Liquidity and Dividend Policy

Deniz Igan, Aureo de Paula and Marcelo Pinheiro

MPRA Paper from University Library of Munich, Germany

Abstract: We document the association between a firm's payout policy and its stock's liquidity. In particular, we show that dividend-paying firms have a more liquid market for their stock and measures of a stock's liquidity is positively linked to its probability of being a dividend payer. Furthermore, this link between dividends and liquidity is stronger when shareholders are more powerful. This is consistent with a mechanism in which payout decisions act as a commitment not to invest: by distributing cash, the firm reduces its potential for internal equity financing, raising its cost of capital and leading to less investment. Such a mechanism may lead to less volatile stock prices and potentially to a decrease in the adverse selection costs faced by liquidity-constrained shareholders, increasing stock price liquidity. When shareholders have more power, liquidity would be more strongly linked with dividends as managers would be more likely to pay dividends to meet shareholders�preference for liquidity.

Keywords: Liquidity; Dividend Payers; Adverse Selection Costs; Corporate Governance; Shareholder Power; Informed Trading (search for similar items in EconPapers)
JEL-codes: G14 G31 G34 (search for similar items in EconPapers)
Date: 2006, Revised 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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