Potential dividends and actual cash flows in equity valuation. A critical analysis

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.

• Autores: Vélez-Pareja, Ignacio; Magni, Carlo Alberto
• Fecha de publicación: 2009
• Institución: Universidad Tecnológica de Bolívar
• Repositorio: Repositorio Institucional UTB
• Idioma: eng
• OAI Identifier: oai:repositorio.utb.edu.co:20.500.12585/12311
• Acceso en línea: https://hdl.handle.net/20.500.12585/12311
• Palabra clave: Cash flow to equity; Equity value; Potential dividends; Fluxo de caixa para valoração; Potenciais dividendos; Valoração de patrimônio; Flujo de caja del accionista; Dividendos potenciales; Valor del patrimonio
• Rights: openAccess
• License: http://creativecommons.org/licenses/by-nc-nd/4.0/