Optimal dividend policy with random interest rates

Several recent papers have studied the impact of macroeconomic shocks on the financial policies of firms. However, they only consider the case where these macroeconomic shocks affect the profitability of firms but not the financial markets conditions. We study the polar case where the profitability...

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Bibliographic Details
Published in:Journal of mathematical economics 2014-03, Vol.51, p.93-101
Main Authors: Akyildirim, Erdinç, Güney, I. Ethem, Rochet, Jean-Charles, Soner, H. Mete
Format: Article
Language:English
Subjects:
Business cycles
Capital market
Cost analysis
Costs
Dividend policy
Dividends
Economic shock
Financial frictions
Financial policy
Interest rates
Macroeconomics
Markov analysis
Markovian processes
Profitability
Studies
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Summary:Several recent papers have studied the impact of macroeconomic shocks on the financial policies of firms. However, they only consider the case where these macroeconomic shocks affect the profitability of firms but not the financial markets conditions. We study the polar case where the profitability of firms is stationary, but interest rates and issuance costs are governed by an exogenous Markov chain. We characterize the optimal dividend policy and show that these two macroeconomic factors have opposing effects: all things being equal, firms distribute more dividends when interest rates are high and less when issuing costs are high.
ISSN:0304-4068
1873-1538
DOI:10.1016/j.jmateco.2014.01.005