Keywords: Equity issuance, equity repurchase, dividend-ratio model, earnings-price ratio
Abstract: The average change in shares of equity is negatively correlated with
estimates of the equity premium calculated using the dividend-ratio model
of Campbell and Shiller, as well as with a variant of the model written in
terms of the earnings-price ratio. This correlation is consistent with
corporations issuing equity when it is a relatively inexpensive source of
finance and repurchasing equity when it is a relatively good investment.
However, when the retirement of shares resulting from mergers are included,
the average change in shares is no longer significantly correlated with the
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Last update: March 19, 1999