IDEAS home Printed from https://ideas.repec.org/a/ibf/ijbfre/v9y2015i2p1-20.html
   My bibliography  Save this article

Returns for Dividend-Paying and Non Dividend Paying Firms

Author

Listed:
  • Yufen Fu
  • George W. Blazenko

Abstract

In this paper, we compare the equity returns of dividend-paying and non-dividend paying firms. We find no unconditional return difference even though non-dividend paying firms have many characteristics that suggest high risk. Equivalently, because non-dividend paying firms have high risk-metrics, their returns are abnormally low compared with dividend-paying firms. The reason for these anomalies is that a larger fraction of non-dividend paying firms are in financial distress and, despite high distress-risk and high growth-leverage, firms in financial distress have low returns from high volatility that decreases the optionsleverage of equity. Removing firms in financial distress, returns for non-dividend paying firms increase relative to dividend-paying firms and abnormal returns disappear. We argue that part of the reason that firms in financial-distress have high volatility that leads to low returns is managerial risk-shifting that takes form as unexpectedly high capital expenditure rates.

Suggested Citation

  • Yufen Fu & George W. Blazenko, 2015. "Returns for Dividend-Paying and Non Dividend Paying Firms," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(2), pages 1-20.
    • Handle: RePEc:ibf:ijbfre:v:9:y:2015:i:2:p:1-20
    as

    Download full text from publisher

    File URL: http://www.theibfr2.com/RePEc/ibf/ijbfre/ijbfr-v9n2-2015/IJBFR-V9N2-2015-1.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. George W. Blazenko & Andrey D. Pavlov, 2009. "Investment Timing for Dynamic Business Expansion," Financial Management, Financial Management Association International, vol. 38(4), pages 837-860, December.
    2. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    3. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79, March.
    4. George W. Blazenko & Andrey D. Pavlov, 2010. "Investment Timing for New Business Ventures," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 14(3), pages 37-68, Fall.
    5. John M. Griffin & Michael L. Lemmon, 2002. "Book‐to‐Market Equity, Distress Risk, and Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2317-2336, October.
    6. Fuller, Kathleen P. & Goldstein, Michael A., 2011. "Do dividends matter more in declining markets?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 457-473, June.
    7. Ľuboš Pástor & Veronesi Pietro, 2003. "Stock Valuation and Learning about Profitability," Journal of Finance, American Finance Association, vol. 58(5), pages 1749-1789, October.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, August.
    10. repec:bla:jfinan:v:58:y:2003:i:5:p:1749-1790 is not listed on IDEAS
    11. Lee, Bong-Soo & Rui, Oliver Meng, 2007. "Time-Series Behavior of Share Repurchases and Dividends," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(1), pages 119-142, March.
    12. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    13. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    14. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    15. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    16. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    17. Dennis Y. Chung & Dušan Isakov & Christophe Pérignon, 2005. "Repurchasing Shares on a Second Trading Line," FSES Working Papers 391, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    18. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    19. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
    20. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross‐Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
    21. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    22. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    23. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    24. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    25. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    26. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    27. Fama, Eugene F. & French, Kenneth R., 2006. "Profitability, investment and average returns," Journal of Financial Economics, Elsevier, vol. 82(3), pages 491-518, December.
    28. Rubin, Amir & Smith, Daniel R., 2009. "Institutional ownership, volatility and dividends," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 627-639, April.
    29. repec:bla:jfinan:v:53:y:1998:i:3:p:1131-1147 is not listed on IDEAS
    30. Grullon, Gustavo & Paye, Bradley & Underwood, Shane & Weston, James P., 2011. "Has the Propensity to Pay Out Declined?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 1-24, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fu, Yufen & Blazenko, George W., 2017. "Normative portfolio theory," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 240-251.
    2. Fu, Yufen & Wright, Danika & Blazenko, George, 2020. "Ethical Investing Has No Portfolio Performance Cost," Research in International Business and Finance, Elsevier, vol. 52(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Deniz Anginer & Çelim Yıldızhan, 2018. "Is There a Distress Risk Anomaly? Pricing of Systematic Default Risk in the Cross-section of Equity Returns [The risk-adjusted cost of financial distress]," Review of Finance, European Finance Association, vol. 22(2), pages 633-660.
    2. Clifford S. Asness & Andrea Frazzini & Lasse Heje Pedersen, 2019. "Quality minus junk," Review of Accounting Studies, Springer, vol. 24(1), pages 34-112, March.
    3. Jianfu Shen, 2021. "Distress Risk and Stock Returns on Equity REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 62(3), pages 455-480, April.
    4. Pätäri, Eero & Karell, Ville & Luukka, Pasi & Yeomans, Julian S, 2018. "Comparison of the multicriteria decision-making methods for equity portfolio selection: The U.S. evidence," European Journal of Operational Research, Elsevier, vol. 265(2), pages 655-672.
    5. Ye, Qing & Wu, Yuliang & Liu, Jia, 2019. "Institutional preferences, demand shocks and the distress anomaly," The British Accounting Review, Elsevier, vol. 51(1), pages 72-91.
    6. Ferreira Filipe, Sara & Grammatikos, Theoharry & Michala, Dimitra, 2016. "Pricing default risk: The good, the bad, and the anomaly," Journal of Financial Stability, Elsevier, vol. 26(C), pages 190-213.
    7. Andreou, Christoforos K. & Lambertides, Neophytos & Panayides, Photis M., 2021. "Distress risk anomaly and misvaluation," The British Accounting Review, Elsevier, vol. 53(5).
    8. Michael S. O'Doherty, 2012. "On the Conditional Risk and Performance of Financially Distressed Stocks," Management Science, INFORMS, vol. 58(8), pages 1502-1520, August.
    9. Jean Helwege & Jing-Zhi Huang & Yuan Wang, 2017. "Debt Covenants and Cross-Sectional Equity Returns," Management Science, INFORMS, vol. 63(6), pages 1835-1854, June.
    10. Li, Tangrong & Lin, Hui, 2021. "Credit risk and equity returns in China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 588-613.
    11. Berggrun, Luis & Cardona, Emilio & Lizarzaburu, Edmundo, 2020. "Firm profitability and expected stock returns: Evidence from Latin America," Research in International Business and Finance, Elsevier, vol. 51(C).
    12. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    13. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    14. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    15. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    16. Kewei Hou & Haitao Mo & Chen Xue & Lu Zhang, 2019. "Which Factors?," Review of Finance, European Finance Association, vol. 23(1), pages 1-35.
    17. Nejadmalayeri, Ali, 2021. "Asset liquidity, business risk, and beta," Global Finance Journal, Elsevier, vol. 48(C).
    18. von Kalckreuth, Ulf, 2005. "A "wreckers theory" of financial distress," Discussion Paper Series 1: Economic Studies 2005,40, Deutsche Bundesbank.
    19. Assaf Eisdorfer & Amit Goyal & Alexei Zhdanov, 2018. "Distress Anomaly and Shareholder Risk: International Evidence," Financial Management, Financial Management Association International, vol. 47(3), pages 553-581, September.
    20. Assaf Eisdorfer & Efdal Ulas Misirli, 2020. "Distressed Stocks in Distressed Times," Management Science, INFORMS, vol. 66(6), pages 2452-2473, June.

    More about this item

    Keywords

    Equity Returns; Dividends; Financial Distress; Volatility; Growth;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibf:ijbfre:v:9:y:2015:i:2:p:1-20. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mercedes Jalbert (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.