Panel Causality Tests Between Dividends and Stock Prices for Korean Companies: A Test of the Lintner’s Dividend Model and the Present Value Model of Stock Price

The Lintner’s dividend model and the present value model of stock prices are among the most important models in finance area. Even though both models are extensively subjected to empirical tests, these tests are conducted largely in isolation. The purpose of this paper is to test the joint implications for the intertemporal behavior of stock prices and dividends expressed in the Lintner’s dividend model and the present value model of stock prices using firm level data. We use panel data corresponding to annual stock prices and dividends of 19 Korean companies listed in the Korean Stock Exchange for January 1988‐January 2012. The methodology used is the panel unit root test, panel cointegration test, and the panel causality test, which allow testing for causal relations between the stock prices and dividends, which are implied by the Lintner’s dividend model and the present value model of stock prices. Results from the panel causality test indicate that bi‐directional causal relations exist between dividends and stock prices of Korean companies, as are implied by the Lintner’s dividend model and the present value model of stock prices. Our empirical findings allow us to conclude that Linter’s dividend model and the present value model of stock prices are important theoretical frameworks for analyzing and explaining the relation between dividends and stock prices for Korean companies. Future researches on companies in other countries are needed.