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Sustainable growth rate, optimal growth rate, and optimal payout ratio: A joint optimization approach

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  • Chen, Hong-Yi
  • Gupta, Manak C.
  • Lee, Alice C.
  • Lee, Cheng-Few

Abstract

This study investigates the investment decision and dividend policy jointly from a non-steady state to a steady state. We extend Higgins’ (1977, 1981, 2008) sustainable growth rate model and develop a dynamic model which jointly optimizes the growth rate and payout ratio. We optimize the firm value to obtain the optimal growth rate in terms of a logistic equation and find that the steady state growth rate can be used as the benchmark for the mean-reverting process of the optimal growth rate. We also investigate the specification error of the mean and variance of dividend per share when introducing the stochastic growth rate. Empirical results support the mean-reverting process of the growth rate and the importance of covariance between the profitability and the growth rate in determining dividend payouts. The intertemporal behavior of the covariance may shed some light on the fact of disappearing dividends over decades.

Suggested Citation

  • Chen, Hong-Yi & Gupta, Manak C. & Lee, Alice C. & Lee, Cheng-Few, 2013. "Sustainable growth rate, optimal growth rate, and optimal payout ratio: A joint optimization approach," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1205-1222.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:4:p:1205-1222
    DOI: 10.1016/j.jbankfin.2012.11.019
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    Cited by:

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    2. Manak C. Gupta, 2016. "An Integrated Model for the Cost-Minimizing Funding of Corporate Activities over Time," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 1-18, November.
    3. Yue Gu & Shenglin Ben & Jiamin Lv, 2022. "Peer Effect in Merger and Acquisition Activities and Its Impact on Corporate Sustainable Development: Evidence from China," Sustainability, MDPI, vol. 14(7), pages 1-20, March.
    4. Cheng Few Lee, 2020. "Financial econometrics, mathematics, statistics, and financial technology: an overall view," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1529-1578, May.
    5. Yang, Bao & Chou, Hsin-I. & Zhao, Jing, 2020. "Innovation or dividend payout: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 180-203.
    6. Mihai Carp & Leontina Păvăloaia & Constantin Toma & Iuliana Eugenia Georgescu & Mihai-Bogdan Afrăsinei, 2020. "Companies’ Sustainable Growth, Accounting Quality, and Investments Performances. The Case of the Romanian Capital Market," Sustainability, MDPI, vol. 12(22), pages 1-16, November.
    7. Sin, C.Y. (Chor-yiu) & Lee, Cheng-Few, 2021. "Using heteroscedasticity-non-consistent or heteroscedasticity-consistent variances in linear regression," Econometrics and Statistics, Elsevier, vol. 18(C), pages 117-142.
    8. Cheng-Few Lee & Woan-lih Liang & Fu-Lai Lin & Yating Yang, 2016. "Applications of simultaneous equations in finance research: methods and empirical results," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 943-971, November.
    9. James Juichia Lin & Cheng-Few Lee, 2021. "Does managerial reluctance of dividend cuts signal future earnings?," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 453-478, February.
    10. Isnurhadi & Sulastri & Yulia Saftiana & Ferry Jie, 2022. "Banking Industry Sustainable Growth Rate under Risk: Empirical Study of the Banking Industry in ASEAN Countries," Sustainability, MDPI, vol. 15(1), pages 1-21, December.
    11. Bai-Sian Chen & Hong-Yi Chen & Hsiao-Yin Chen & Fang-Chi Lin, 2022. "Corporate growth and strategic payout policy," Review of Quantitative Finance and Accounting, Springer, vol. 59(2), pages 641-669, August.
    12. He, Xiaolong & Wang, Chaoyi & Yang, Xiaowei & Lai, Zhoujing, 2021. "Do enterprise ownership structures affect financial performance in China's power and gas industries?," Utilities Policy, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Dividend policy; Payout ratio; Growth rate; Specification error; Logistic equation; Partial adjustment model; Mean reverting process;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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