Motivated by empirical evidence and economic arguments,we assume that the cash reservoir of a financial corporation follows a mean reverting process. The firm must decide the optimal dividend strategy, which consists of the optimal times and the optimal amounts to pay as dividends. We model this as a stochastic impulse control problem, and succeed in finding an analytical solution. We also find a formula for the expected time between dividend payments. A crucial and surprising economic result of our paper is that, as the dividend tax rate decreases, itis optimal for the shareholders to receive smaller but more frequent dividend payments.
Date of this Version
Abel Cadenillas, Sudipto Sarkar, and Fernando Zapatero, "Optimal Dividend Policy with Mean-Reverting Cash Reservoir" (January 2005). University of Southern California Law and Economics Working Paper Series. Working Paper 23.