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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page The Aggregate Change in Shares and the Level of Stock Prices
William R. Nelson

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 equity premium.

Keywords: Equity issuance, equity repurchase, dividend-ratio model, earnings-price ratio

Full paper (1403 KB PDF) | Full paper (45688 KB Postscript)

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Last update: March 19, 1999