An alternative test of the after-tax CAPM and the association between change in systematic risk and the dividend policy of the firm

The dissertation comprises of two essays. The first essay proposes an alternative test for the after-tax CAPM via a linear homogeneous relationship amongst a set of four security expected dividend yields. The present test (i) employs no market proxy, (ii) does not employ dividend yields variable in a direct test, and (iii) allows for changing tax coefficient and risk premium, thus, mitigating the proxy effect. By focusing on dividend yields alone, our test is capable of bypassing the ambiguities imbedded in previous studies.;The second essay investigates possible impact of change in beta risk on the dividend policy of the firm. Testable implications are derived from the the cross sectional relationship between payout ratios and risk as suggested by the Pecking Order Hypothesis(POH), the growth and duration arguments, the leverage effect and Bar-Yosef & Huffman(1986) Incentive Signalling Model of Dividend.;The findings of the first essay are generally inconsistent with the After-Tax CAPM. The null hypotheses are overwhelmingly rejected, implying that the After-Tax CAPM is not an adequate representation of equilibrium price formation. However, the results are not necessarily inconsistent with any exact two-factors pricing model. The second essay, interestingly, finds a negative relationship between the target payout ratio (of Lintner's Model) and systematic risk in both a cross sectional as well as a time series context. Moreover, a negative relationship is observed only in a cross sectional analysis for the 'raw' payout ratio. These results suggest that, when comparing with the 'raw' ratio, Lintner's target ratio appears to be a more appropriate proxy for the firm's dividend policy since its behavior is more consistent with the implications of the theoretical premises from which the null hypotheses are derived. Finding a significant negative relationship between change in target payout ratio and beta risk implies that financing and investments decisions may be interrelated and that investors may use payout ratio to better estimate the risk exposure of the firm.