Pv2003 Model Essay

We report some considerations done in PV20003. We start translating this corollary in concrete: if the firm pays dividends, its market value of equity presents a dividend-related term less sensitive to ρ ̄. Then, the sensitivity of the market value to ρ ̄ is higher when the market value depends only on the terminal value BT and the dividends are not paid. This higher sensitivity implies then higher return volatility.
According to the numerical analysis presented in PV2003, the volatility is al- most constant when there is no uncertainty about mean profitability, while de- creases in presence of learning. However, close to maturity, the volatility declines to 0, due to the assumptions made. Moreover, the authors show that, in case of no learning, the volatility of dividend payers is slightly lower than the volatility of non-payers because dividends are riskless; however, the effect of dividends on volatility is negligible
PV2003 model suggests the following implications: the M/B ratio of a typical young firm is higher due to the profitability uncertainty and decline later due to the investors’ learning process. According to this theoretical result, a negative cross-sectional relation between M/B and firm age is found when the other known determinants of M/B are controlled. Moreover, the empirical analysis supports other three theoretical results: the age effect on M/B is stronger for firms which pay no dividends; M/B increases with the level and the volatility of profitability; M/B decreases with expected future returns.
PV2003 model has implications also on stock return volatility. Through Corol- laries 5 and 6, we have respectively that idiosyncratic volatility should be high for firms with higher uncertainty about average profitability, for firms which pay no dividends and for firms with more volatile profitability. Supports for these theoretical predictions are found in the