Present value model between prices and dividends with constant and time-varying expected returns: enterprise-level Brazilian stock market evidence from non-stationary panels

The Present Value Model (PVM) – in which current security prices depend upon the present value of future discounted dividends, where the discount rate is equivalent to the required rate of return – is one of the long-standing principles of Finance Theory. The objective of this work is to analyze the validity of the PVM between prices and dividends at the firm level from panel techniques applied to non-stationary and potentially cointegrated processes for the Brazilian stock market. Considering the Present Value Model with Constant and Time-Varying Expected Returns, the evidence that real (log) prices and real (log) dividends are non-stationary I(1) and (log) price-dividend ratio is I(0) cannot be rejected. Regarding FMOLS and DOLS estimators for panel cointegration models, stock prices are found to be overvalued under either constant or time-varying expected returns assumption.