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Why are aggregate equity payouts pro-cyclical?

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  • Huang-Meier, Winifred
  • Freeman, Mark C.
  • Mazouz, Khelifa

Abstract

We use two general equilibrium models to explain why changes in the external economic environment result in pro-cyclical aggregate dividend payout behavior. Both models that we consider endogenize low elasticity of investment. The first model incorporates capital adjustment costs, while the second one assumes that risk-averse managers maximize their own objective function rather than shareholder wealth. We show that, while both models generate pro-cyclical aggregate dividends, a feature consistent with the observed business-cycle pattern of payouts from well-diversified portfolios, the second model provides a more likely explanation for this effect. Our findings emphasize the importance of incorporating agency conflicts when considering the relationship between the external economic environment and the financial behavior of businesses.

Suggested Citation

  • Huang-Meier, Winifred & Freeman, Mark C. & Mazouz, Khelifa, 2015. "Why are aggregate equity payouts pro-cyclical?," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 98-108.
    • Handle: RePEc:eee:jmacro:v:44:y:2015:i:c:p:98-108
    DOI: 10.1016/j.jmacro.2015.01.005
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    1. Huang-Meier, Winifred & Freeman, Mark C., 2015. "Aggregate dividends and consumption smoothing," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 324-335.
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    More about this item

    Keywords

    Dynamic stochastic general equilibrium economies; Payout policy; Business fluctuations; Firm objectives; Capital adjustment costs;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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