Stock Market Liquidity and Firm Dividend Policy
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
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, G33working papers series
Date posted: April 18, 2003
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