November 5, 2004Burridge Center Investment Conference 1 Do Dividends Matter More in Declining...

November 5, 2004 Burridge Center Investment Conference 1

Do Dividends Matter More in Declining Markets?

Kathleen Fuller & Michael Goldstein

University of Georgia Babson College


Dividends:Who cares?

• Academic research indicates investors’ preferences for dividends vary across shareholder types.– Tax clienteles

• Anecdotal evidence suggests investors’ preferences vary over time– Fidelity ad

– S&P 500 prediction

Investors’ preferences for dividend-paying stocks vary over time conditional on the state of the market


Why do investors care?

• Prospect theory:– Markowitz (1959), Kahneman & Tversky (1979), Gaul

(1991), Connolly, Stivers & Sun (2004)

• Signaling– future value or reduce agency costs.– Bhattacharya (1979), Easterbrook (1984), John & Williams

(1985), Miller & Rock (1985) , Jensen (1986), Lang & Litzenberger (1989)

• KEY QUESTION: Does the market value dividends more in declining markets?


Why concentrate on dividends?

• Dividends vs. Repurchases– Dividend payments benefit all shareholders equally.– Repurchases not generally regularly-scheduled

• Like three midterms instead of just a final– Repurchases not generally long term commitment to signal in the

future.• Repurchases not as good/regular a signal, so won’t affect our results.

– If non-dividend paying firms repurchase shares instead of paying dividends, we bias against finding our results.

• Overall, not saying dividends are the only way to signal.– Just that if dividends are regularly-scheduled signals, they should

be valued somehow.


Empirical Predictions• Dividends matter more in declining markets:

– Dividend-paying stocks outperform non-dividend-paying stocks more in declining markets than in rising markets.

– Maintaining a dividend payment should garner a favorable response during declining markets but not during advancing markets

• Dividend increase should matter more in declining markets than advancing markets

– Dividend-paying stocks should outperform non-dividend-paying stocks even in months with no dividend payment.


Empirical Predictions (cont.)• Signaling theory vs. Prospect theory

– Dividend Yield:• Prospect theory:

– the larger the dividend yield, the greater the value according to prospect theory• signaling theory

– no difference– Firm Size:

• Prospect theory:– does not differentiate

• Signaling theory:– greater for small stocks

– Liquidity:• Prospect theory:

– no predictions• signaling theory:

– greater investor dispersion in more liquid stocks– greatest differences between dividend-paying and non-dividend-paying stocks

in down markets.


Sample • 20,315 NYSE, Amex and NASDAQ listed firms from January 1,

1970 to December 31, 2000.

• Firms classified as dividend-paying or non-dividend paying firms based on regular quarterly dividend payments

• S&P 500 index returns for 31-year period.

• Advancing ≡ S&P500 return is positive; Declining ≡ S&P500 return is negative

• 1,272,371 monthly observations for non-dividend-paying firms and 751,856 monthly observations for dividend-paying firms


Overall Results• Dividend paying stocks outperform non-dividend

paying stocks by more in down markets than in up markets– Robust to:

• Risk: CAPM, Fama-French, Fama-MacBeth• Truncation, NYSE/NASDAQ, Volume, Bull/Bear, Implicit

Volatility

• Maintaining dividends in down markets: sig. positive return

• Increasing dividend in down market yields sig. higher return than increasing in up market

• Results still hold in non-dividend paying months Dividend-paying stocks outperform non-dividend-

paying stocks in declining markets.


Prospect vs. Signaling Results

• Dividend yield does not matter– All that matters is the payment of the dividend, not how much

• Size matters– Small dividend-paying stocks outperform small non-dividend-paying

stocks in down markets more than large dividend-paying stocks outperform large non-dividend-paying stocks in down markets.

• Volume matters– Liquid, high volume stocks have the highest differences between

dividend-paying and non-dividend-paying stocks in down markets. Collectively, results are more supportive of a signaling theory

explanation than a prospect theory one.


Table 1Sample Statistics Non-Dividend

Paying Dividend Paying

Panel A: All Markets (372 months) Monthly Volume1 18,147 20,476 Price $11.21 $25.30

Market Cap. $288,530,530 $1,321,917,830 Dividend per share None $0.078

Beta 0.733 0.716 Number of Obs. 1,392,422 769,266

Panel B: Up Markets (217 months)

Monthly Volume 17,736 21,340

Price $11.49 $26.20

Market Cap. 286,760,200 1,411,436,090

Dividend per share None $0.080

Beta 0.725 0.708

Number of Obs. 846,677 473,542

Panel C: Down Markets (155 months)

Monthly Volume 18,833 19,183

Price $10.80 $24.06

Market Cap. 291,171,220 1,175,653,940

Dividend per share None $0.076

Beta 0.744 0.728

Number of Obs. 545,745 295,724

1 The number of volume observations is less than other variables since some months no volume was reported on CRSP. Instead of throwing out that entire observation for the month when no volume was reported, we simply ignored those observations when computing the average monthly volume.


