The role of dividends and investor sentiment in the relation between idiosyncratic risk and expected returns

Jungshik Hur () and Qing Yang ()
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Jungshik Hur: Louisiana Tech University
Qing Yang: Niagara University

Review of Quantitative Finance and Accounting, 2024, vol. 63, issue 3, No 1, 807-827

Abstract: Abstract We test the role of dividends and investor sentiment in the relation between idiosyncratic risk and expected returns because Pastor and Veronesi (J Financ 58:1749–1789, 2003) find evidence that dividends reduce firm-specific uncertainty by sending information to the market participants through dividends. Also, Baker and Wurgler (J Financ 61:1645–1680, 2006) document that the negative relation between idiosyncratic risk and expected return only exists under the optimistic sentiment. We first document that the negative relation between idiosyncratic risk and expected return is more concentrated for stocks without dividends than stocks with dividends. We further find that the role of dividends in the relation between idiosyncratic risk and expected return is not affected by investor sentiment. These findings are robust to weighing schemes of returns and firm characteristics such as beta, size, book-to-market ratio, momentum, and liquidity.

Keywords: Idiosyncratic volatility puzzle; Dividend payments; Investor sentiment (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01156-1

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