Some Aspects of the Aggregation Problem in the Dividend-Earnings Relationship

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Abstract
Four models of the relationship between dividends and earnings are estimated to study the effects of different types of aggregation. The data indicate that the adjustment process is probably discrete. One of the models implies a discrete adjustment process, while the other three imply a continuous process. All of the models are estimated using two different but equally reasonable proxies for normal earnings. Temporal and cross-sectional aggregation, and changes in assumptions about the adjustment process, affect the estimated speeds of adjustment more than the target payout ratios. Temporal aggregation produces a bigger information loss than aggregation across firms.

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