Does Dividend Policy Lead the Economy?

Abstract

I investigate the predictive role of the aggregate dividend–payout ratio ((Formula presented.)) for future economic activity. A vector-autoregression-based variance decomposition shows that the main driving force of (Formula presented.) is long-run predictability of earnings growth, with dividend growth predictability assuming a secondary role. Consistent with this result, long-horizon regressions indicate that (Formula presented.) is a significant predictor, especially at intermediate and long forecasting horizons, of future aggregate business conditions. Critically, (Formula presented.) outperforms several popular equity and bond predictors from the literature. The predictive ability of (Formula presented.) remains robust in an out-of-sample forecasting analysis. Overall, (Formula presented.) conveys important information about the economy.