Table 2Average Return for both Up and Down Markets

a Significance was only tested using parametric tests for the Differences of Differences.* indicates t-test is significant at the 5% level ** indicates t-test is significant at the 1% levelw indicates the Wilcoxon sign-rank test is significant at the 1% level k indicates the Kruskal-Wallis test is significant at the 1% level

Non-Dividend-paying Dividend-paying Differencea

Panel A: All years All Markets 1.01% 1.38% -0.37%**,w,k Up Markets 3.72% 3.88% -0.16%w,k Down Markets -3.03% -2.13% -0.90%**,w,k Difference Of Differences 0.74%**

Panel B: Subperiods

1970s All Markets 1.07% 1.22% -0.15%**,w,k Up Markets 6.09% 5.26% 0.83%**,w,k Down Markets -3.02% -2.55% -0.47%**,w,k Difference Of Differences 1.30%**

1980s All Markets 0.84% 1.68% -0.84%**,w,k Up Markets 3.61% 4.26% -0.65%**,w,k Down Markets -3.26% -2.03% -1.23%**,w,k Difference Of Differences 0.58%**

1990s All Markets 1.10% 1.23% -0.13%**,w,k Up Markets 3.19% 2.76% 0.43%**,w,k Down Markets -2.87% -1.70% -1.17%*,w,k Difference Of Differences 1.60%**


