Previous studies analyzing stock market bubbles employ cash dividends as fundamental factors of the determination of stock prices. But cash dividends can be controlled and manipulated by managers so that they might not reflect the true value of a company. To obtain the more precise value of a company, this study suggests the concept of net dividends which consider not only cash dividends but also other cash flows in the company’s equity.
Using the proposed concept of net dividends, bubbles in the KOSPI market during the last 15 years are estimated by the state-space model and Kalman-filtering. The estimation results are presented by graphs which show the percentage of bubbles in the total capital of KOSPI. The results with net dividends are also compared to the results with usual cash dividends. Using net dividends, the graph shows very abrupt changes in the percentages and large negative bubbles, whereas using cash dividends it shows rather smooth movements and small positive bubbles. Especially during and after the IMF crisis of Korea, the results with net dividends seem to agree with real phenomena. These results indicate that in order to correctly analyze stock market bubbles, net dividends are required not the cash dividends previously employed.
