Dividend Rate Research Articles

Ultimate Control, Expropriation and Dividend Payments: A Reputation Management Perspective

General management is concerned with a firm's reputation, and a high expropriation risk can lead to an unfavourable reputation. The corporate reputation management perspective predicts that such firms could improve their reputation by adopting appropriate dividend policies. This study investigates the dividend policies of firms listed in Hong Kong over the 1997–2007 period. The results show that for firms with a higher expropriation risk proxied by high ultimate control and control divergence, dividend rates are negatively associated with control divergence and dividend payments are more stable, thus supporting the predictions of the reputation management perspective. This study further discusses the implications for researchers and practitioners in general management.

Indifference pricing and hedging in a multiple-priors model with trading constraints

This paper considers utility indifference valuation of derivatives under model uncertainty and trading constraints, where the utility is formulated as an additive stochastic differential utility of both intertemporal consumption and terminal wealth, and the uncertain prospects are ranked according to a multiple-priors model of Chen and Epstein (2002). The price is determined by two optimal stochastic control problems (mixed with optimal stopping time in the case of American option) of forward-backward stochastic differential equations. By means of backward stochastic differential equation and partial differential equation methods, we show that both bid and ask prices are closely related to the Black-Scholes risk-neutral price with modified dividend rates. The two prices will actually coincide with each other if there is no trading constraint or the model uncertainty disappears. Finally, two applications to European option and American option are discussed.

Variance matters (in stochastic dividend discount models)

Stochastic dividend discount models (Hurley and Johnson in Financ Anal J 50–54. http://www.jstor.org/stable/4479761 , 1994, J Portf Manag 27–31. doi: 10.3905/jpm.1998.409658 , 1998; Yao in J Portf Manag 99–103. doi: 10.3905/jpm.1997.409618 , 1997) present expressions for the expected value of stock prices when future dividends, periodically received by shareholders as a reward for their risky investment, evolve through time in a Markovian setting by the means of a discretely distributed random rate of growth. Such result extends and makes more flexible the classical textbook formula for stock prices known as Gordon model. This paper introduces a closed-form expression for the variance of random stock prices, determines how their variance is affected by the variance of the dividend rate of growth, establishes that, in this framework, the dividend process is non-stationary, and perform a simple econometric analysis applying real market data.

Back to 1986? Some Lessons from the Great Tax Reform

This paper has suggested that as we consider tax reform in 2014 and thereafter, we should revert to some of the positive features of TRA 86, updated to reflect increasing globalization. Specifically:a. The top individual rate, the KG rate and the dividend rate should be set at 28%;b. The corporate rate should also be set at 28%;c. Corporations should be taxed on global income with no deferral or exemption.These reforms are not enough to address our long-term deficit problem; they are designed to be revenue neutral overall, like in TRA 86. In the longer term we need a VAT, but that is a task that must wait for bolder political leadership than we currently appear to have.

Optimal dividend strategy in compound binomial model with bounded dividend rates

We consider the compound binomial model, and assume that dividends are paid to the shareholders according to an admissible strategy with dividend rates bounded by a constant. The company controls the amount of dividends in order to maximize the cumulative expected discounted dividends prior to ruin. We show that the optimal value function is the unique solution of a discrete HJB equation. Moreover, we obtain some properties of the optimal payment strategy, and offer a simple algorithm for obtaining the optimal strategy. The key of our method is to transform the value function. Numerical examples are presented to illustrate the transformation method.

World Dividends and Tax Shocks

For a sample of 28,895 firms across 30 countries and 29 years, there is a negative relation between dividend tax rates and dividend payout. Firms increase dividend payout in response to both absolute and relative (to capital gains tax rates) decreases in dividend tax rates. This negative relation is robust to both increases and decreases and both shocks and continuous variation in dividend tax rates and affects both dividend payer status and dividend payout level. However, dividend payers do not increase dividend payout levels following decreases in dividend tax rates. The negative relation between dividend tax rates and dividend payout is stronger in countries and firms with better governance and suggests a dividend taxation elasticity of −0.45.

