Modigliani and Cohn [1979] hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has...

We test whether the impact of financial constraints on firm value is observable in asset" returns. We form portfolios of firms based on observable characteristics related to financial" constraints, and test for common covariation in the stock returns of these firms. Using several" different...

The aggregate dividend payout ratio forecasts aggregate excess returns on both stocks and corporate bonds in post-war US data. Both high corporate profits and high stock prices forecast low excess returns on equities. When the payout ratio is high, expected returns are high. The payout ratio's...