Dividend timing and behavior in laboratory asset markets

Summary

This paper investigates the effect of dividend timing on price bubbles and endogenous expectations in twenty-six laboratory asset markets. In ten “Al” markets, a single dividend is paid at the end of the trading horizon. In nine “A2” markets, dividends are paid at the end of each trading period. In seven “A3” markets, some of the dividends are paid at the end of the trading horizon, and the rest are paid on a per-period basis. The results indicate that price bubbles are most likely in A2 markets, less likely in A3 markets, and least likely in Al markets. Six distinct hypotheses are considered. The data suggest that the concentration of dividend value at a single point in time helps to create common expectations, and thus significantly reduce the incidence of bubbles. Also, the results underscore the difficulty facing econometric tests on field data where fundamental value has to be approximated.

We are grateful to Corinne Bronfman, Ron King, Jim Meehan, John Conlon and anonymous referees for comments. The views expressed in this paper do not necessarily represent those of the Federal Trade Commision, or of any individual Commissioner. The data and subject instructions are available at cost from the authors.