The Long Run Drivers Of Stock Returns: Total Payouts And The Real Economy

Stock Returns

The Long Run Drivers of Stock Returns: Total Payouts and the Real Economy by Roger G. Ibbotson

Stock Return Estimation Methods

  • Historical Risk Premiums: measure over various markets and time periods (Ibbotson & Sinquefield)
  • Consensus forecasts: individual investors , economists , and institutional inves tors , e.g., Welch (2001)/(2004), Fernandez Lopez
  • Demand: degree of investor risk avers ion and other characteristics , e.g., Ibbotson, Siegel & Diermeier (1984), Mehra & Prescott (1985), Mehra (2003), Constantinides (2003), Kaplan (2016)
  • Real economy (supply): stock market is constrained to be part of the economy, e.g., Diermeier, Ibbotson & Siegel (1984), Shiller (2000), Fama & French (2002), Ibbotson & Chen (2003)

Stocks, Bonds, Bills and Inflation Study (1976/1977)

  • Ibbotson/Sinquefield (1976/1977) conduct study of drivers of long-run asset class returns, using the S&P Composite as the measure of large cap stocks (similar to this study)
  • Key return building blocks :
    • Equity risk premium
    • Horizon premium
    • Default premium
    • Real interest rates
    • Inflation

Stock Returns

Stock Returns

The Supply of Stock Returns

Long-Run Stock Returns: Participating in the Real Economy

  • Ibbotson & Chen (2003) decompose his torical return of s tocks into different supply components : dividends, earnings, book value, and GDP per capita growth
  • Most of return is attributable to the supply of corporate fundamentals (e.g., dividends and earnings etc.) and real economic productivity (i.e., GDP per capita)
  • P/E growth and changing factor shares only account for a small portion of his torical returns
  • This next page updates original 1926-2000 sample to include 1871-2014, (without s tock buybacks )

Stock Returns

Stock Returns

Literature Review

  • Drivers of Rise of Buybacks:
    • SEC rule 10b-18 in 1982 provided a safe harbor for firms to conduct share buybacks without a suspicion of share price manipulation (e.g., Grullonand Michaely, 2002)
    • Tax benefits (e.g., Grullonand Michaely, 2002)
    • Greater flexibility than dividends (e.g., Guayand Harford, 2000)
    • Alternative motivations: undervaluation/signaling, management of “dilution effects”, EPS management (e.g., Allen and Michaely, 2003, and Brav, Campbell, Michaely2005)
  • International Evidence on Buybacks:
    • Increasing evidence of international importance of buybacks: European Union (von Eijeand Megginson, 2008), Japan (Tong et al, 2012), Australia (Brown and O’Day, 2006)

See full slides below.

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