   A substantive body of
empirical research supports the view that share prices are influenced by changes in company
dividends.  For example, questionnaire surveys of investors indicate that dividend information
plays an important part in their assessment of the current value of a share (Arnold and Moizer,
2
1984; Pike, Meerjanssan and Chadwick, 1993)
 while interviews with financial managers suggest
that companies take a great deal of care when setting their dividend level (Lintner, 1956).  In
addition, stock market studies demonstrate that share prices respond to dividend news; dividend
increases tend to be associated with share 英语论文网 【http://www.51lunwen.org】price increases while dividend cuts are usually
associated with share price falls (Pettit, 1972; Ahrony and Swary, 1980; Abeyrathna et al.,
3, 4
1996).