Table 3CAPM Risk-Adjusted Abnormal Returns

Non-Dividend-paying Abnormal Returns

Dividend-paying Abnormal Returns

Difference

All Markets 0.14% 0.27% -0.13%**,w,k

Up Markets 0.85% 0.66% 0.19%**,w,k

Down Markets -0.90% -0.30% -0.60%**,w,k

Difference of Differences 0.79% **


Panel A: All Markets

BE/ME

Size Low 2

Non-Div. Dividend Difference Non-Div. Dividend Difference

Small 2.14% 2.29% -0.17%,w,k 0.54% 1.43% -0.89%**,w,k

2 3.48% 2.01% 1.47%**,w,k 1.33% 1.23% 0.10%

3 3.92% 1.85% 2.07%**,w,k 1.38% 1.11% 0.27%

Large 3.86% 1.84% 2.02%**,w,k 1.31% 1.16% 0.15%

3 High


Small -0.20% 0.72% -0.92%**,w,k -2.00% -0.90% -1.10%**,w,k

2 0.26% 0.42% -0.16%w,k -1.20% -1.30% 0.10%

3 0.23% 0.29% -0.06% -0.80% -1.20% -0.40%

Large 0.69% 0.34% 0.36%w,k -0.40% -0.70% 0.30%

Table 4Excess Returns for 16 Portfolios Formed on Size and BE/ME


Panel B: Up Markets

BE/ME

Size Low 2


Small 4.64% 4.21% 0.43%**,w,k 2.65% 2.93% -0.28%**,w,k

2 6.51% 4.14% 2.38%**,w,k 3.93% 3.03% 0.90%**,w,k

3 6.87% 4.17% 2.70%**,w,k 3.90% 3.08% 0.82%**,w,k

Large 7.11% 4.11% 3.00%**,w,k 3.74% 3.36% 0.38%

3 High


Small 1.71% 1.88% -0.17%,w,k -0.16% 0.59% -0.75%**,w,k

2 2.89% 2.23% 0.66%**,w,k 2.28% 1.37% 0.91%**,w,k

3 2.68% 2.43% 0.25% 2.03% 1.77% 0.26%

Large 2.59% 2.61% -0.02% 2.42% 2.57% -0.15%


Panel C: Down Markets

BE/ME

Size Low 2


Small -2.28% -1.14% -1.14%**,w,k -3.25% -1.29% -1.96%**,w,k

2 -2.25% -1.82% -0.43%*,w,k -3.31% -2.02% -1.29%**,w,k

3 -1.98% -2.29% 0.31% -2.98% -2.46% -0.52%*,w,k

Large -1.89% -2.39% 0.50%* -2.79% -2.80% 0.01%

3 High


Small -3.69% -1.42% -2.27%**,w,k -5.05% -3.37% -1.68%**,w,k

2 -4.36% -2.57% -1.79%**,w,k -6.93% -5.30% -1.63%**,w,k

3 -3.85% -3.37% -0.48% -5.45% -5.45% 0.21%

Large -2.11% -3.50% 1.39%**,w,k -4.76% -5.47% 0.71%


Table 5Fama-French Adjusted Returns

Intercept RMRF SMB HML DOWN Adjusted R2

Panel A: Traditional Fama-French

Non-Dividend-paying -0.0016 1.0054** 1.1211** 0.2761** 89.4%

Dividend-paying 0.0002 0.9680** 0.4163** 0.5122** 92.3%

Differences ** **

Panel B: Modified Fama-French for UP/DOWN Markets

Non-Dividend-paying 0.0042* 0.9210** 1.0580** 0.2641** -0.0134** 89.8%

Dividend-paying 0.0015 0.9497** 0.4027** 0.5096** -0.0029 92.3%

Differences ** ** **


Table 6Fama-MacBeth Returns

Intercept b Ln(Mktcap) Ln(BVEquity) DIV

Down Markets -0.0201 0.7803 4.1177 0.3817 0.3759Up Markets 0.0049 0.7563 4.3412 0.5219 0.3608

Differences ** ** ** ** **


Table 7Cumulative Abnormal Returns for Dividend Changes in Up and Down Markets

Panel A Dividend Increase Dividend Decrease No Change 1.013%** -0.360%** 0.102%**

Panel B Up Market Down Market Difference Dividend Increase 0.857%**

1.206%** -0.349%*,w,k

Dividend Decrease -0.375%**

-0.324%* -0.051%w,k

No Change 0.046%

0.170%** -0.124%**,w,k


Table 8Average Return for Up and Down Marketsfor Dividend-Paying Stocks during Months with No Dividend PaymentsPanel A – Returns Up

Markets Down

Markets

Non-Dividend-paying

Dividend-paying

Difference Non-Dividend-paying

Dividend-paying

Difference Difference of differencesa

All Stocks

3.72% 3.72% 0.00% -3.03% -2.36% -0.67%**, w,k 0.67%**

Panel B – Fama-French Regressions


Non-Dividend-paying 0.0042* 0.9210** 1.0580** 0.2641** -0.0134** 89.8%

Dividend-paying -0.0008 0.9527** 0.4036** 0.5161** -0.0028 92.1%

Differences * ** ** **


Table 9Fama-French Risk Adjusted Returns Removing Smallest (and Largest) Firms


Panel A: Fama-French Risk Adjusted Returns removing Smallest 25%

Non-Dividend-paying 0.0106** 1.0606** 1.0015** 0.1837** -0.0081** 94.6%

Dividend-paying 0.0021* 0.9703** 0.3794** 0.5099** -0.0029 92.3%

Differences ** ** ** ** *

Panel B: Fama-French Risk Adjusted Returns for Middle 50% (Deleted Smallest 25% and Largest 25%)


Dividend-paying 0.0001 0.8955** 0.6339** 0.6026** -0.0022 90.4%



Table 10Returns for both Bull and Bear Markets

Panel A: Univariate Results Up

Markets Down

Markets

Non-Dividend-paying

Dividend-paying

Difference Non-Dividend-paying

Dividend-paying

Difference Difference of differencesa

2.09% 2.23% -0.14%**, w,k -2.37% -0.53% -1.84%,w, k 1.70%** Panel B: Fama-French Regressions Intercept RMRF SMB HML DOWN Adjusted R2

Non-Dividend-paying 0.0000 0.9885** 1.1225** 0.2808** -0.0051 Dividend-paying 0.0008 0.9623** 0.4168** 0.5138** -0.0017

