Cash Dividend, Investor Preference And Market Stability

Dividend policy, which can impact stock market and investor’s behavior, is animportant issue in the field of corporate finance. Recently, China SecuritiesRegulatory Commission emphasized that listed companies should attach importanceto investor return, especially cash dividend payout, which on one hand could fosterlong run investment philosophy, on the other hand could attract more institutionalinvestors to participate in A share market. This paper collects relevant data, designsresearch methodology and systematically studies the relationship between dividendpolicy, stock return volatility, turnover ratio and institutional ownership.This paper discusses the relations between dividend, volatility and institutionalownership from three aspects. First, summary statistics show dividend paying stockshave lower volatility and higher institutional ownership. Regression models turn outthat higher dividend to book ratio is associated with lower volatility. Second, it ispresumed that dividend does not only impact volatility and turnover ratio directly, butalso influences institutional behavior. Regression models show that institutionalinvestors prefer high dividend to book ratio stocks. Third, it is proved that thosestocks with higher institutional ownership have lower volatility. In the end,institutional investors turn out to play a complementary role in the relation betweendividend and volatility.The policy implication for China’s stock market is quite meaningful. First, listedcompanies should be encouraged to pay appropriate amount of cash dividend toattract more institutional investors and reduce volatility and turnover ratio. Second,more institutional investors should be encouraged to participate in the stock market tocultivate the whole market with long run investment philosophy.