Consumption, earnings risk, and payout ratios
by Claude Bergeron; Jean-Pierre Gueyie; Komlan Sedzro
American J. of Finance and Accounting (AJFA), Vol. 6, No. 1, 2019

Abstract: This paper investigates the theoretical relationship between earnings, risks and dividends, in an intertemporal context. After assuming that firms adjust their dividend payments toward a target dividend payout ratio, we utilise the framework of the consumption capital asset pricing model (CCAPM) to examine the effect of systematic earnings risk on dividend policy. Our main result indicates that the dividend payout ratio of a firm is negatively related to its earnings consumption beta, obtained from the covariance between aggregate consumption and earnings. This result suggests that risk measured with earnings influences dividend policy. This result also suggests that the earnings consumption beta integrates the multiple dimensions of a firm's earnings risk.

Online publication date: Wed, 18-Dec-2019

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