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This paper investigates the interconnections between real economy and the financial market in a discrete dynamical framework. We focus on the effect of the dividend policy decided by managers and the expectations of investors about future payments. We found that an excessively high dividend payout ratio erodes the economy, while in the opposite case instability and fluctuations arise. By means of analytical results and numerical simulations we show that the positive return of government bonds leads to instability, while investors' expectations modify the path of the asset price. • We investigate the co-evolution of physical capital and a financial asset. • An excessively high dividend payout ratio may erode the economy. • A low dividend payout might cause economic fluctuations. • Positive returns for government bonds lead to instability. • Unfulfilled expectations over dividends affect the path of the asset price. [ABSTRACT FROM AUTHOR]

This paper investigates how dividend policies may influence the creation and propagation of cycles between real economy and financial markets. We focus on the effect of a constant dividend policy on the stability of the aggregate economy, by means of a discrete dynamical framework in which managers, individuals and financial mediators coexist. We show the counter-intuitive effect of the dividend payout ratio: in a developed economy, an increase in dividends leads to a lower stock price level due to the cross-feedback effect between markets. Moreover, in non-developed economies the choice of managers and individuals may not influence the propagation of fluctuations, while in developed economies, high payout ratios and high sensitivity to market trends trigger a cross-feedback effect between the two markets that amplifies their volatility and drags the whole economy into fluctuations and cycles. • The paper investigates, in a discrete dynamical framework, how dividend payout policies influence the creation and propagation of cycles between the real economy and financial markets. • In developed economies, an increase in dividends leads to a lower price level in equilibrium due to the cross-feedback effect between markets. • The stability of the system is guaranteed by a low dividend rate or when the decision of individuals regarding financial investments is not highly sensitive to the stock trend. • The instability of the economy depends on the development level of the country: in non-developed economies the choice of managers and individuals may not influence the propagation of fluctuations. • In developed economies, high payout ratios and high sensitivity to market trends trigger a cross-feedback effect between the two markets, amplifying their volatility and dragging the whole economy into fluctuations and cycles. [ABSTRACT FROM AUTHOR]