A1 Journal article – refereed
A class of solvable stochastic dividend optimization problems: on the general impact of flexibility on valuation

List of Authors: Luis H.R. Alvarez Esteban, Jukka Virtanen
Publication year: 2006
Journal: Economic Theory
Volume number: 28
Issue number: 2


We consider the determination of an optimal dividend policy in the presence of cash flow uncertainty and transaction costs. We state a set of weak conditions under which the optimal dividend policy can be explicitly characterized for a broad class of diffusions modelling the underlying cash flow dynamics and demonstrate that increased dividend policy flexibility does not only increase the maximal expected cumulative present value of the future dividends, it also increases the rate at which this value grows (i.e. Tobin’s marginal q). We also prove that increased transaction costs result into larger but less frequent dividend payments.

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Last updated on 2019-20-07 at 11:53