Abstract
We study how firms’ management can ensure steady dividend growth and payout to the share-holders in an emerging market. We create the dividend equalization reserve account whereby during high profit some amount of money is kept in order to top up dividends during deficiency. We use a mean reversion stochastic differential equation with a functional mean reversion speed to find the optimal dividend policy with optimal dividend equalization reserve. One of our results indicates that, it is optimal to pay high dividends when we have high mean levels. Also, we realized that a higher level of volatility which implies more dividend can be paid. And high dividend can also be paid as the interest rate rises but this is more significant when the firm makes profits above average. Lastly, we compared the buffer approach to a situation where hedging was not applied and found that the buffering approach is more suitable because it gives shareholders steady dividend payments.
Highlights
Since the seminal works by Jeanblanc-Picqué and Shiryaev [1] and, Radner and Shepp [2], there have been a number of literatures on the optimization of dividend policies of a firm
We consider an exponential relationship between φ ( Xt, Zt ) and ∆Bt at any point of time and have the functional mean reversion speed φ defined by φ ( Xt, Zt ) = e∆Bt
We have established strategies for a company that wants to optimize the policy of paying steady dividends to the shareholders
Summary
Since the seminal works by Jeanblanc-Picqué and Shiryaev [1] and, Radner and Shepp [2], there have been a number of literatures on the optimization of dividend policies of a firm. The paper by Højgaard and Taksar [3] provides a typical example of the studies that attempted to find a policy which maximizes the expected discounted dividends paid until bankruptcy In the paper they considered a risky company such as an insurance company with investments strategy, risk control and dividend distribution scheme. They presented a model for risk management by choosing different business activities, the dividend payments remain unsteady. This is likely to cause a general failure to the growing markets In such emerging markets, business is more affected by macroeconomic shocks and firms cannot have stable levels of profitability which would have automatically ensured the steady dividend payments.
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