SOME FURTHER THEORETICAL AND EMPIRICAL IMPLICATIONS REGARDING THE RELATIONSHIP BETWEEN EARNINGS, DIVIDENDS AND STOCK-PRICES

In this paper earnings, dividends and stock prices are modelled within a plausible economic framework. The first stage in the analysis invol ves characterization of the dynamic behavior of earnings, evidence was found for mean reverting behavior in the long term, and weaker eviden ce for mean reversion in the short term. The relationship between divi dends and earnings is then examined using a modified form of the Lintn er model. The empirical results suggest the modified formulation perfo rms as effectively as the original Lintner approach. Using these findi ngs, we then develop the functional form of the corresponding share pr ice relationship. As a consequence of using a generalized model for ea rnings we are able to examine theoretically, the effect of different e arnings processes on share price behavior. The empirical results imply that changes in earnings per share and earnings per share are importa nt in explaining returns.