The Bright Side of Paying Dividends: Evidence from Stock Price Crash Risk

61 Pages Posted: 1 Mar 2018 Last revised: 24 Sep 2018

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Le Luo

School of Management, Huazhong University of Science and Technology

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Date Written: February 1, 2018

Abstract

We examine the economic benefits of paying dividends from the perspective of stock price crash risk. We find that dividend payments mitigate stock price crash risk. In addition, we show that dividend payments reduce bad news hoarding (overinvestment) while bad news hoarding (overinvestment) is positively associated with stock price crash risk, suggesting that curbing bad news hoarding and curtailing overinvestment are two channels through which dividend payments mitigate crash risk. Finally, our main results are robust to various sensitivity checks including controls for potential endogeneity concerns. Our findings are important because they (1) suggest that dividend payments, an easily observable cue, can help investors assess crash risk and thus adjust their investment portfolios, (2) support some policymakers’ proposition that dividend payments constrain managerial misreporting and protect shareholders (e.g., Breeden, 2003; Glassman, 2005), and (3) complement a recent literature about dividend payments enhancing earnings quality (e.g., Skinner and Soltes, 2011) by adding that dividend payments generate a net economic benefit in the form of reduced crash risk, curbed bad news hoarding, and curtailed overinvestment.

Keywords: Dividends; Crash risk; Information asymmetry; Agency theory; Financial reporting quality

JEL Classification: G01; G35; M41

Suggested Citation

Kim, Jeong-Bon and Luo, Le and Xie, Hong, The Bright Side of Paying Dividends: Evidence from Stock Price Crash Risk (February 1, 2018). Available at SSRN: https://ssrn.com/abstract=3127275 or http://dx.doi.org/10.2139/ssrn.3127275

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Le Luo

School of Management, Huazhong University of Science and Technology ( email )

No. 1037, Luoyu Road, Hongshan District
Wuhan, Hubei 430074
China

Hong Xie (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

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