I have a question if somebody can help.
How we can interpret the negative relationship between dividend and stock liquidity. Stock liquidity is measured by the stock price impact as of Amihud (200 2) and dividend is measured by the amount of dividend paid to total assets. Dividend is the independent variable. Thanks in advance.
It depends on how you calculate dividend, stock price, and TA, and also how do you control some other determinants. Usually, after the declaration of a stock dividend, the stock's price often increases. However, because a stock dividend increases the number of shares outstanding while the value of the company remains stable, it dilutes the book value per common share, and the stock price is reduced accordingly. Please focus on some good literature for further justifications and the robustness of your findings…
Well, most of literture, focuses on testing the effect of stock liquidity on dividends, not much has examined the opposite direction relationship - if dividend payment affects stock liquidity. If they do they only discus the positive relationship.
The following paper talks about such negative relationship. You may check it out.
Stock liquidity and dividend payouts
F Jiang, Y Ma, B Shi - Journal of Corporate finance, 2017 - Elsevier
What do you mean by the negative relationship here? Do you mean that the more profits are distributed, the more liquidity will be decreased?
Dear Milan,
Thanks for such explanations. But I want what are the interpretation (significance) of such adverse relationship. Why higher dividend payments leads to less liquidity in the stock market. The literature has been all the way discussing the issue from stock liquidity point of view. Studies mostly said the higher the liquid stocks the higher the dividend payments. So How about if the firms pay higher dividends?
Thanks again
The Amihud measure of liquidity is one of many in finance. It is dependent on return and trading volume. Illiquiity increases when great stock price increases with small trading volume. For dividends, it depends on whether the investor holds the share until the price goes ex. It will not encourage trading. The stock price increases on news of a dividend payout but the volume may not increase because investors want the divident will hold it. Investor behavior is important to understand whether return frm dividend or price appreciation to explain returns, timing to measure and the frequency of the data used.
If a company usually pay high payouts, investors are very likely to hold those share in the long run, as majority investors are risk averse.
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