Bubbling Dividends

Although historical asset price ‘bubbles’ are often attributed to irrationality, the empirical analysis of such episodes has been limited. The results presented in this paper suggest that during an historical price reversal, investors successfully incorporated forecasts of short-term dividend changes into their valuations, but were unable to predict longer-term changes. When short-term growth is controlled for, it appears that the railways were priced consistently with the non-railways for almost the entire episode. These findings may imply that investors had imperfect foresight, but that they acted consistently