Abstract:
This thesis examines the relationship between future returns and dividend yields
on the London Stock Exchange for the period 1966 to 1993. An additional set of
explanatory variables is introduced in the form of the Confederation of British
Industries, Industrial Trends Survey data.
A significant relationship was found between dividend yields and future returns
when regression statistics were generated by ordinary least squares. The relationship
was shown, however, to be attributable only to the period from 1966 to 1980 and in
particular to the turbulent era from 1973 to 1975. When allowance was made for the
effect of a lagged regressor by use of the Goetzmann and Jorion (1993) simulation
model, no significant relationship between dividend yields and future returns for the
entire sample period was found.
Ordinary Least Squares estimation of regressions of future returns on the
Confederation of British Industries surveys of Business Opinion showed only a modest
relationship. This was considerably weakened when the regression coefficients were
estimated by randomisation. In common with Dividend Yields the relationship was
entirely a feature of the 1966 to 1980 period.
The evidence provided by this study does not enable the refutation of the semi-strong form of market efficiency.
