The two-period dividend policy model and its application to Shanghai and New York Stock Exchanges

Abstract

The study generates optimal dividend model with incorporated framework, in which, agency, principal, and firm all participate in the achievement of general equilibrium. For protecting maximum utility and allowing wealth transferring between current and future life period, investors or say principals make financial and consumption decisions with the constraints of capital they possess. The decision of this capital investment not only determines the cash availability for firm but also implicitly change the behavior of agency say executive in the way of seeking the real value for shareholders. On the other hand, the decision of finance by agency bares double objectives one of which is personal utility realization. As consequence, there are six factors are resulted as determinations of theoretical equilibrium. These factors consist of, capital structure of firm, tax shield from debt finance, growth rate of dividend, personal tax on dividend payment, investment strategy of principal and cost of capital. According to empirical tests on Shanghai Stock Exchange and New York Stock Exchange, the theory of dividend is partially followed by both markets and degree of determination for some factors over both markets interprets distinguishable significance.