A Free Boundary Problem Arising from a Stochastic Optimal Control Model with Bounded Dividend Rate

We consider a Barenblatt parabolic equationArising from a financial stochastic optimal control model. In this model, the control variable l, which is bounded and lies in [0, M], should be chosen to optimize the objective function to take the maximum value. From the problem, it can be seen that l should be either 0 or M, which depends on whether vx is greater than 1 or not. We divide the domain into two parts, {vx > 1} and {vx ⩽ 1}. Thus, the junction of the two regions, that is, free boundary, has particular financial implications. It can be expressed as a functional form h(t). In this article, we not only prove the existence and uniqueness of the solution to this equation, but we also study the property of the free boundary h(t). We show that h(t) is a differentiable, nondecreasing function. We also present the shapes of h(t) in different cases. The most difficult point is to prove the concavity of the value function by stochastic analysis.

Optimal Stopping Problems in Diffusion-Type Models with Running Maxima and Drawdowns

We study optimal stopping problems related to the pricing of perpetual American options in an extension of the Black-Merton-Scholes model in which the dividend and volatility rates of the underlying risky asset depend on the running values of its maximum and maximum drawdown. The optimal stopping times of the exercise are shown to be the first times at which the price of the underlying asset exits some regions restricted by certain boundaries depending on the running values of the associated maximum and maximum drawdown processes. We obtain closed-form solutions to the equivalent free-boundary problems for the value functions with smooth fit at the optimal stopping boundaries and normal reflection at the edges of the state space of the resulting three-dimensional Markov process. We derive first-order nonlinear ordinary differential equations for the optimal exercise boundaries of the perpetual American standard options.

Optimal Stopping Problems in Diffusion-Type Models with Running Maxima and Drawdowns

We study optimal stopping problems related to the pricing of perpetual American options in an extension of the Black-Merton-Scholes model in which the dividend and volatility rates of the underlying risky asset depend on the running values of its maximum and maximum drawdown. The optimal stopping times of the exercise are shown to be the first times at which the price of the underlying asset exits some regions restricted by certain boundaries depending on the running values of the associated maximum and maximum drawdown processes. We obtain closed-form solutions to the equivalent free-boundary problems for the value functions with smooth fit at the optimal stopping boundaries and normal reflection at the edges of the state space of the resulting three-dimensional Markov process. We derive first-order nonlinear ordinary differential equations for the optimal exercise boundaries of the perpetual American standard options.

Optimal Stopping Problems in Diffusion-Type Models with Running Maxima and Drawdowns

We study optimal stopping problems related to the pricing of perpetual American options in an extension of the Black-Merton-Scholes model in which the dividend and volatility rates of the underlying risky asset depend on the running values of its maximum and maximum drawdown. The optimal stopping times of the exercise are shown to be the first times at which the price of the underlying asset exits some regions restricted by certain boundaries depending on the running values of the associated maximum and maximum drawdown processes. We obtain closed-form solutions to the equivalent free-boundary problems for the value functions with smooth fit at the optimal stopping boundaries and normal reflection at the edges of the state space of the resulting three-dimensional Markov process. We derive first-order nonlinear ordinary differential equations for the optimal exercise boundaries of the perpetual American standard options.

Mutual Funds’ Holdings and Listed Firms’ Dividend Payouts: Evidence from China

This paper investigates the relationship between listed firms’ dividend policies and mutual funds’ investment decisions in China. We find that all types of mutual funds prefer to invest in companies that distribute earnings by way of dividends. Robustness checks show that mutual funds prefer cash dividends to stock dividends, but they are not particularly attracted to firms that pay high cash or high stock dividends. We further show that all types of mutual funds can positively influence listed firms’ cash dividend pay-out rates, but only transient (short-term) funds influence stock dividend increases of listed firms.

The Explicit Solution of the Optimal Dividend Control When Premium Rate Is Less Than Maximum Dividend Rate

In this paper, we consider the optimal control problem for an insurance company. In the view of the classical Cramer-Lundberg model, the claim process is constructed by Poisson process. We propose a value function which is the total dividend of the insurance company from arbitrary time to expire time. The main problem of this paper is to maximize the value function of the insurance company. Through the standard arguments, we give the corresponding HJB equation. By solving the HJB equation, we obtain the explicit expression of value function and control strategies when the claim size is exponential distribution and premium rate less than maximum dividend rate. This paper also shows the numerical results based on the proposed model.

