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Stock Market Liquidity and Firm Dividend Policy

Suman Banerjee
Nanyang Business School

Vladimir A. Gatchev
University of Central Florida - Department of Finance

Paul A. Spindt
Tulane University - A.B. Freeman School of Business

February 25, 2005

EFMA 2003 Helsinki Meetings

Abstract:
We provide evidence of a link between firm dividend policy and stock market liquidity. In the cross-section, owners of less (more) liquid common stock are more (less) likely to receive cash dividends. Over time, the notable increase in US stock market liquidity explains most of the declining propensity of firms to pay dividends documented by Fama and French (2001). We further show that past liquidity is an important determinant of dividend initiations and omissions for individual firms. Extending our analysis, we find evidence that sensitivity of firm value to innovations in aggregate liquidity declines after dividend initiations.

Keywords: Payout policy, Payout choice, Dividends, Liquidity, Trading costs

JEL Classifications: G35, G33

Working Paper Series

Date posted: April 18, 2003 ; Last revised: February 25, 2005

Suggested Citation

Banerjee, Suman, Gatchev, Vladimir A. and Spindt, Paul A., Stock Market Liquidity and Firm Dividend Policy (February 25, 2005). EFMA 2003 Helsinki Meetings. Available at SSRN: http://ssrn.com/abstract=391663 or doi:10.2139/ssrn.391663

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Contact Information

Vladimir A. Gatchev (Contact Author) University of Central Florida - Department of Finance ( email ) Orlando, FL 32816-1400 United States (407) 823-3694 (Phone) (407) 823-6676 (Fax) HOME PAGE: http://www.bus.ucf.edu/vgatchev/
Suman Banerjee Nanyang Business School ( email ) S3-B1B-76 Nanyang Avenue Singapore 639798 Singapore (65) 6790-6237 (Phone)
Paul A. Spindt Tulane University - A.B. Freeman School of Business ( email ) 7 McAlister Drive New Orleans, LA 70118 United States 504-865-5425 (Phone)