Investor determined dividend policies

Abstract

Assuming the validity of the Miller and Modigliani (1961) thesis arguing that investors can set their own dividend policies, two questions arise. The first asks, what are the levels of these investor determined dividend yields and the second asks what they should be. The dividend levels are addressed by employing put call parity relations in option markets to identify risk neutral dividend yields. Models for the reverse measure change back to the physical measure from the risk neutral one are then used to infer the physical dividend yields. Rational levels for the dividend yields are determined on demanding ex-dividend returns to be economically acceptable risky positions. Risk acceptability is defined using the principles of conic finance and in particular by measuring the degree of acceptability by the stress level of a distorted expectation. Estimates of dividend yields and their associated acceptability levels are evaluated for ten \(ETF^{\prime }s\) and 35 stocks over the period 2015 through 2023 and observed to be consistent with those of the highly successful hedge funds.