89.5% 92.3%

Differences ** ** *


Table 11Fama-French Risk Adjusted Returns Controlling for Volatility

Intercept RMRF SMB HML DOWN VOL Adj. R2

Panel A: Including 1986 and 1987 data

Non-Dividend-paying 0.0088** 0.8159** 0.8162** 0.1731** -0.0222** -0.0024 86.9%

Dividend-paying -0.0022 0.9057** 0.2974** 0.6364** -0.0027 -0.0045 90.5%

Differences ** ** ** **

Panel B: Excluding 1986 and 1987 data

Non-Dividend-paying 0.0112** 0.7498** 0.7706** 0.1501* -0.0277** -0.0011 84.8%

Dividend-paying -0.0013 0.8632** 0.2773** 0.6497** -0.0045 -0.0006 88.2%



Table 12Fama-French Risk Adjusted Returns Controlling for NYSE and NASDAQ

Intercept RMRF SMB HML DOWN AdjustedR2

Panel A: NYSE/AMEX Stocks

Non-Dividend-paying

-0.0003 1.1219** 0.9474** 0.5791** -0.0054** 89.9%

Dividend-paying 0.0009 1.0232** 0.3490** 0.5051** -0.0028 92.1%

Differences ** ** *

Panel B: NASDAQ Stocks

Non-Dividend-paying

0.0070** 0.7804** 1.1430** 0.0709 -0.0192** 85.3%

Dividend-paying 0.0023 0.7965** 0.5419** 0.5279** -0.0047 84.5%


Panel C: Dividend-paying NYSE/AMEX vs. Dividend-paying NASDAQ Stocks

NYSE/AMEX 0.0009 1.0232** 0.3490** 0.5051** -0.0028 92.1%

NASDAQ 0.0023 0.7965** 0.5419** 0.5279** -0.0047 84.5%

Differences ** **


Table 13Fama-French Risk Adjusted Returns by Dividend Yield


Lowest dividend yield 0.0092** 1.1117** 0.4625** 0.2911** -0.0067* 89.70%

2 0.0028* 1.0520** 0.4504** 0.5183** -0.0034 89.90%

3 -0.0001 0.9885** 0.4352** 0.5839** -0.0013 90.70%

4 -0.002 0.8990** 0.3864** 0.5982** -0.0021 90.60%

Highest dividend yield -0.0025* 0.6985** 0.2804** 0.5568** -0.0008 85.00% F-test for differences ** ** ** **

Non-Dividend-paying 0.0042* 0.9210** 1.0580** 0.2641** -0.0134** 89.80%Lowest dividend yield 0.0092** 1.1117** 0.4625** 0.2911** -0.0067* 89.70% Differences ** ** *

Panel A: Dividend Yield Comparisions

Panel B: Comparison of non-dividend paying and lowest yielding stocks


Table 14Fama-French Risk Adjusted Returns by Size

Intercept RMRF SMB HML DOWN Adjusted

R2

Smallest Non-Dividend-paying -0.0066* 0.6832** 1.1378** 0.4174** -0.0232** 72.50%

Dividend-paying -0.0086** 0.6386** 0.6971** 0.5888** -0.002 72.40%


2 Non-Dividend-paying 0.0088** 1.0041** 1.1790** 0.4024** -0.0146** 87.60%

Dividend-paying -0.0011 0.8165** 0.6968** 0.6594** -0.0034 86.00%


3 Non-Dividend-paying 0.0121** 1.1170** 0.9391** 0.0981** -0.0068** 95.10%

Dividend-paying 0.0008 0.9433** 0.5972** 0.5701** -0.0011 91.10%

Differences ** ** ** ** *

Largest Non-Dividend-paying 0.0134** 1.0339** 0.6000** -0.1601** -0.0003 93.20%

Dividend-paying 0.0043** 1.0348** 0.0924** 0.4034** -0.0041 91.50%



Table 15Fama-French Risk Adjusted Returns by Volume

Volume Group

Intercept RMRF SMB HML DOWN Adj. R2

Non-Dividend-paying -0.0122** 0.7230** 0.8198** 0.4980** -0.0065 74.1%

Lowest Dividend-paying -0.0033** 0.6731** 0.5251** 0.5123** 0.0006 82.1%

Differences ** ** *

Non-Dividend-paying -0.0111** 0.9953** 1.1023** 0.7269** -0.0069 83.3%

2 Dividend-paying -0.0027** 0.9083** 0.6354** 0.6260** 0.0006 88.8%

Differences ** * ** * *

Non-Dividend-paying 0.0015 1.0813** 1.1926** 0.5375** -0.0113** 86.7%

3 Dividend-paying 0.0014 1.0122** 0.5680** 0.5939** -0.0014 90.8%

Differences ** **


4 Dividend-paying 0.0047** 1.0829** 0.3790** 0.5246** -0.0050 89.9%


Non-Dividend-paying 0.0312** 1.2073** 1.2567** -0.1641** -0.0175** 90.1%

Highest Dividend-paying 0.0057** 1.1313** 0.0405 0.3627** -0.0063** 91.6%

Differences ** ** ** *


Conclusion• Results indicate that dividend paying firms outperform non-dividend

paying firms more after controlling for risk.– CAPM, Fama-French, Fama-MacBeth– Robust to volume, volatility, exchange, etc.

• Maintaining a dividend results in a sig. positive return in down market while increasing a dividend results in sig. more positive return in down market than up market.

• Dividend-paying stocks outperform non-dividend-paying stocks even during non-dividend paying months.

• Results are not a function of dividend yield, but are a function of size and volume. – Consistent with a signaling theory explanation.

Dividends are valued more by investors in declining markets because they signal information when most needed.

November 5, 2004Burridge Center Investment Conference 1 Do Dividends Matter More in Declining...

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