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Dividend multifactor process, long-run risk and payout ratios

Dividend multifactor process, long-run risk and payout ratios The purpose of this paper is to examine the theoretical relationship between the multidimensionality of risk and dividend policy, in an intertemporal context. After assuming that dividends are generated by a multifactor process, we use the fundamental framework of the consumption capital asset pricing model to explore the effect of long-run risk on dividend payout ratios (dividends divided by earnings). Our approach is similar to any multifactor model that, given the N factor process, derives useful equilibrium conditions. Our main result shows that the dividend payout ratio is negatively related to N sensitive coefficients, given by the long-run covariance between dividends and economic factors. This suggests that the multidimensionality of long-run consumption risk influences dividend policy. In brief, the model proposes that the target payout ratio can be determined with a simple and easyto-apply formula that takes into account the long-run sensitivity of dividends to various economic factors. Keywords: multifactor model; intertemporal model; CCAPM; dividend policy; payout ratio; long-run risk. Reference to this paper should be made as follows: Bergeron, C., Gueyie, J-P. and Sedzro, K. (2015) Dividend multifactor process, long-run risk and payout ratios, American J. Finance and Accounting, Vol. 4, No. 2, pp.172­191. Biographical notes: Claude http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Journal of Finance and Accounting Inderscience Publishers

Dividend multifactor process, long-run risk and payout ratios

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Publisher
Inderscience Publishers
Copyright
Copyright © 2015 Inderscience Enterprises Ltd.
ISSN
1752-7767
eISSN
1752-7775
DOI
10.1504/AJFA.2015.072597
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to examine the theoretical relationship between the multidimensionality of risk and dividend policy, in an intertemporal context. After assuming that dividends are generated by a multifactor process, we use the fundamental framework of the consumption capital asset pricing model to explore the effect of long-run risk on dividend payout ratios (dividends divided by earnings). Our approach is similar to any multifactor model that, given the N factor process, derives useful equilibrium conditions. Our main result shows that the dividend payout ratio is negatively related to N sensitive coefficients, given by the long-run covariance between dividends and economic factors. This suggests that the multidimensionality of long-run consumption risk influences dividend policy. In brief, the model proposes that the target payout ratio can be determined with a simple and easyto-apply formula that takes into account the long-run sensitivity of dividends to various economic factors. Keywords: multifactor model; intertemporal model; CCAPM; dividend policy; payout ratio; long-run risk. Reference to this paper should be made as follows: Bergeron, C., Gueyie, J-P. and Sedzro, K. (2015) Dividend multifactor process, long-run risk and payout ratios, American J. Finance and Accounting, Vol. 4, No. 2, pp.172­191. Biographical notes: Claude

Journal

American Journal of Finance and Accounting – Inderscience Publishers

Published: Jan 1, 2015

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