Returns for Dividend-Paying and Non-Dividend Paying Firms
International Journal of Business and Finance Research, Vol. 9, No. 2 (2015), 1-15.
20 Pages Posted: 24 Mar 2013 Last revised: 25 Mar 2015
Date Written: July 27, 2012
In this paper, we compare the equity returns of dividend-paying and non-dividend paying firms. We find no unconditional return difference even though non-dividend paying firms have many characteristics that suggest high risk. Equivalently, because non-dividend paying firms have high risk-metrics, their returns are abnormally low compared with dividend-paying firms. The reason for these anomalies is that a larger fraction of non-dividend paying firms are in financial distress and, despite high distress-risk and high growth-leverage, firms in financial distress have low returns from high volatility that decreases the options-leverage of equity. Removing firms in financial distress, returns for non-dividend paying firms increase relative to dividend-paying firms and abnormal returns disappear. We argue that part of the reason that firms in financial-distress have high volatility that leads to low returns is managerial risk-shifting that takes form as unexpectedly high capital expenditure rates.
Keywords: Equity returns, dividends, financial distress, volatility, growth
JEL Classification: G12, G32, G33, G35
Suggested Citation: Suggested Citation