Why are aggregate equity payouts pro-cyclical?


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.

Publication DOI: https://doi.org/10.1016/j.jmacro.2015.01.005
Divisions: College of Business and Social Sciences > Aston Business School > Accounting
College of Business and Social Sciences > Aston Business School > Economics, Finance & Entrepreneurship
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Macroeconomics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Huang-Meier, W., Freeman, M. C., & Mazouz, K. Why are aggregate equity payouts pro-cyclical?. Journal of macroeconomics, 44 (2015). DOI: http://dx.doi.org/10.1016/j.jmacro.2015.01.005
Uncontrolled Keywords: business fluctuations,capital adjustment costs,dynamic stochastic general equilibrium economies,firm objectives,payout policy,Economics and Econometrics
Publication ISSN: 1873-152X
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Related URLs: http://www.scop ... tnerID=8YFLogxK (Scopus URL)
PURE Output Type: Article
Published Date: 2015-06
Published Online Date: 2015-02-24
Authors: Huang-Meier, Winifred (ORCID Profile 0000-0002-8989-8595)
Freeman, Mark C.
Mazouz, Khelifa



Version: Accepted Version

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