The Valuation of Future Dividends in Cross-sectional Models of Stock Returns

The valuation of future dividends as implied in option prices adds to the understanding of cross-sectional stock returns. I consider portfolios sorted by the difference between the valuation of future dividends and actual dividends. If it is fast, such implied dividend growth coincides with high stock returns but is followed by low stock returns, particularly if dividend yields are low. Explaining returns of portfolios sorted by implied dividend growth and accounting variables challenges the value effect and casts light on a possible origin of the profitability effect and the investment effect: a stock’s return history associated with implied dividends.