Title: Dividend multifactor process, long-run risk and payout ratios

Authors: Claude Bergeron; Jean-Pierre Gueyie; Komlan Sedzro

Addresses: École des sciences de l'administration (ESA), Université du Québec (TÉLUQ), Québec, Québec, Canada ' École des sciences de la gestion (ESG), Université du Québec à Montréal (UQÀM), Montréal, Québec, Canada ' École des sciences de la gestion (ESG), Université du Québec à Montréal (UQÀM), Montréal, Québec, Canada

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.

DOI: 10.1504/AJFA.2015.072597

American Journal of Finance and Accounting, 2015 Vol.4 No.2, pp.172 - 191

Received: 20 Aug 2015
Accepted: 29 Aug 2015
Published online: 21 Oct 2015 *

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