Does Dividend Policy Lead the Economy?
Journal of Money, Credit and Banking (forthcoming)
33 Pages Posted: 30 May 2013 Last revised: 10 Apr 2023
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: Suggested Citation