A Model of Competitive Stock Trading with Endogenous Dividend Policy and Differences of Opinion

• Main Authors: Chen, Chia-Hui, 陳珈惠
• Other Authors: 陳其美
• Format: Others
• Language: en_US
• Published: 2003
• Online Access: http://ndltd.ncl.edu.tw/handle/74685465841467420398

碩士 === 國立臺灣大學 === 財務金融學研究所 === 91 === This article intends to analyze the roles of dividend policy and differences of opinion in leading to special patterns in the equilibrium price and trading volume of a common stock that is traded continuously in a frictionless economy. We show that differences of opinion about the firm’s return on assets (ROA) among risk averse investors represent both a speculative opportunity and a source of excess risks in stock trading. With moderately divergent opinions, a linear stationary Radner equilibrium exists, where the stock price and the investors’ stockholdings are all linear functions of the firm’s current retained earnings. More divergent opinions imply a weaker relationship between the stock price and the retained earnings. Diverences of opinion do create incentives for the investors to trade, but more divergent opinions need not imply a higher trading volume. Because an optimistic investor also perceives more risk, in equilibrium the equivalence conditions that ensure optimistic investors to behave like trend chasers are very subtle. Trading volume is positively correlated with absolute price changes, but the market depth may increase or decrease when opinions become more divergent. We also show that the consecutive price changes may be positively or negatively correlated. The role of a high dividend payout ratio is twofold: it implies productive ineffciency (effciency) if the firm’s ROA is high (low), and it mitigates the divergence in opinion among traders, which in turn reduces the stock price volatility and investors'' risk bearing. We characterize the value-maximizing dividend policy and show that our results are mostly compatible with existing empirical facts.