Liquidity and Dividend Policy: International Evidence

Abstract

Since the days of Miller and Modigliani, academics have been studying dividend policy. There have been many theories as to why companies declare dividends, under what circumstances investors may prefer dividends to other forms of compensation, and factors that cause dividends to rise. However, the concept of liquidity has until very recently been largely ignored. This paper examines liquidity and dividend policy on the international level to determine what relationship the liquidity of a firm's stock has on the decision of how much dividend to disburse to investors. It finds that in several specific cases, there is an inverse relationship between stock liquidity and the dividend amount paid. This perhaps would point to dividends indeed at times compensating for lower stock liquidity.

Determinants of Market Liquidity of Shares Traded on the BM&FBOVESPA

“…For the dividend yield, unlike the relationships suggested by correlations, there were significant positive relationships with Quoted_f and Espread_f. These results are consistent with those of Banerjee, Gatchev and Spindt (2007) and Griffin (2010), that suggests that less liquid stocks are best dividend payers (TAB. 3).…”

“…The less liquid shares are the ones that pay more dividends, given the positive relationship between dividend yield and relative bid-ask spread, corroborating the results of Banerjee, Gatchev and Spindt (2007) and Griffin (2010 is associated with lower cash trading volumes and turnover, which provides support for the hypothesis that large investors reduce liquidity of shares.…”

“…They point out also that the increase in liquidity of shares in the United States, over time, explains most of the companies' propensity to pay lower dividends. From an international analysis, Griffin (2010) found that, in many cases, the relationship between the liquidity of the shares and the dividend paid is reversed; Consistent with the results of Banerjee, Gatchev and Spindt (2007). For these authors, dividends serve as compensation for the lower liquidity of shares.…”

“…That is, the specific characteristics of firms affect the liquidity and the return of their securities. Empirical evidence of the association between dividend policy and stock liquidity are presented in Banerjee, Gatchev and Spindt (2007) and Griffin (2010). The first found a lower probability of the holders of more liquid shares receive dividends.…”

Stock market liquidity and firm dividend policy: Evidence from Tehran Stock Exchange

“…According to Modigliani and Miller (1958), investors should be indifferent as to whether or not they receive dividends now or capital appreciation in the future, an idea known as the Dividend Irrelevance Theory. In other words, an increase in current dividends must lead to a reduction in the terminal value of the existing shares since the dividend stream on the existing shares have to be diverted to absorb outside capital from which higher future dividends are paid (Griffin, 2010). Liquidity is a relatively broad concept, which in this case refers to the capability to trade large volumes quickly, at low cost, and without moving the price.…”