Dividend policy, systematic liquidity risk, and the cost of equity capital

Khelifa Mazouz, Yuliang Wu (), Rabab Ebrahim and Abhijit Sharma
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Khelifa Mazouz: University of Cardiff
Yuliang Wu: School of Management, University of Bradford
Rabab Ebrahim: University of Bahrain
Abhijit Sharma: Huddersfield Business School, University of Huddersfield

Review of Quantitative Finance and Accounting, 2023, vol. 60, issue 3, No 1, 839-876

Abstract: Abstract This paper examines a new channel through which dividend policy can affect firm value. We find that firms that pay dividends exhibit lower systematic liquidity risk than those that do not. We also report a significant negative relationship between dividend payment and systematic liquidity risk. The liquidity improvement associated with dividend payments translates into an economically meaningful reduction in the cost of equity capital. Our results are robust to endogeneity concerns, to alternative measures of liquidity risk and dividend payouts, and to alternative model specifications. Further analysis suggests that the reduction in liquidity risk associated with dividend payouts is more pronounced for weakly governed firms and firms with opaque informational environment. Finally, we find that the recent financial crisis led to a greater increase in systematic liquidity risk for firms with no or low dividend payouts. Overall, our study implies that dividend policy can be used by corporate managers to shape liquidity risk and mitigate the adverse impact of economic downturns on the value of their firms.

Keywords: Dividend policy; Systematic liquidity risk; Cost of equity capital; Firm value (search for similar items in EconPapers)
JEL-codes: G12 G32 G35 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-022-01114-3

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