Does Dividend Policy Lead the Economy?

Journal of Money, Credit and Banking (forthcoming)

33 Pages Posted: 30 May 2013 Last revised: 10 Apr 2023

See all articles by Paulo F. Maio

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Date Written: June 24, 2024

Abstract

I investigate the predictive role of the aggregate dividend-payout ratio (de) for future economic activity. A VAR-based variance decomposition shows that the main driving force of de is long-run predictability of earnings growth, with dividend growth predictability assuming a secondary role. Consistent with this result, long-horizon regressions indicate that de is a significant predictor, especially at intermediate and long forecasting horizons, of future aggregate business conditions. Critically, de outperforms several popular equity and bond predictors from the literature. The predictive ability of de remains robust in an out-of-sample forecasting analysis. Overall, de conveys important information about the economy.

Keywords: JEL codes: E27, E37, E44, G10, G17, G35 Dividend-payout ratio, Earnings growth predictability, Variance decomposition, Forecasting economic activity, Out-of-sample predictability, Long-horizon regressions, Financial markets and the economy

JEL Classification: E27, E37, E44, G10, G17, G35

Suggested Citation

Maio, Paulo F., Does Dividend Policy Lead the Economy? (June 24, 2024). Journal of Money, Credit and Banking (forthcoming), Available at SSRN: https://ssrn.com/abstract=2271779 or http://dx.doi.org/10.2139/ssrn.2271779

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

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