What do firms do when dividend tax rates change? An examination of alternative payout responses

This paper investigates whether investor-level taxes affect corporate payout policy decisions. We predict and find a surge of special dividends in the final months of 2010 and 2012, immediately before individual-level dividend tax rates were expected to increase. We also find evidence that immediately before the expected tax increases, firms altered the timing of their regular dividend payments by shifting what would normally be January regular dividend payments into the preceding December. To our knowledge this is the first evidence in the literature about changes in the timing of regular dividend payments in response to tax law changes. For both actions (specials and shifting), we find that it was more likely for a firm to respond to individual-level tax rates if insiders owned a relatively large amount of the firm. Overall, our paper provides evidence that managers consider individual-level taxes in making corporate payout decisions.

The International Valuation Dispersion

We use a variance decomposition approach to examine why aggregate valuation ratios differ across countries. In a cross section of 22 developed countries from 1980 to 2009, we find that 50% of all cross-country differences in the aggregate price-to-book ratio (P/B) can be explained by cross-country differences in expected future five-year profitability. In the second half of our sample period, this percentage exceeds that of the first half, rising to almost 64%. Although international differences in accounting standards and conventions may have made earnings from different countries more difficult to compare relative to dividends, we find that it is still cross-country differences in expected future profitability, rather than dividend growth rates, that are more closely related to international differences in valuation ratios. Even among 25 emerging markets, we find that expected future profitability at the five-year horizon can account for 29% of all cross-country P/B variations. Our results show that international investors are able to identify substantial cross-country differences in future earnings prospects and incorporate them into stock market valuations.

Mutual benefits of transferring stock risks to dividend policy

Purpose – The literature on the relation between dividends and stock risks include mixed results. The related studies have reached either insignificant, or positive, or negative results. The authors offer a mathematical structure that addresses potential mutual benefits of dividends signaling under conditions of stock risks (systematic and unsystematic). The mathematical structure demonstrates explicitly a case of risk transfer. The purpose of this paper is to examine the potential benefits to firms and stockholders when financial managers adjust dividends per share (DPS) using percentage change in the explanatory power of systematic and unsystematic risks. This perspective is derived from a practical consideration that dividends are part of stock returns that can be adjusted to take stock risks into account. Design/methodology/approach – The paper utilizes the specifications of the two-stage (simultaneous) regression and partial adjustment model. The sample includes quarterly data for firms listed in the Dow Jones Industrial Average and NASDAQ for the period December 31, 1989-March 31, 2011. Findings – The authors have reached general results based on hypotheses developed from related literature. The results show that: first, benefits of risk transfer can be realized. That is, firms as well as stockholders achieve benefits when the DPS are adjusted using percentage change in the explanatory power of systematic risk only; second, dividend growth rates are affected positively by changes in systematic risks; third, the highest stock returns in the market are reached with sharp decreases in dividend growth rates; fourth, in the highest returns quartile, firm size and time do not matter but the industry type does; and fifth, the associations between dividend growth rates, systematic, unsystematic risks, and stock returns are intrinsically nonlinear. Originality/value – The study contributes to the literature in terms of first, providing practical insights on the financial strategies that help in the use of dividends to convey the right signals to stockholders, and second, empirically show the potential benefits of adjusting dividends growth rates according to systematic and unsystematic stock risks in a unified mathematical structure that adds to the current literature.

KOSPI200 옵션의 내재변동성 추정

옵션가격의 결정에 있어서 실제 변동성은 사후에 알 수 있는 정보이므로 대용값으로 내재변동성을 가장 많이 사용하는데 본 연구에서는 동일한 기초자산을 가진 옵션의 잔존만기와 행사가격을 이용하여 내재변동성을 추정하고자 한다. KOSPI200 옵션 데이터와 서포트벡터회귀, 나무모형 및 회귀모형을 통해 모형의 설명력을 평균제곱근오차 (RMSE)와 평균절대오차 (MAE)를 사용하여 살펴보았다. 그 결과 서포트벡터회귀와 MART의 성능이 최소제곱회귀보다 우수한 것으로 나타났으며, 서포트벡터회귀와 MART의 성능은 거의 비슷하였다. Using the assumption that the price of a stock follows a geometric Brownian motion with constant volatility, Black and Scholes (BS) derived a formula that gives the price of a European call option on the stock as a function of the stock price, the strike price, the time to maturity, the risk-free interest rate, the dividend rate paid by the stock, and the volatility of the stock's return. However, implied volatilities of BS method tend to depend on the stock prices and the time to maturity in practice. To address this shortcoming, we estimate the implied volatility function as a function of the strike priceand the time to maturity for data consisting of the daily prices for KOSPI200 call options from January 2007 to May 2009 using support vector regression (SVR), the multiple additive regression trees (MART) algorithm, and ordinary least squaress (OLS) regression. In conclusion, use of MART or SVR in the BS pricing model reduced both RMSE and MAE, compared to the OLS-based BS pricing model.

