Excerpt from The Short and Long Run Effects of Debt-Equity Ratios and Dividend Payout Ratios on Corporation Stock Prices
The paper reports the results of an investigation which sought to determine the effects of debt and dividend policies on corporate stock prices. More specifically, the research attempted to divide the total of the effects of debt and dividends into a part over which the managers of a firm can exercise direct control and those over which they have less control. That is, it was thought that stock price responses to debt and dividends were composed of two types of influences:
a. the influence of debt and dividend policies, which is said to be described by the average of the variables, and
b. the influence of short run variation in debt and dividends around these desired or policy levels.
It is hypothesized that in any specific year, the stock price of, say. Standard Oil of New Jersey differs from that of Texaco not only because Standard pursues different financial policies, but because, in that year. Standard and/or Texaco may have debt ratios or dividend payout ratios which differ from their target or average ratios due to the peculiarities of that year. Stated in even another way, variations in stock prices are thought to arise from variations in established financial policies between companies, and from within company year-to-year aberrations around these financial policies.
While there is an interest on the part of managers in knowing how short run fluctuations from established policies will affect their stock price, the more important managerial concern would seem to be that of determining the long run effects of specific policy choices. Thus, the real purpose of the research is to filter out the short run effects and focus on the long run effects of debt and dividend policies on stock prices.
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