A Note On Dividend Policy and Beta: A Comment

Dyl and Hoffmeister (1986) suggest a possible explanation to account for the persistence of dividends even in a Miller-Modigliani (MM) rational world characterized by perfect markets. Dyl and Hoffmeister (DH) claim that a firm's dividend policy will affect the duration, and hence risk, of the firm's common stock. The MM result that value is invariant to dividend policy is used to establish that dividend policy has no effect on the duration of a firm's common stock. The DH result that dividend policy affects duration arises from relying on the Gordon Growth Model (1959), which confounds dividend policy with investment policy. Firms can select a "preferred habitat" with respect to the riskiness of their common share by changing investment policy, but dividend policy is irrelevant for this purpose. The causality for the observed association between payout ratios and beta must be sought elsewhere.