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Stock Market Liquidity and Firm Dividend PolicySuman BanerjeeNanyang Business School Vladimir A. GatchevUniversity of Central Florida - Department of Finance Paul A. SpindtTulane 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.
Number of Pages in PDF File: 47 Keywords: Payout policy, Payout choice, Dividends, Liquidity, Trading costs JEL Classification: G35, G33 working papers seriesDate posted: April 18, 2003Suggested CitationContact Information
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