Seeking Safety in Bad Times: Dividends and Risk Perception

Abstract:     
In this paper, we test whether varying investor desire for safety affects valuations and dividend payout policies in the time series. Specifically, we find that the market reactions to dividend initiations and dividend increases are higher, ceteris paribus, in times when investors are more likely to seek safety. In addition, dividend initiations and increases are higher and dividend-paying stocks have higher valuations relative to non-paying stocks during such times. Collectively, these findings suggest that investor desire for safety has an incremental and meaningful impact on valuations and payout policies.

Number of Pages in PDF File: 54

Keywords: dividend policy, dividend initiation, consumer confidence, investor sentiment

JEL Classification: G10, G14, G35

working papers series