Stock Market Liquidity and Firm Dividend Policy
47 Pages Posted: 18 Apr 2003 Last revised: 9 Jan 2018
Date Written: February 25, 2005
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. Over time, the notable increase in US stock market liquidity explains most of the declining propensity of firms to pay dividends documented by Fama and French (2001). We further show that past liquidity is an important determinant of dividend initiations and omissions for individual firms. Extending our analysis, we find evidence that sensitivity of firm value to innovations in aggregate liquidity declines after dividend initiations.
Keywords: Payout policy, Payout choice, Dividends, Liquidity, Trading costs
JEL Classification: G35, G33
Suggested Citation: Suggested Citation