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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 Journal of Financial and Quantitative Analysis 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. Predictions of the proportion of dividend payers based on 1963-1977 cross-sectional estimates account for most of the declining propensity of firms to pay dividends documented by Fama and French (2001). Furthermore, historic liquidity is an important determinant of dividend initiations and omissions. Finally, we show that sensitivity of firm value to aggregate liquidity declines after dividend initiations, suggesting that investors view stock market liquidity and dividends as substitutes.
Keywords: Payout policy, Payout choice, Dividends, Liquidity, Trading costs JEL Classification: G35, G33 Accepted Paper SeriesDate posted: January 10, 2006Suggested CitationContact Information
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