Dividend policy and probability of extreme returns

Mohammed Bouaddi, Omar Farooq and Neveen Ahmed

International Journal of Managerial Finance, 2020, vol. 17, issue 4, 640-661

Abstract: Purpose - This study examines the effect of dividend policy on theex anteprobability of stock price crash and theex anteprobability stock price jump. Design/methodology/approach - We use the data of publicly listed non-financial firms from France and theex antemeasures of crash and jump probabilities (based on the Flexible Quadrants Copulas) to test our hypothesis during the period between 1997 and 2019. Findings - Our results show that dividend payments are negatively associated with theex anteprobability of crash and positively associated with theex anteprobability of jump. Our results are robust across various sub-samples and across different proxies of dividend policy. Our findings also hold when we use ex-post measures of crash and jump probabilities. Originality/value - Unlike prior literature, we useex antemeasures of crash and jump probabilities. The main advantage of this forward looking measure is that it allows for more flexibility by modeling the dependence between market returns and stock returns as functions of their actual state. Our measure is also consistent with the behavior of investors and market participants in a way that the market participants do not know the future outcome with certainty, but rather they are anticipating the future.

Keywords: Dividend policy; Agency problems; Jumps; Crashes; Flexible quadrants copulas; G35 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-01-2020-0023

DOI: 10.1108/IJMF-01-2020-0023

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