Dividends, Sustainability and Relevance

Abstract:     
Sustainability and economic relevance of dividend policies are addressed in terms of an optimal control model set forth by Feichtinger et al. (2007), by means of which two different capitalization measures, accounting for dividends and capital gains, can be given explicit representation. In the light of the theory of capital tailored by Dorfman (1969), an intertemporal economic measure of shareholder value is introduced, together with the associated shadow price. Relevant tradeoffs and scale effects are thoroughly discussed, in connection with the Modigliani-Miller irrelevance framework. The ratio between the value function and the hamiltonian function is conjectured to represent a sound parallel to the price-earnings ratio. The lens property of the model provides a setting for discussing conditions for the rationality of myopic policymaking.

Number of Pages in PDF File: 29

Keywords: Optimal control, dividend policy, shadow prices, scale effects, Modigliani-Miller irrelevance

JEL Classification: D92, C61, G35

working papers series