Do Dividends Matter More in Declining Markets?

Journal of Corporate Finance, Vol. 17, No. 3, June 2011, pp. 457-473, June 2011

44 Pages Posted: 20 Mar 2005 Last revised: 6 May 2011

Kathleen P. Fuller

University of Mississippi - School of Business Administration

Michael A. Goldstein

Babson College - Finance Division

Date Written: December 21, 2010

Abstract

We find dividends do matter to shareholders, but more in declining markets than advancing ones. Dividend-paying stocks outperform non-dividend-paying stocks by 1 to 2% more per month in declining markets than in advancing markets. These results are economically and statistically significant and robust to many risk adjustments and across industries. In addition, we find an asymmetric response to dividend changes based on market conditions: dividend increases matter more in declining markets than advancing ones. Tests indicate that results are not due to more profitable firms and appear not to be caused either by free cash flow or signaling explanations. We also find that it is the existence of dividends, and not the dividend yield, that drives returns’ asymmetric behavior relative to market movements..

Keywords: Dividend policy, asymmetry, market movements

JEL Classification: G35

Suggested Citation

Fuller, Kathleen P. and Goldstein, Michael A., Do Dividends Matter More in Declining Markets? (December 21, 2010). Journal of Corporate Finance, Vol. 17, No. 3, June 2011, pp. 457-473, June 2011. Available at SSRN: https://ssrn.com/abstract=687067 or http://dx.doi.org/10.2139/ssrn.687067

Kathleen Petrie Fuller

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Michael A. Goldstein (Contact Author)

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

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