Why are aggregate equity payouts pro-cyclical?

Winifred Huang (), Mark C. Freeman and Khelifa Mazouz

Journal of Macroeconomics, 2015, vol. 44, issue C, 98-108

Abstract: We use two general equilibrium models to explain why changes in the external economic environment result in pro-cyclical aggregate dividend payout behavior. Both models that we consider endogenize low elasticity of investment. The first model incorporates capital adjustment costs, while the second one assumes that risk-averse managers maximize their own objective function rather than shareholder wealth. We show that, while both models generate pro-cyclical aggregate dividends, a feature consistent with the observed business-cycle pattern of payouts from well-diversified portfolios, the second model provides a more likely explanation for this effect. Our findings emphasize the importance of incorporating agency conflicts when considering the relationship between the external economic environment and the financial behavior of businesses.

Keywords: Dynamic stochastic general equilibrium economies; Payout policy; Business fluctuations; Firm objectives; Capital adjustment costs (search for similar items in EconPapers)
JEL-codes: C63 C68 E22 E32 G35 L21 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:44:y:2015:i:c:p:98-108

DOI: 10.1016/j.jmacro.2015.01.005

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