The Theory of Investment Value

Williams wrote this as his Harvard doctoral thesis and it is the origin of the dividend discount model and, more broadly, of the proposition that the value of any asset is the present value of the cash it will distribute to its owner. He states the principle plainly: a stock is worth the present value of all the dividends it will ever pay.

The book works out the implications with unusual care for 1938. Williams handles growth, showing what happens to the valuation when the growth rate approaches the discount rate and being explicit that a perpetually higher growth rate than the discount rate produces an infinite value and is therefore impossible. He addresses the question of retained earnings, arguing that earnings reinvested have value only through the future dividends they enable, which is the argument later restated as the difference between value-creating and value-destroying reinvestment. He also states an early version of what became the Modigliani-Miller proposition, that the total value of a firm is not changed by how its capital structure divides claims on the same cash flows, and he illustrates it with what he called the bloated bondholder argument.

The book includes extensive worked valuations of specific companies of the period, including General Motors and United States Steel, and algebraic derivations that make it heavy going. It is a foundational text rather than a practical manual, and almost every subsequent valuation method is a refinement of what it states. Its treatment of how to estimate the inputs is thin, which is the permanent problem with the method.