Payout-Based Asset Pricing

Abstract

Firms' payout decisions respond to expected returns: everything else equal, firms invest less and pay out more when their cost of capital increases. Given investors' demand for firm payout, market clearing implies that productivity and payout demand dynamics fully determine equilibrium asset prices and returns. Using this logic, we propose a payout-based asset pricing framework. To operationalize it, we introduce a quantitative model, calibrating the productivity and payout demand processes to match aggregate U.S. corporate output and payout moments. Model-implied payout yields and firm returns match key empirical moments, and model-implied expected returns predict future firm returns in the data.

Keywords: Payout-Based Asset Pricing, Production-Based Asset Pricing, Investment-Based Asset Pricing, Market Returns, Return Predictability

JEL Classification: E10, E13, G10, G11, G12, G35