Forecasting accuracy of alternative dividend models

Lee, Wu and Djarraya (1987) show that the traditional dividend models as represented by the partial adjustment, adaptive expectations, myopic policy and residual theory are all special cases of their proposed integrated model. Their empirical results indicate that the integrated model explains the firm's dividend decision process rather well. Despite that the integrated model is superior to other dividend models in terms of ex post performance, the forecasting accuracy of the model is still to be investigated. The purpose of this paper is to examine the forecasting accuracy of alternative dividend models. The empirical results suggest that forecasting accuracy can be improved if the integrated model is first used to identify the dividend adjustment process and then the identified dividend model is used to forecast future dividends.