An equilibrium aggregate dividend model is developed. This study differs from previous research in that ; first, while most of the previous studies use discrete-time model or descriptive methods, such as regression analysis and event study, this study uses continuous-time model; second, whereas most of the past studies focus on the behavior of individual firms, this examines a general market equilibrium condition to develop an equilibrium valuation model; third, unlike other major studies, we introduce the concept of an opportunity cost as one of the major variables affecting dividend policy. Under this framework and some assumptions, we succeed in deriving an optimal level of dividend in the aggregate market. By comparing our results to those of previous studies using comparative static analysis, we find that MM (Miller and Modigliani) theories can be applied to the real world only under very unrealistic assumptions. In addition, we show the mechanism of how a firm’s debt policy, the cost of capital, and the corporate tax rate affect the dividend policy of firms. This is the first theoretical approach to incorporate aggregate and continuous-time framework into the dividend policy, and the empirical test of our model must be made to prove the validity of the model in the future.
