The retention ratio of a corporation in any period may be defined as the ratio of retained earnings to the sum of retained earnings and dividend payments. The retention ratio is one factor in the decision concerning the optimal level of investment and the manner in which this investment is financed. The related variable, the dividend payout ratio, is defined as the proportion of available earnings paid out as dividends. In principle the sum of the retention ratio and time payout ratio should be unity. A major part of the economic debate concerning the retention ratio has mirrored the debate surrounding the debt-to-equity ratio chosen by a firm.
KeywordsTransaction Cost Capital Gain Future Earning Financing Decision Dividend Payment
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- Gordon, M. 1963. Optimal investment and financing policy. Journal of Finance 18, May, 264–72.Google Scholar