Dividend policy and probability of extreme returns
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 22 October 2020
Issue publication date: 8 July 2021
Abstract
Purpose
This study examines the effect of dividend policy on the ex ante probability of stock price crash and the ex ante probability stock price jump.
Design/methodology/approach
We use the data of publicly listed non-financial firms from France and the ex ante measures of crash and jump probabilities (based on the Flexible Quadrants Copulas) to test our hypothesis during the period between 1997 and 2019.
Findings
Our results show that dividend payments are negatively associated with the ex ante probability of crash and positively associated with the ex ante probability of jump. Our results are robust across various sub-samples and across different proxies of dividend policy. Our findings also hold when we use ex-post measures of crash and jump probabilities.
Originality/value
Unlike prior literature, we use ex ante measures of crash and jump probabilities. The main advantage of this forward looking measure is that it allows for more flexibility by modeling the dependence between market returns and stock returns as functions of their actual state. Our measure is also consistent with the behavior of investors and market participants in a way that the market participants do not know the future outcome with certainty, but rather they are anticipating the future.
Keywords
Citation
Bouaddi, M., Farooq, O. and Ahmed, N. (2021), "Dividend policy and probability of extreme returns", International Journal of Managerial Finance, Vol. 17 No. 4, pp. 640-661. https://doi.org/10.1108/IJMF-01-2020-0023
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited