Discussion paper

DP16224 Stock Market and No-Dividend Stocks

We develop a stationary model of the aggregate stock market featuring both dividend-paying and nodividend stocks within a familiar, parsimonious consumption-based equilibrium framework. We find that such a simple feature leads to profound implications supporting several stock market empirical regularities that leading consumption-based asset pricing models have difficulty reconciling. We show
that the presence of no-dividend stocks in the stock market leads to a lower correlation between the stock market return and aggregate consumption growth rate, a non-monotonic and even a negative relation between the stock market risk premium and its volatility, and a downward sloping term structure of equity risk premia. When we quantify these effects, we find them to be economically
significant. We also find that no-dividend stocks command lower mean returns but have higher return volatilities and higher market betas than comparable dividend-paying stocks, consistently with empirical evidence. We provide straightforward intuition for all these results and the underlying economic mechanisms at play.


Atmaz, A and S Basak (2021), ‘DP16224 Stock Market and No-Dividend Stocks‘, CEPR Discussion Paper No. 16224. CEPR Press, Paris & London. https://cepr.org/publications/dp16224