Dividend policy, its asymmetric behavior and stock liquidity

Abstract

PurposeThis paper examines the impact of dividend policy on stock market liquidity, and whether the dividend payouts has an asymmetric effect on stock liquidity.Design/methodology/approachA multivariate panel-data regression analysis is conducted for a sample of the largest 411 nonfinancial US firms. Three main hypothesis are tested: (1) whether dividend payouts impact affect stock liquidity, (2) whether low and high dividend payments can asymmetrically effect on stock liquidity and (3) whether the presence of the GFC has an impact the relationship between dividend payments and stock liquidity.FindingsThe study finds that dividend policy is adversely associated with stock liquidity. This supports the prediction of the liquidity-dividend hypothesis. The authors also report that stock liquidity asymmetrically responds to changes in dividend payouts, confirming the prediction of the dividend-signaling approach. More specifically, higher dividend payments decrease stock liquidity by a lower magnitude than the increase in stock liquidity resulting from lower dividend payments. Finally, the presence of the GFC weakened the relationship between dividend payments and stock liquidity.Research limitations/implicationsThe paper can help in performing future research by using different dataset covering the COVID-19 crisis.Practical implicationsThe paper allows market participants to better understand the impact of dividend policy and its asymmetric effects on stock liquidity. The authors’ analyses can direct investors and regulators to adopt new supervisory devices to create an appropriate level of dividend payouts that helps to effectively support the level of stock liquidity.Social implicationsThe paper intends to support the business community and to make strong contributions to the economic development and the welfare of the community.Originality/valueThe originality comes from its new evidence as it can help in assessing the importance of dividend policy and its asymmetric impact on stock liquidity in the full sample and during the GFC. The paper is helpful in performing future analyses using a new sample period for another set of data as well as accounting for COVID-19 pandemic crisis.

Determinants of Dividend Policy: A Case of the Property and Real Estate Sector

“…The research concludes that free cash flow, leverage, and liquidity have no direct effect on dividend policy. The results of this study are consistent with research conducted by [26][27][28][29]. Profitability as an intermediary has been proven in this study.…”

The Influence of Dividend Policy, ESG Score, Profitability, and Leverage on the Stock Liquidity of IDX 80 Companies on the Indonesia Stock Exchange

“…This policy can be proxied by the Dividend Payout Ratio (DPR), referring to the percentage of company profits distributed to shareholders in the form of cash dividends. Research by (Ali Taher & Al-Shboul, 2023) shows that dividend policy is negatively related to stock liquidity. Additionally, referring to Stereńczak and Kubiak's study (2022), stock liquidity is influenced by the company's dividend policy.…”

Dividend and Excess Return in China

“…Yan and Zhu (2020) paid attention to dividend policy from 2007 to 2018, they found that the dividend payment is largely affected by the proportion of state-owned enterprises in the same industry. Ali and Al-Shboul (2023) found that high dividends can reduce stock liquidity. Ali and Al-Shboul's research analysed 411 non-financial U.S. stock companies from 2006 to 2017 and concluded that the dividend policy is inversely proportional to stock liquidity.…”

“…Pursuant to the Wind financial terminal, there are more and more retail investors and institutes investing in A-shares listed companies in recent years. The research (e.g., Barberis & Huang, 2008;Kumar, 2009;Hu et al, 2021;Ali Taher & Al-Shboul, 2023) shows retail investors tend to buy stocks that pay dividends and are willing to pay a price for it with a premium. The lower stock price after dividends will attract more investors to speculate.…”