Do Dividends Matter More in Declining Markets?

Abstract:     
We find dividends do matter to shareholders, but more in declining markets than advancing ones. Dividend-paying stocks outperform non-dividend-paying stocks by 1% to 1.5% more per month in declining markets than in advancing markets. These results are economically and statistically significant and robust to many risk adjustments and across SIC codes. In addition, we find an asymmetric response to dividend changes based on market conditions: dividend increases matter more in declining markets than advancing ones. Other tests suggest that a credible communication explanation is more consistent with these results than a prospect theory explanation. We also find that it is the existence of dividends, and not the dividend yield, that drives returns' asymmetric behavior relative to market movements.

Keywords: Dividend policy, asymmetry, market movements

JEL Classifications: G35

Working Paper Series