On Tue, 9 Aug 2005, Alex wrote:
> > A no dividend situation presents no real problem theoretically -- if a
> > company is earning but not paying dividends it must by definition have
> > grown by precisely the amount they didn't pay out.
>
> Doesn't this assume that the company has made good investments that yield
> precisely the same return as external investments
Actually it just assumes the new investments pay the same as old -- which is no weirder than assuming the old will continue in the future to yield what they did in the past. There's no essential difference between new and old investments -- its just the expanded reproduction of the company. (The assumption that all investments pay the same as the interest rate is a second level assumption when you're averaging all companies together to talk about the economy in general.)
But Alex, we should be clear we're all agreeing that your basic intuition is right -- this theory *is* assuming what it purports to prove.
I'm sure you'll very much enjoy the market psychology stuff that's been written since you last took economics. You'll feel profoundly vindicated.
Michael