Does Stock Market Liquidity Affect Dividends?

Using two exogenous shocks, we examine the causal impact of stock liquidity on firms’ dividend policy. Both the first shock, the reduction of the minimum tick size from one sixteenth to decimals in the US, and the second shock, the mandatory conversion of non traded stocks to traded stocks in China, changed liquidity of affected stocks. We find, in both experiments, that increased stocks liquidity results in a significant reduction in dividends. Our empirical design enables us to control for asset liquidity, investment changes and other omitted factors which might affect firms’ dividend policy. We conclude that when firms set dividend policy, satisfying investors’ liquidity needs is a significant factor