Sustainable growth rate, optimal growth rate, and optimal payout ratio: A joint optimization approach

Hong-Yi Chen, Manak C. Gupta, Alice C. Lee and Cheng-Few Lee
Authors registered in the RePEc Author Service: Cheng Few Lee

Journal of Banking & Finance, 2013, vol. 37, issue 4, 1205-1222

Abstract: This study investigates the investment decision and dividend policy jointly from a non-steady state to a steady state. We extend Higgins’ (1977, 1981, 2008) sustainable growth rate model and develop a dynamic model which jointly optimizes the growth rate and payout ratio. We optimize the firm value to obtain the optimal growth rate in terms of a logistic equation and find that the steady state growth rate can be used as the benchmark for the mean-reverting process of the optimal growth rate. We also investigate the specification error of the mean and variance of dividend per share when introducing the stochastic growth rate. Empirical results support the mean-reverting process of the growth rate and the importance of covariance between the profitability and the growth rate in determining dividend payouts. The intertemporal behavior of the covariance may shed some light on the fact of disappearing dividends over decades.

Keywords: Dividend policy; Payout ratio; Growth rate; Specification error; Logistic equation; Partial adjustment model; Mean reverting process (search for similar items in EconPapers)
JEL-codes: C10 G35 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:4:p:1205-1222

DOI: 10.1016/j.jbankfin.2012.11.019

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