Stock Market Liquidity and Firm Dividend Policy

Posted: 10 Jan 2006 Last revised: 8 Jan 2018

See all articles by Suman Banerjee

Suman Banerjee

Stevens Institute of Technology; Stevens Institute of Technology

Vladimir A. Gatchev

University of Central Florida - Department of Finance

Paul A. Spindt

Tulane University - A.B. Freeman School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 2005

Abstract

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, G33

Suggested Citation

Banerjee, Suman and Gatchev, Vladimir A. and Spindt, Paul A., Stock Market Liquidity and Firm Dividend Policy (December 2005). Journal of Financial and Quantitative Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=873621 or http://dx.doi.org/10.2139/ssrn.391663

Suman Banerjee

Stevens Institute of Technology ( email )

525 River Street
Hoboken, NJ 07030
United States
2012613689 (Phone)

Stevens Institute of Technology ( email )

Hoboken, NJ 07030
United States

Vladimir A. Gatchev (Contact Author)

University of Central Florida - Department of Finance ( email )

Orlando, FL 32816-1400
United States
(407) 823-3694 (Phone)
(407) 823-6676 (Fax)

HOME PAGE: http://www.bus.ucf.edu/vgatchev/

Paul A. Spindt

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5413 (Phone)

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