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Optimal dividend policy with random interest rates

Author

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  • Akyildirim, Erdinç
  • Güney, I. Ethem
  • Rochet, Jean-Charles
  • Soner, H. Mete

Abstract

Several recent papers have studied the impact of macroeconomic shocks on the financial policies of firms. However, they only consider the case where these macroeconomic shocks affect the profitability of firms but not the financial markets conditions. We study the polar case where the profitability of firms is stationary, but interest rates and issuance costs are governed by an exogenous Markov chain. We characterize the optimal dividend policy and show that these two macroeconomic factors have opposing effects: all things being equal, firms distribute more dividends when interest rates are high and less when issuing costs are high.

Suggested Citation

  • Akyildirim, Erdinç & Güney, I. Ethem & Rochet, Jean-Charles & Soner, H. Mete, 2014. "Optimal dividend policy with random interest rates," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 93-101.
    • Handle: RePEc:eee:mateco:v:51:y:2014:i:c:p:93-101
    DOI: 10.1016/j.jmateco.2014.01.005
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    References listed on IDEAS

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    1. Hackbarth, Dirk & Miao, Jianjun & Morellec, Erwan, 2006. "Capital structure, credit risk, and macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 82(3), pages 519-550, December.
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    3. Décamps, Jean-Paul & Mariotti, Thomas & Rochet, Jean-Charles & Villeneuve, Stéphane, 2008. "Free Cash-Flow, Issuance Costs and Stock Price Volatility," IDEI Working Papers 518, Institut d'Économie Industrielle (IDEI), Toulouse.
    4. Zhengjun Jiang & Martijn Pistorius, 2012. "Optimal dividend distribution under Markov regime switching," Finance and Stochastics, Springer, vol. 16(3), pages 449-476, July.
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    Keywords

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    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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