Do Dividends Matter More in
Declining Markets?
Kathleen Fuller
University of Georgia
November 5, 2004
&
Michael Goldstein
Babson College
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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
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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?
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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.
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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-dividendpaying stocks even in months with no dividend payment.
November 5, 2004
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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.
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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
November 5, 2004
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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-dividendpaying stocks in declining markets.
November 5, 2004
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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.
November 5, 2004
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Table 1
Sample Statistics
Non-Dividend
Paying
Panel A: All Markets (372 months)
Monthly Volume1
18,147
Price
$11.21
Market Cap.
$288,530,530
Dividend per share
None
Beta
Number of Obs.
Dividend
Paying
20,476
$25.30
$1,321,917,830
$0.078
0.733
1,392,422
0.716
769,266
17,736
$11.49
286,760,200
None
0.725
846,677
21,340
$26.20
1,411,436,090
$0.080
0.708
473,542
Panel C: Down Markets (155 months)
Monthly Volume
18,833
Price
$10.80
Market Cap.
291,171,220
Dividend per share
None
Beta
0.744
Number of Obs.
545,745
19,183
$24.06
1,175,653,940
$0.076
0.728
295,724
Panel B: Up Markets (217 months)
Monthly Volume
Price
Market Cap.
Dividend per share
Beta
Number of Obs.
November 5, 2004
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Table 2
Average Return for both Up and Down Markets
Non-Dividend-paying
Dividend-paying
Differencea
1.01%
1.38%
-0.37%**,w,k
3.72%
-3.03%
3.88%
-2.13%
-0.16%w,k
-0.90%**,w,k
0.74%**
1.07%
1.22%
-0.15%**,w,k
6.09%
-3.02%
5.26%
-2.55%
0.83%**,w,k
-0.47%**,w,k
1.30%**
0.84%
1.68%
-0.84%**,w,k
3.61%
-3.26%
4.26%
-2.03%
-0.65%**,w,k
-1.23%**,w,k
0.58%**
1.10%
1.23%
-0.13%**,w,k
3.19%
-2.87%
2.76%
-1.70%
0.43%**,w,k
-1.17%*,w,k
1.60%**
Panel A: All years
All Markets
Up Markets
Down Markets
Difference Of Differences
Panel B: Subperiods
1970s
All Markets
Up Markets
Down Markets
Difference Of Differences
1980s
All Markets
Up Markets
Down Markets
Difference Of Differences
1990s
All Markets
Up Markets
Down Markets
Difference Of Differences
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% level
w indicates the Wilcoxon sign-rank test is significant at the 1% level k indicates the Kruskal-Wallis test is significant at the 1% level
November 5, 2004
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Table 3
CAPM 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
0.79% **
Difference of Differences
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Table 4
Excess Returns for 16 Portfolios Formed on Size and
BE/ME
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
Non-Div.
Dividend
Difference
Non-Div.
Dividend
Difference
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%
November 5, 2004
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Panel B: Up Markets
BE/ME
Size
Low
2
Non-Div.
Dividend
Difference
Non-Div.
Dividend
Difference
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
Non-Div.
Dividend
Difference
Non-Div.
Dividend
Difference
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%
November 5, 2004
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Panel C: Down Markets
BE/ME
Size
Low
2
Non-Div.
Dividend
Difference
Non-Div.
Dividend
Difference
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
Non-Div.
Dividend
Difference
Non-Div.
Dividend
Difference
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%
November 5, 2004
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Table 5
Fama-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
November 5, 2004
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Table 6
Fama-MacBeth Returns
Down Markets
Up Markets
Differences
November 5, 2004
Intercept
b
-0.0201
0.0049
0.7803
0.7563
4.1177
4.3412
0.3817
0.5219
0.3759
0.3608
**
**
**
**
**
Ln(Mktcap) Ln(BVEquity)
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Table 7
Cumulative Abnormal Returns for Dividend Changes in
Up and Down Markets
Panel A
Dividend Increase
1.013%**
Dividend Decrease
-0.360%**
No Change
0.102%**
Panel B
Dividend Increase
Up Market
0.857%**
Down Market
1.206%**
Difference
-0.349%*,w,k
Dividend Decrease
-0.375%**
-0.324%*
-0.051%w,k
No Change
0.046%
0.170%**
-0.124%**,w,k
November 5, 2004
