Real investment and dividend policy in a dynamic stochastic general equilibrium (DSGE) model. Corporate finance at an aggregate level through DSGE models.
In this thesis, I take a theoretical dynamic stochastic general equilibrium (DSGE) approach
to investigate optimal aggregate dividend policy. I make the following contribution:
1. I extend the standard DSGE model to incorporate a residual dividend policy,
external financing and default and find that simulated optimal aggregate payouts are
much more volatile than the observed data when other variables are close to the values
observed in the data.
2. I examine the sensitivity of optimal aggregate dividend policy to the level of the
representative agentΒΏs habit motive. My results show that, when the habit motive gets
stronger, the volatility of optimal aggregate payouts increases while the volatility of
aggregate consumption decreases. This is consistent with the hypothesis that investors
use cash payouts from well diversified portfolios to help smooth consumption.
3. I demonstrate that the variability of optimal aggregate payouts is sensitive to
capital adjustment costs. My simulated results show that costly frictions from changing
the capital base of the firm cause optimal aggregate dividends and real investments to
be smooth and share prices to be volatile. This finding is consistent with prior empirical
observations.
4. I run simulations that support the hypothesis that optimal aggregate dividend
policy is similar when the representative firm is risk averse to when it has capital
adjustment costs. In both cases, optimal aggregate dividends volatility is very low.
5. In all calibrated DSGE models, apart from case 4, optimal aggregate payouts
are found to be countercyclical. This supports the hypothesis that corporations prefer
to hold more free cash flows for potential investment opportunities instead of paying
dividends when the economy is booming, but is inconsistent with observed data.
Keywords: Dynamic Stochastic General Equilibrium (DSGE), real business cycle,
utility function, habits, dividend
