Dividend Policy, Investment, and Stock Returns

61 Pages Posted: 18 Mar 2011 Last revised: 1 Nov 2013

See all articles by Seung Mo Choi

Seung Mo Choi

International Monetary Fund (IMF)

Shane A. Johnson

Texas A&M University - Department of Finance

Hwagyun Kim

Texas A&M University - Mays Business School

Changwoo Nam

Korea Development Institute (KDI)

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

Choi, Seung Mo and Johnson, Shane A. and Kim, Hwagyun and Nam, Changwoo, Dividend Policy, Investment, and Stock Returns (November 17, 2012). Finance Down Under 2014 Building on the Best from the Cellars of Finance, Available at SSRN: https://ssrn.com/abstract=1787615 or http://dx.doi.org/10.2139/ssrn.1787615

Seung Mo Choi

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Shane A. Johnson

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

Hwagyun Kim (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4218
United States

Changwoo Nam

Korea Development Institute (KDI) ( email )

P.O. Box 113
Cheongryangri
Seoul 130-012
Korea, Republic of (South Korea)
82-2-958-4158 (Phone)

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