The Value and Performance of U.S. Corporations

Bronwyn H. Hall and

Bronwyn H. Hall University of California, Berkeley

Robert E. Hall

Robert E. Hall Robert and Carole McNeil Joint Hoover Senior Fellow and Professor of Economics - Stanford University

Discussants: John Heaton and

JH

John Heaton

N. Gregory Mankiw

N. Gregory Mankiw Robert M. Beren Professor of Economics - Harvard University

THE VALUE OF A CORPORATION is known from hour to hour in the stock
market. The performance of a corporation, from the shareholders’ perspective,
is measured by the corporation’s ability to pay dividends, now
and in the indefinite future. Our research investigates the relation between
value and performance. We use modern finance theory as a
benchmark for valuation. Finance theory holds that, on average, the
current value of a share is the discounted value of the future dividends
the share earns. The theory is explicit about the discount rate. If, on average,
over firms and over time, shares sell for less than the discounted
value of the dividends the shares ultimately pay, it means that the stock
market undervalues those shares; investors require a higher rate of return
than theory suggests they should.