The Impact of dividend policy on the stock price volatility: An Empirical Examination of the US airline industry = The Impact of dividend policy on the stock price volatility: An Empirical Examination of the US airline industry

다국어 초록 (Multilingual Abstract)

Despite years of theoretical and empirical investigations, the issue of dividend policy and its effects on the volatility of stock prices has been remaining a controversial subject among financial scholars and managers. Dividend policy is the strategic decision of how much part of earnings should be allocated to the firm’s stockholders and how much to retain for future investment opportunities. Since the primary objective of financial management of firms is the capital maximization of stockholders, the allocation of earnings as dividends and increasing the stock price may be recognized as the most favorable combination to maximize the wealth for stockholders. These two forms of wealth maximization, namely capital growth of stocks and dividend payouts, impacts investor’s choice of stock investments based on investor preference. Since investors are risk-averse by nature, they tend to apt to less volatile stocks that are relatively secure and stable investments. The traditional practices showed that a well-organized dividend policy by a firm is highly likely to ameliorate the firm stock performance on the market and gain the attention of investors or lenders. Yet, although many scholars have attempted to relate the firm’s dividend policy to stock price movements, but there mainly appeared contradictory results and still, an unequivocal answer to the aforementioned issue has not been reached. So, this study aimed to identify the potential impacts of dividend policy on stock price volatility as a main objective.
The study sample included publicly traded 135 US airline firms on NYSE, AMEX and NASDAQ for the period of 2010-2018, financial information was available from the COMPUSTAT database. This was a quantitative and descriptive research study and followed Baskin (1989) and Hussainey et al. (2011) approach as the theoretical framework. Dividend payout ratio that is a proxy of dividend policy was employed as an independent variable due to the being potential factor that impacts on the volatility of stock price. Control variables (firm size, asset growth, return on assets, financial leverage, standard deviation of stock returns, systematic and unsystematic risk) were included to account for additional factors in order to provide with more reliable causal inferences while analyzing secondary data. The panel data multiple least squares regression was adopted with a firm-year two-way fixed effect model. The results showed that there appeared a significant and negative relationship between dividend payout ratio and the stock price movements in the airline sector of the US, which supported a hypothesis. The higher the dividend payouts to stockholders are the lower the stock price instability will be in the sampled airline firms. The evidence from the study was also consistent with the theory confirming stockholders put more value to current income than capital gains as explained in birds in the hands theory. Agency cost theory in terms of dividend policy also affirmed by the study, as higher dividend payouts could lower the price volatility of stocks which leads to reduction of risk of the firm. Moreover, firm size, return on assets, growth rates at assets were significantly and negatively associated with stock price volatility, whereas standard deviation of stock returns had a positive link with stock movement in terms of price at the significance level of p=0 .001. The more highly significantly associated determinant appeared to be total assets (LogTA), suggesting that larger firms are well established in their capital markets and capable of paying higher dividends to stockholders, thus leading to relatively stable stock prices compared to small firms. A higher positive correlation coefficient of the standard deviation of stock returns revealed that the higher its value, the greater movements in stock prices would occur in practice.
As such, the integrated results drawn out of literature part and the overall analysis of the secondary data showed that dividend policy has a significant impact on stock price fluctuation in the airline sector, whereas the literature associated with this issue in the US hospitality industry is sparse and has not reached the unequivocal answer to whether there is an association or not. This research also contributes to the existing literature by analyzing the dividend policy’s impact on stock price instability for most recent years and by extending the influential determinants such as systematic and unsystematic risk, the standard deviation of stock returns that were rarely used in many studies.