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
Journal of Financial and Quantitative Analysis
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, G33Accepted Paper Series
Date posted: January 10, 2006
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