Dividend policy

Résumé

Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend at a later stage. Whether to issue dividends, and what amount, is determined mainly on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program. If there are no NPV positive opportunities, i.e. projects where returns exceed the hurdle rate, and excess cash surplus is not needed, then – finance theory suggests – management should return some or all of the excess cash to shareholders as dividends. This is the general case, however there are exceptions. For example, shareholders of a "growth stock", expect that the company will, almost by definition, retain most of the

Source officielle

https://en.wikipedia.org/wiki/Dividend_policy

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Cours associés (6)

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Séances de cours associées (16)

Séances de cours associées

Chargement

This thesis examines how banks choose their optimal capital structure and cash reserves in the presence of regulatory measures. The first chapter, titled Bank Capital Structure and Tail Risk, presents a bank capital structure model in which bank assets are subject to both diffusion and tail risk. Of these two types of risk, tail risk causes uninsured deposits to be risky, as the bank's asset value can unexpectedly fall below the value of deposits in case of default. The model shows that tail risk, rather than diffusion risk, is the main driver of the risk on deposits when the bank is unregulated and of the endogenous deposit insurance premium when the bank is regulated. Keeping total volatility constant, the model shows that a high tail risk component leads to higher credit spreads, default risk, and magnitude of bank losses in default than a high diffusion risk component.The second chapter, titled Bank Regulation and Market Discipline in the Presence of Risk-Taking Incentives, presents a bank capital structure model in which equity holders can increase asset risk once debt is in place. I study the effects of capital requirements and subsidized deposit insurance on the bank's privately optimal funding and operational risk level. The model predicts that there are synergetic effects of regulation and market discipline. When the regulator sets the capital charge and deposit insurance premium payments sufficiently high for a risky portfolio, the bank commits to the low-risk asset portfolio by setting a lower leverage ratio and substituting market debt for deposits. This market discipline effect disappears when the regulatory costs become too high. In the third chapter that is titled Dividend Restrictions and Asymmetric Information, we develop a dynamic model of a bank whose management has superior information about the impact of a pending shock to the bank's cash holdings and can signal the bank's type through its dividend policy. Banks that will be adversely affected by the shock have incentives to pool with unaffected banks to increase their market value. To avoid being mimicked, the unaffected banks can credibly signal via a more aggressive payout strategy. Dividend payout restrictions have the potential to prevent a separating equilibrium from forming. This leads to the bad type adopting a more aggressive payout policy with a higher risk of default but mitigates the distortion of the good type's policy. We identify a number of scenarios where this trade-off presents an opportunity for regulatory intervention and some where it does not.

EPFL2021

Chargement

Corporate Finance, Asset Returns, and Credit Risk

Philip Valta

This dissertation consists of three chapters. The first chapter empirically investigates how the intensity of product market competition affects the cost of debt. Using a large sample of loans to publicly traded US manufacturing firms, the chapter provides evidence that an intensification of product market competition among firms significantly increases the cost of bank loans. The analysis reveals that the effect is strongest in industries with high illiquidity and specificity of assets. This finding indicates that the liquidation value of assets is an important channel through which competition affects the cost of debt. Moreover, loans to firms that operate in more competitive industries contain more covenants restricting the firms' financing and dividend policies. Overall, the results suggest that banks explicitly take into account the risk arising from product market competition when pricing and designing debt contracts. The second chapter tests whether equity risk reflects the shareholders' incentives to default strategically on the firm's debt obligations. The chapter develops a model that relates shareholders' incentives to default strategically with the likelihood that debt renegotiations fail. Using an international cross-section of stocks to exploit the exogenous variation of insolvency procedures across countries and to test the model's predictions, the analysis reveals that the equity beta increases with the degree of creditor protection. Moreover, the equity beta decreases with the costs of liquidation and shareholders' bargaining power, and the sensitivity of this relationship weakens as country's creditor protection toughens. The results are economically important, and robust to various specifications and estimation techniques. The third chapter investigates how the debt structure and the strategic interaction between shareholders and creditors in the event of default affect expected stock returns. By endogenizing shareholders' decision to default, the model generates new predictions linking firm characteristics to expected stock returns through an intuitive economic mechanism. In particular, the model predicts that expected stock returns are higher for firms that face high debt renegotiation difficulties, and that have a large fraction of secured or convertible debt. Expected stock returns are lower for firms whose shareholders maintain strong bargaining power, and for firms subject to high liquidation costs. Using a large sample of publicly traded US firms between 1985 and 2005, the third chapter presents new evidence on the link between debt structure, renegotiation frictions, and stock returns, which is supportive of the model's predictions.

EPFL2010

Chargement

Pricing interest rate, dividend, and equity risk

Sander Félix M Willems

This thesis studies the valuation and hedging of financial derivatives, which is fundamental for trading and risk-management operations in financial institutions. The three chapters in this thesis deal with derivatives whose payoffs are linked to interest rates, equity prices, and dividend payments. The first chapter introduces a flexible framework based on polynomial jump-diffusions (PJD) to jointly price the term structures of dividends and interest rates. Prices for dividend futures, bonds, and the dividend paying stock are given in closed form. Option prices are approximated efficiently using a moment matching technique based on the principle of maximum entropy. An extensive calibration exercise shows that a parsimonious model specification has a good fit with Euribor interest rate swaps and swaptions, Euro Stoxx 50 index dividend futures and dividend options, and Euro Stoxx 50 index options. The second chapter revisits the problem of pricing a continuously sampled arithmetic Asian option in the classical Black-Scholes setting. An identity in law links the integrated stock price to a one-dimensional polynomial diffusion, a particular instance of the PJD encountered in the first chapter. The Asian option price is approximated by a series expansion based on polynomials that are orthogonal with respect to the log-normal distribution. All terms in the series are fully explicit and no numerical integration nor any special functions are involved. The moment indeterminacy of the log-normal distribution introduces an asymptotic bias in the series, however numerical experiments show that the bias can safely be ignored in practice. The last chapter presents a non-parametric method to construct a maximally smooth discount curve from observed market prices of linear interest rate products such as swaps, forward rate agreements, or coupon bonds. The discount curve is given in closed form and only requires basic linear algebra operations. The method is illustrated with several practical examples.

EPFL2019

Chargement

EPFL2021

Corporate Finance, Asset Returns, and Credit Risk

Philip Valta

EPFL2010

Pricing interest rate, dividend, and equity risk

Sander Félix M Willems

EPFL2019