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Table 8
Average Return for Up and Down Markets
for Dividend-Paying Stocks during Months with No
Dividend Payments
Panel A – Returns
NonDividendpaying
All
Stocks
3.72%
Up
Markets
Dividendpaying
3.72%
Difference
NonDividendpaying
0.00%
-3.03%
Down
Markets
Dividendpaying
-2.36%
Difference
Difference
of
differencesa
-0.67%**, w,k
0.67%**
Panel B – Fama-French Regressions
Intercept
Non-Dividend-paying
Dividend-paying
Differences
November 5, 2004
0.0042*
-0.0008
*
Adjusted R2
RMRF
SMB
HML
0.9210**
1.0580**
0.2641**
-0.0134**
89.8%
0.9527**
0.4036**
0.5161**
-0.0028
92.1%
**
**
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DOWN
**
19
Table 9
Fama-French Risk Adjusted Returns Removing
Smallest (and Largest) Firms
Intercept
RMRF
SMB
HML
DOWN
Adjusted R2
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%)
Non-Dividend-paying
0.0102**
1.0561**
1.0844**
0.2703**
-0.0110**
92.3%
Dividend-paying
0.0001
0.8955**
0.6339**
0.6026**
-0.0022
90.4%
**
**
**
**
**
Differences
November 5, 2004
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Table 10
Returns for both Bull and Bear Markets
Panel A: Univariate Results
Up
Markets
NonDividend- Difference
Dividend- paying
paying
2.09%
2.23%
Panel B: Fama-French Regressions
Intercept
Non-Dividend-paying
Dividend-paying
Differences
November 5, 2004
0.0000
0.0008
Down
Markets
NonDividend- Difference
Dividend- paying
paying
-0.14%**, w,k
-2.37%
-0.53%
-1.84%,w, k
HML
DOWN
Adjusted R2
0.9885** 1.1225** 0.2808**
0.9623** 0.4168** 0.5138**
-0.0051
-0.0017
89.5%
92.3%
**
*
RMRF
SMB
**
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Difference
of
differencesa
1.70%**
21
Table 11
Fama-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%
Differences
**
**
**
**
November 5, 2004
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Table 12
Fama-French Risk Adjusted Returns Controlling for
NYSE and NASDAQ
RMRF
SMB
HML
DOWN
AdjustedR2
-0.0003
1.1219**
0.9474**
0.5791**
-0.0054**
89.9%
0.0009
1.0232**
0.3490**
0.5051**
-0.0028
92.1%
**
**
0.0070**
0.7804**
1.1430**
0.0709
-0.0192**
85.3%
0.0023
0.7965**
0.5419**
0.5279**
-0.0047
84.5%
**
**
**
Intercept
Panel A: NYSE/AMEX Stocks
Non-Dividendpaying
Dividend-paying
Differences
*
Panel B: NASDAQ Stocks
Non-Dividendpaying
Dividend-paying
Differences
**
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
November 5, 2004
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Table 13
Fama-French Risk Adjusted Returns by Dividend Yield
Intercept
RMRF
SMB
HML
DOWN
Adjusted R2
Panel A: Dividend Yield Comparisions
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%
-0.0025*
0.6985**
0.2804**
0.5568**
-0.0008
85.00%
**
**
**
**
Lowest dividend yield
Highest dividend yield
F-test for differences
Panel B: Comparison of non-dividend paying and lowest yielding stocks
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
November 5, 2004
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*
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Table 14
Fama-French Risk Adjusted Returns by Size
Intercept RMRF
Smallest Non-Dividend-paying
Dividend-paying
Non-Dividend-paying
Dividend-paying
Differences
3
Non-Dividend-paying
Dividend-paying
Differences
Largest Non-Dividend-paying
Dividend-paying
Differences
November 5, 2004
HML
DOWN
-0.0066* 0.6832** 1.1378** 0.4174** -0.0232**
-0.0086** 0.6386** 0.6971** 0.5888** -0.002
**
Differences
2
SMB
**
**
**
**
**
**
**
**
86.00%
95.10%
91.10%
*
0.0134** 1.0339** 0.6000** -0.1601** -0.0003
0.0043** 1.0348** 0.0924** 0.4034** -0.0041
**
87.60%
**
0.0121** 1.1170** 0.9391** 0.0981** -0.0068**
0.0008 0.9433** 0.5972** 0.5701** -0.0011
**
72.40%
**
0.0088** 1.0041** 1.1790** 0.4024** -0.0146**
-0.0011 0.8165** 0.6968** 0.6594** -0.0034
**
Adjusted
2
R
72.50%
93.20%
91.50%
**
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Table 15
Fama-French Risk Adjusted Returns by Volume
Intercept
RMRF
SMB
HML
DOWN
Adj. R2
Non-Dividend-paying
-0.0122**
0.7230**
0.8198**
0.4980**
-0.0065
74.1%
Dividend-paying
-0.0033**
0.6731**
0.5251**
0.5123**
0.0006
82.1%
Volume
Group
Lowest
Differences
2
**
-0.0111**
0.9953**
1.1023**
0.7269**
-0.0069
83.3%
Dividend-paying
-0.0027**
0.9083**
0.6354**
0.6260**
0.0006
88.8%
**
*
**
*
*
Non-Dividend-paying
0.0015
1.0813**
1.1926**
0.5375**
-0.0113**
86.7%
Dividend-paying
0.0014
1.0122**
0.5680**
0.5939**
-0.0014
90.8%
**
Differences
4
0.0156**
1.1656**
1.1928**
0.2320**
-0.0151**
90.5%
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%
Dividend-paying
0.0057**
1.1313**
0.0405
0.3627**
-0.0063**
91.6%
**
**
*
Differences
November 5, 2004
**
Non-Dividend-paying
Differences
Highest
*
Non-Dividend-paying
Differences
3
**
**
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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, 2004
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