Investment opportunity set dependence of dividend yield and price earnings ratio

Summarizes previous valuation models based on accounting information, extends the basic model to include dividends and retained earnings, and develops hypotheses on the relationship between share prices, dividends and earnings for firms with different investment opportunity set (IOS) levels. Tests them using 1992‐1998 data on a sample of US multinationals and shows that the share prices of firms with high IOS levels are related to retained earnings and less strongly to dividends; while for low IOS firms dividends are more relevant than earnings.