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Optimal Dividend Policy with Random Interest Rates

Author

Listed:
  • Erdinc Akyildirim

    (Akdeniz University)

  • Ibrahim Güney

    (University of Zurich, Swiss Finance Institute)

  • Jean-Charles Rochet

    (GFRI, University of Geneva; Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB))

  • Halil Mete Soner

    (ETH Zürich; Swiss Finance Institute)

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

  • Erdinc Akyildirim & Ibrahim Güney & Jean-Charles Rochet & Halil Mete Soner, 2013. "Optimal Dividend Policy with Random Interest Rates," Swiss Finance Institute Research Paper Series 13-14, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1314
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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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