ON THE OPTIMAL DIVIDEND PROBLEM FOR A SPECTRALLY POSITIVE LÉVY PROCESS

AbstractIn this paper we study the optimal dividend problem for a company whose surplus process evolves as a spectrally positive Lévy process before dividends are deducted. This model includes the dual model of the classical risk model and the dual model with diffusion as special cases. We assume that dividends are paid to the shareholders according to an admissible strategy whose dividend rate is bounded by a constant. The objective is to find a dividend policy so as to maximize the expected discounted value of dividends which are paid to the shareholders until the company is ruined. We show that the optimal dividend strategy is formed by a threshold strategy.

The Systematic Risk of Private Equity

This paper introduces a novel econometric approach to estimate the systematic risk and abnormal returns of illiquid assets based only on their observable cash flows. Our model assumes that the returns of a private equity investment are generated by the standard market model, and that the dividends from the investment occur at a stochastic, yet increasing rate from its unobservable interim values until the investment finally liquidates. Using the Generalized Method of Moments (GMM), we then estimate the systematic risk and abnormal returns of private equity by minimizing the distance between the model expected dividends and the cross-section of observed dividends over time. Our methodology generates asymptotically consistent estimates and we confirm its validity via a detailed Monte Carlo simulation in which all model parameters are randomly distributed, and the individual dividend rates of each investment are further correlated with the market returns and dependent on the individual risk and return profile of each investment. We apply our model to two research-quality datasets containing the net cash flows of over 1,000 mature buyout and venture capital funds, and the gross cash flows of almost 15,000 portfolio company investments. This allows us to study the risk and return characteristics at each level individually. Our estimations show that that the exposure to systematic risk is notably higher than previously estimated and widely assumed, with beta coefficients ranging from 2.5 to 3.1. While carried interest provisions reduce the exposure to systematic risk, we find that management fees effectively offset this effect. Our estimations also suggest that buyout deals have generated gross alphas of around 5% per annum, relative to the total returns of the S&P 500, whereas venture capital investments have generated alphas of more than 10%. As expected, both management fees and carried interests have a negative effect on the abnormal returns delivered to institutional investors. For buyout funds, annual alphas are slightly negative but statistically insignificantly different from zero. Net alphas of venture capital funds remain positive and range from 2% to 5%. Relative to the total returns of the Fama-French all U.S. stock market index, we find slightly lower market betas around 2.4 and consistently positive net alphas for both buyout and venture capital funds. In all estimations, our model shows excellent goodness-of-fit properties, explaining up to 95% of the cross-sectional variation in the observed monthly dividends.

Optimal control of interbank contagion under complete information

Abstract We study a preferred equity infusion government program set to mitigate interbank contagion. Financial institutions are prone to insolvency risk channeled through the network of interbank debt and to funding liquidity risk. The government seeks to maximize, under budget constraints, the total net worth of the financial system or, equivalently, to minimize the dead-weight losses induced by bank runs. The government is assumed to have complete information on interbank debt. The problem of quantifying the optimal amount of infusions can be expressed as a convex combinatorial optimization problem, tractable when the set of banks eligible for intervention (core banks) is sufficiently, yet realistically, small. We find that no bank has an incentive to withdraw from the program, when the preferred dividend rate paid to the government is equal to the government's outside return on the intervention budget. On the other hand, it may be optimal for the government to make infusions in a strict subset of core banks.

Dividend optimization for general diffusions with restricted dividend payment rates

The dividend optimization problem is studied for a surplus process modeled by a general diffusion where both the drift and diffusion coefficients are functions of the surplus. The dividend payment rate is restricted. The objective is to find an optimal strategy that maximizes the total expected discounted dividends until ruin. It is shown that an optimal strategy is to pay no dividends when the surplus is below a threshold and to pay out dividends at the maximal possible rate when the surplus reaches or is above the threshold . We also give a result on how to determine and the value function and derive some analytical properties of the value function.