Dividend multifactor process, long-run risk and payout ratios

Claude Bergeron, Jean-Pierre Gueyie and Komlan Sedzro

American Journal of Finance and Accounting, 2015, vol. 4, issue 2, 172-191

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 easy-to-apply formula that takes into account the long-run sensitivity of dividends to various economic factors.

Keywords: multifactor models; intertemporal model; CCAPM; dividend policy; payout ratios; long-run risk; consumption risk. (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ids:amerfa:v:4:y:2015:i:2:p:172-191

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