Bridge over ocean
1 January 1992 Financial Analysts Journal Volume 48, Issue 1

A Bias in Dividend Discount Models

  1. Adam K. Gehr, Jr.

All dividend discount models (DDMs) require the analyst to estimate one or several growth rates of dividends. If the analyst uses an unbiased, expected value of the growth rate, the resulting estimate of the stock price will be biased. The size of the bias will depend on the amount of uncertainty about the growth rate. An unbiased estimate of the price can be generated by calculating the expected price across the distribution of growth rates.

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