POTENTIAL DIVIDENDS AND ACTUAL CASH FLOWS IN EQUITY VALUATION. A CRITICAL ANALYSIS

Authors

  • Ignacio Vélez Pareja Master of Science en Industrial Engineering, University of Missouri, Estados Unidos. Profesor Asociado, Universidad Tecnológica de Bolívar, Colombia. Grupo de investigación Instituto de Estudios para el Desarrollo, IDE, Colombia.
  • Carlo Alberto Magni PhD in Mathematics applied to economic problems, University of Trieste, Italia. Associate Professor of Mathematical Methods for Economics, Actuarial and Financial Sciences , University of Modena and Reggio Emilia, Faculty of Economics, Italia.

DOI:

https://doi.org/10.1016/S0123-5923(09)70092-0

Keywords:

Cash flow to equity, potential dividends, equity value

Abstract

Practitioners and most academics in valuation include changes in liquid assets (potential dividends) in the cash flows. This widespread and wrong practice is inconsistent with basic finance theory. We present economic, theoretical, and empirical arguments to support the thesis. Economic arguments underline that only flows of cash should be considered for valuation; theoretical arguments show how potential dividends lead to contradiction and to arbitrage losses. Empirical arguments, from recent studies, suggest that investors discount potential dividends with high discount rates, which means that changes in liquid assets are not value drivers. Hence, when valuing cash flows, we should consider only actual payments.

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Published

2009-12-31

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Section

Research articles

How to Cite

POTENTIAL DIVIDENDS AND ACTUAL CASH FLOWS IN EQUITY VALUATION. A CRITICAL ANALYSIS. (2009). Estudios Gerenciales, 25(113), 123-150. https://doi.org/10.1016/S0123-5923(09)70092-0