Stock price synchronicity and dividend policy : evidence from an emerging market

Purpose: The purpose of this paper is to document the impact of stock price synchronicity (SYNCH) on the dividend payout ratio. Design/methodology/approach: The authors use data from India for the period between 2000 and 2012 and the panel regression approach to test their arguments. Findings: This paper documents that the relationship between synchronicity and dividend payout ratio is positive until a turning point is reached. After that point, synchronicity has a negative impact on dividend payout ratio. The authors argue that firms with low synchronicity have higher information asymmetries. As a result, they have an incentive to develop a reputation as better-governed firms by paying high dividends. However, as synchronicity increases further, information asymmetries go down and as a result incentive to use dividend payouts as a mechanism to reduce information asymmetries goes down. Therefore, positive relationship between synchronicity and dividend payout ratios breaks down at high levels of synchronicity. Originality/value: The authors provide evidence regarding the role played by SYNCH – a publicly available measure – on dividend polices adopted by firms within the context of emerging markets.