Abstract

This paper examines the relationship between dividends and inflation in Australia by testing for cointegration between these two variables. The results of the tests indicate that inflation is contributing to dividend growth. This finding can be interpreted in different ways. Trying to follow a dividend policy which is perceived to be optimal Australian firms may, for example, believe that there is a desirable level of real dividend income to be paid out to their investors. A second possible interpretation of the results would be that inflation simply increases the nominal volume of corporate earnings and thereby leads to higher dividend payments.

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