Market Risk-Adjusted Dividend Policy and Price-to-Book Ratio

Abstract

This paper offers a new mathematical formulation that addresses the relationship between expected price-to-book ratio, dividend per share, dividend payout ratio, systematic and unsystematic risks. The sample includes the non-financial firms in the DJIA covering the period 1997-2006. The general results show that the expected price-to-book ratios are: (a) positively associated with the expected dividend payout ratios, (b) negatively associated with the current dividend payout ratios, (c) due to an improvement in the expected firm profitability.The paper contributes to the current literature in two ways. First, the variations in price-to-book ratios, systematic and unsystematic risks are not due to dividends per se. Second, the relationships between expected price-to-book ratio and dividend payout ratios are intrinsically nonlinear, which is not addressed in the relevant literature. Third, the expected dividend payout ratios can be used efficiently for signaling purposes as well as a proxy for measuring the agency problem.