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Stock Market Liquidity and Firm Dividend Policy

Published online by Cambridge University Press:  06 April 2009

Suman Banerjee ,
Vladimir A. Gatchev  and
Paul A. Spindt
Suman Banerjee
Affiliation:
suman.banerjee@tulane.edu, A. B. Freeman School of Business, Tulane University, 7 McAlister Drive, New Orleans, LA 70118 and UNSW Asia, 1 Kay Siang Road, Singapore, 248922
Vladimir A. Gatchev
Affiliation:
vgatchev@bus.ucf.edu, Department of Finance, College of Business Administration, University of Central Florida, Orlando, FL 32816
Paul A. Spindt
Affiliation:
spindt@tulane.edu, A. B. Freeman School of Business, Tulane University, 7 McAlister Drive, New Orleans, LA 70118.
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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 as 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 2 , June 2007 , pp. 369 - 397
Copyright
Copyright © School of Business Administration, University of Washington 2007

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