Author(s)

Adeline Peter Mtunya^1*, Philip Ngare², Yaw Nkansah-Gyekye¹

¹School of Computational and Communication Science and Engineering, Nelson Mandela African Institution of Science and Technology, Arusha, Tanzania.
²School of Mathematics, University of Nairobi, Nairobi, Kenya.

We study how firms’ management can ensure steady dividend growth and payout to the share-holders in an emerging market. We create the dividend equalization reserve account whereby during high profit some amount of money is kept in order to top up dividends during deficiency. We use a mean reversion stochastic differential equation with a functional mean reversion speed to find the optimal dividend policy with optimal dividend equalization reserve. One of our results indicates that, it is optimal to pay high dividends when we have high mean levels. Also, we realized that a higher level of volatility which implies more dividend can be paid. And high dividend can also be paid as the interest rate rises but this is more significant when the firm makes profits above average. Lastly, we compared the buffer approach to a situation where hedging was not applied and found that the buffering approach is more suitable because it gives shareholders steady dividend payments.

Investment, Dividend Policy, Steady Payment, Functional Mean Reversion Speed, Stochastic Optimal Control

Mtunya, A. , Ngare, P. and Nkansah-Gyekye, Y. (2016) On Steady Dividend Payment under Functional Mean Reversion Speed. Journal of Mathematical Finance, 6, 368-377. doi: 10.4236/jmf.2016.63030.