Dividend policy irrelevancy and the construct of earnings

Zhan Gao, James Arvid Ohlson, Adam J. Ostaszewski

Research output: Journal article publicationJournal articleAcademic researchpeer-review

5 Citations (Scopus)


This paper analyzes the characteristics of earnings in valuation settings where the dividend policy is irrelevant to equity value. The paper first demonstrates an equivalent characterization of dividend policy irrelevancy (DPI) in a general linear dynamic. It then proceeds to show how DPI leads to ideal and practical constructs of earnings and examines their analytical properties. We further demonstrate that earnings properties can be used to deduce the core approach in practical equity valuation - namely, measures of growth in expected earnings explain the price to forward earnings ratio. However, unlike dividends, free cash flow cannot generally be claimed to be irrelevant to value.
Original languageEnglish
Pages (from-to)673-694
Number of pages22
JournalJournal of Business Finance and Accounting
Issue number5-6
Publication statusPublished - 1 Jun 2013
Externally publishedYes


  • Dividend policy
  • Earnings
  • Equity valuation
  • Information dynamics

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance


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