Dividend Policy, Investment, and Stock Returns
61 Pages Posted: 18 Mar 2011 Last revised: 1 Nov 2013
Date Written: November 17, 2012
Abstract
We propose an asset pricing model in a production economy where cash flows are determined by firms' dividend and investment decisions. Managers choose extensive and intensive margins in payout policy while facing non-convex costs as firm cash holdings grow. Differences in the timing of dividend payments by younger growing firms and older mature firms help explain the value and size premiums. Quantitative analysis shows that model-implied dividend policies and investments are consistent with the data, and interactions among productivity shocks, investment, and dividend policies help explain cross-sectional stock returns. We also provide empirical support for the model's testable implications.
Keywords: Asset Pricing, Cross-Sectional Stock Returns, Payout Policy, Propensity to Pay Dividend, Firm Heterogeneity
JEL Classification: G12, G35, E22
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Optimal Investment, Growth Options, and Security Returns
By Jonathan Berk, Richard C. Green, ...
-
By Lu Zhang
-
A Cross-Sectional Test of a Production-Based Asset Pricing Model
-
Equilibrium Cross-Section of Returns
By Joao F. Gomes, Leonid Kogan, ...
-
Equilibrium Cross-Section of Returns
By Joao F. Gomes, Leonid Kogan, ...
-
Capital Investments and Stock Returns
By K.c. John Wei, Feixue Xie, ...
-
Capital Investments and Stock Returns
By K.c. John Wei, Feixue Xie, ...
-
Capital Investments and Stock Returns in Japan
By Sheridan Titman, K. C. John Wei, ...
-
Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns
By Murray Carlson, Adlai J. Fisher, ...
-
By Eugene F. Fama and Kenneth R. French