We derive representations for the stock price drift and volatility in the equilibrium of agents with arbitrary, heterogeneous utility functions and with the aggregate dividend following an arbitrary Markov diffusion. We introduce a new, intrinsic characteristic of the aggregate dividend process that we call the ”rate of discounting volatility” and show that, in equilibrium, the size of market p...

This article documents how the changing composition of U.S. publicly traded firms has prompted a decline in the long-run mean of the aggregate dividend-price ratio, most notably since the 1970s. Adjusting the dividend–price ratio for such changes resolves several issues with respect to the predictability of stock market returns: The adjusted dividend-price ratio is less persistent, in-sample ev...

We characterize the joint dynamics of expected returns, stochastic volatility, and prices. In particular, with a given dividend process, one of the processes of the expected return, the stock volatility, or the price-dividend ratio fully determines the other two. For example, the stock volatility determines the expected return and the price-dividend ratio. By parameterizing one, or more, of exp...

This paper tests whether the 2003 dividend tax cut—one of the largest reforms ever to a US capital tax rate—stimulated corporate investment and increased labor earnings, using a quasi-experimental design and US corporate tax returns from years 1996–2008. I estimate that the tax cut caused zero change in corporate investment and employee compensation. Economically, the statistical precision chal...

In this paper we develop a framework for optimal investment decisions for insurance companies under unhedgeable risk. The perspective that we choose is from an insurance company that tries to maximise the stream of dividends paid to its shareholders. The policy instruments that the company has are the dividend policy and the investment policy. The insurance company can continue to pay dividends...

Using more than 112,000 firm-year observations in 33 countries, we find that two Hofstede’s cultural dimensions, uncertainty avoidance and long-term orientation, remain significant in the determination of dividend policy even after controlling for governance and firm-specific factors. When uncertainty avoidance is high, only firms in countries with stronger investor protection pay more dividend...

This paper investigates the relationship between real earnings growth, real dividend growth, the dividend payout ratio and real stock returns in the US and UK between 1900-2001. We find a positive relationship in the UK between the payout ratio and subsequent real earnings growth contrary to conventional theory, though consistent with the US evidence presented by Arnott and Asness (2003). By co...

It has been argued that when management is more concerned with the firm’s survival than with profitability, it is efficient to use a levered capital structure and thereby commit to the transfer of the liquidation decision to lenders. Our paper analyzes this view in a setting where lenders may behave opportunistically when they control the liquidation decision — i.e., when there is a lender hold...