Cheng F. Lee, Manak Gupta, An Inter-Temproal Approach to the Optimization of Dividend Policy with Pre- Determined Investment: A Further Comment, The Journal of Finance, Vol. 32, No. 4 (Sep., 1977), pp. 1358-1361

In the process of managing a financial institution there are decisions that require special considerations beyond those in other firms. In this paper dividend disbursal practices in the banking firms will be analyzed. The central issue is what part of profits should be distributed and what part should be retained within firms as an addition to the banks' net worth.

Following the dividend flexibility hypothesis used by DeAngelo and DeAngelo (2006), Blau and Fuller (2008), and others, we theoretically extend the proposition of DeAngelo and DeAngelo (2006) optimal payout policy in terms of the flexibility dividend hypothesis. In addition, we also introduce growth rate, systematic risk, and total risk variables into the theoretical model. To test the theoretical results derived in this paper, we use the data collected in the US from 1969 to 2009 to investigate the impact of the growth rate, systematic risk, and total risk on the optimal payout ratio in terms of the fixed-effect model. We find that based on flexibility considerations, a company will reduce its payout when the growth rate increases. In addition, we find that a nonlinear relationship exists between the payout ratio and the risk. In other words, the relationship between the payout ratio and the risk is negative (or positive) when the growth rate is higher (or lower) than the rate of return on total assets. Our theoretical model and empirical results can therefore be used to identify whether flexibility or the free cash flow hypothesis should be used to determine the dividend policy.

Burton G. Malkiel, Fred D. Arditti, Manak C. Gupta, Session Topic: Recognizing the Impact of Growth: Discussion, The Journal of Finance, Vol. 30, No. 2, Papers and Proceedings of the Thirty-Third Annual Meeting of the American Finance Association, San Francisco, California, December 28-30, 1974 (May, 1975), pp. 548-555

This study investigates the investment decision and dividend policy jointly from a non-steady state to a steady state. We extend Higgins, 1977, Higgins, 1981, Higgins, 2008 sustainable growth rate model and develop a dynamic model which jointly optimizes the growth rate and payout ratio. We optimize the firm value to obtain the optimal growth rate in terms of a logistic equation and find that the steady state growth rate can be used as the benchmark for the mean-reverting process of the optimal growth rate. We also investigate the specification error of the mean and variance of dividend per share when introducing the stochastic growth rate. Empirical results support the mean-reverting process of the growth rate and the importance of covariance between the profitability and the growth rate in determining dividend payouts. The intertemporal behavior of the covariance may shed some light on the fact of disappearing dividends over decades.