Dividend Growth Uncertainty and Stock Prices

One of the striking phenomena in recent stock market history is the continuous rise in stock prices. Classical explanations for this phenomenon have argued that these apparently high valuations are either caused by measurement error in accounting data, or by high expected future growth in dividends. In this paper, it is shown that a high degree of uncertainty about expected growth in dividends can lead to an increase in stock prices. Moreover, dividend growth uncertainty can lead stock prices to over- or underreact to changes in dividends.