Testing the Predictive Ability of the Dividend Valuation Model on Ordinary Shares
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Date
1993-06Author
Kerandi, Andrew M
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
The valuation of ordinary shares is much more difficult than that of
preferred shares and bonds because of more uncertainty and instability
surrounding the income from ordinary shares. The satisfying aspect of
investing in bonds is the certainty of income. Bonds have a superior
claim on assets and income in the event of liquidation, and as long as
the interest and principal on a bond are adequately secured and the
yield satisfactory, the decision to invest is not difficult. Greater
risk is associated with preferred share investment because dividends are
less certain and do not represent a fixed commitment of the company.
However,. yields can easily be determined and whether the dividends and
principal are secure can be readily established. The valuation of
ordinary shares is more complicated and this has led to the development
of a number of models, including the dividend valuation model and
earning per share valuation model.
This study sought to determine the predictive ability of the Dividend
Valuation Model on the ordinary shares. Data collected in form of share
prices, market indices and dividend per share from the Nairobi Stock
Exchange (NSE) secretariat were used to predict share prices for each of
the thirteen companies studied. The market model was used to provide a
link between the expected values which are non-observable and the real
values that were used in testing the model. The predicted share prices
were compared with actual prices by computing the difference between
them. The differences between the two prices were subjected to t-tests.
The tests of significance showed t hat; out of the thirteen companies
studied, only three showed that the differences were not significant. We
therefore concluded that the dividend valuation model was a poor
predictor of share prices in the NSE
Citation
Master of Business and Administration, University of Nairobi, 1993Publisher
University of Nairobi. Faculty of Commerce