DIVIDEND YIELD AND EXPECTED RETURNS - THE ZERO-DIVIDEND PUZZLE

Previous research examining the relation between dividend yield and equity returns documents a U-shaped pattern arising from the positive CAPM-adjusted average excess return of zero-dividend firms. In contrast, this paper reports that zero-dividend firms earn negative average excess returns relative to firms of similar size. Despite the apparent conformity of these results to the predictions of after-tax asset pricing models, the negative size-adjusted excess returns cannot be drive solely by tax effects. These excess returns, which are concentrated in the initial zero-dividend years and approach - 1% per month, are attributed to possible dividend-expectation effects rather than taxes. © 1990.