November 5, 2004Burridge Center Investment Conference 1 Do Dividends Matter More in Declining Markets? Kathleen Fuller&Michael Goldstein University of GeorgiaBabson College

November 5, 2004Burridge Center Investment Conference 2 Dividends: Who cares? Academic research indicates investors’ preferences for dividends vary across shareholder types. –Tax clienteles Anecdotal evidence suggests investors’ preferences vary over time –Fidelity ad –S&P 500 prediction  Investors’ preferences for dividend-paying stocks vary over time conditional on the state of the market

November 5, 2004Burridge Center Investment Conference 3 Why do investors care? Prospect theory: –Markowitz (1959), Kahneman & Tversky (1979), Gaul (1991), Connolly, Stivers & Sun (2004) Signaling – future value or reduce agency costs. –Bhattacharya (1979), Easterbrook (1984), John & Williams (1985), Miller & Rock (1985), Jensen (1986), Lang & Litzenberger (1989) KEY QUESTION: Does the market value dividends more in declining markets?

November 5, 2004Burridge Center Investment Conference 4 Why concentrate on dividends? Dividends vs. Repurchases –Dividend payments benefit all shareholders equally. –Repurchases not generally regularly-scheduled Like three midterms instead of just a final –Repurchases not generally long term commitment to signal in the future. Repurchases not as good/regular a signal, so won’t affect our results. –If non-dividend paying firms repurchase shares instead of paying dividends, we bias against finding our results. Overall, not saying dividends are the only way to signal. –Just that if dividends are regularly-scheduled signals, they should be valued somehow.

November 5, 2004Burridge Center Investment Conference 5 Empirical Predictions Dividends matter more in declining markets: –Dividend-paying stocks outperform non-dividend-paying stocks more in declining markets than in rising markets. –Maintaining a dividend payment should garner a favorable response during declining markets but not during advancing markets Dividend increase should matter more in declining markets than advancing markets –Dividend-paying stocks should outperform non-dividend- paying stocks even in months with no dividend payment.

November 5, 2004Burridge Center Investment Conference 6 Empirical Predictions (cont.) Signaling theory vs. Prospect theory –Dividend Yield: Prospect theory: –the larger the dividend yield, the greater the value according to prospect theory signaling theory –no difference –Firm Size: Prospect theory: –does not differentiate Signaling theory: –greater for small stocks –Liquidity: Prospect theory: –no predictions signaling theory: –greater investor dispersion in more liquid stocks –greatest differences between dividend-paying and non-dividend-paying stocks in down markets.

November 5, 2004Burridge Center Investment Conference 7 Sample 20,315 NYSE, Amex and NASDAQ listed firms from January 1, 1970 to December 31, Firms classified as dividend-paying or non-dividend paying firms based on regular quarterly dividend payments S&P 500 index returns for 31-year period. Advancing ≡ S&P500 return is positive; Declining ≡ S&P500 return is negative 1,272,371 monthly observations for non-dividend-paying firms and 751,856 monthly observations for dividend-paying firms

November 5, 2004Burridge Center Investment Conference 8 Overall Results Dividend paying stocks outperform non-dividend paying stocks by more in down markets than in up markets –Robust to: Risk: CAPM, Fama-French, Fama-MacBeth Truncation, NYSE/NASDAQ, Volume, Bull/Bear, Implicit Volatility Maintaining dividends in down markets: sig. positive return Increasing dividend in down market yields sig. higher return than increasing in up market Results still hold in non-dividend paying months  Dividend-paying stocks outperform non-dividend- paying stocks in declining markets.

November 5, 2004Burridge Center Investment Conference 9 Prospect vs. Signaling Results Dividend yield does not matter –All that matters is the payment of the dividend, not how much Size matters –Small dividend-paying stocks outperform small non-dividend-paying stocks in down markets more than large dividend-paying stocks outperform large non-dividend-paying stocks in down markets. Volume matters –Liquid, high volume stocks have the highest differences between dividend-paying and non-dividend-paying stocks in down markets.  Collectively, results are more supportive of a signaling theory explanation than a prospect theory one.

November 5, 2004Burridge Center Investment Conference 10 Table 1 Sample Statistics

November 5, 2004Burridge Center Investment Conference 11 Table 2 Average Return for both Up and Down Markets a Significance was only tested using parametric tests for the Differences of Differences. * indicates t-test is significant at the 5% level ** indicates t-test is significant at the 1% level w indicates the Wilcoxon sign-rank test is significant at the 1% level k indicates the Kruskal-Wallis test is significant at the 1% level

November 5, 2004Burridge Center Investment Conference 12 Table 3 CAPM Risk-Adjusted Abnormal Returns

November 5, 2004Burridge Center Investment Conference 13 Panel A: All Markets BE/ME SizeLow2 Non-Div.DividendDifferenceNon-Div.DividendDifference Small2.14%2.29%-0.17%,w,k 0.54%1.43%-0.89% **,w,k 23.48%2.01%1.47% **,w,k 1.33%1.23%0.10% 33.92%1.85%2.07% **,w,k 1.38%1.11%0.27% Large3.86%1.84%2.02% **,w,k 1.31%1.16%0.15% 3High Non-Div.DividendDifferenceNon-Div.DividendDifference Small-0.20%0.72%-0.92% **,w,k -2.00%-0.90%-1.10% **,w,k 20.26%0.42%-0.16% w,k -1.20%-1.30%0.10% 30.23%0.29%-0.06%-0.80%-1.20%-0.40% Large0.69%0.34%0.36% w,k -0.40%-0.70%0.30% Table 4 Excess Returns for 16 Portfolios Formed on Size and BE/ME

November 5, 2004Burridge Center Investment Conference 14 Panel B: Up Markets BE/ME SizeLow2 Non-Div.DividendDifferenceNon-Div.DividendDifference Small4.64%4.21%0.43% **,w,k 2.65%2.93%-0.28% **,w,k 26.51%4.14%2.38% **,w,k 3.93%3.03%0.90% **,w,k 36.87%4.17%2.70% **,w,k 3.90%3.08%0.82% **,w,k Large7.11%4.11%3.00% **,w,k 3.74%3.36%0.38% 3High Non-Div.DividendDifferenceNon-Div.DividendDifference Small1.71%1.88%-0.17%,w,k -0.16%0.59%-0.75% **,w,k 22.89%2.23%0.66% **,w,k 2.28%1.37%0.91% **,w,k 32.68%2.43%0.25%2.03%1.77%0.26% Large2.59%2.61%-0.02%2.42%2.57%-0.15%

November 5, 2004Burridge Center Investment Conference 15 Panel C: Down Markets BE/ME SizeLow2 Non-Div.DividendDifferenceNon-Div.DividendDifference Small-2.28%-1.14%-1.14% **,w,k -3.25%-1.29%-1.96% **,w,k %-1.82%-0.43% *,w,k -3.31%-2.02%-1.29% **,w,k %-2.29%0.31%-2.98%-2.46%-0.52% *,w,k Large-1.89%-2.39%0.50% * -2.79%-2.80%0.01% 3High Non-Div.DividendDifferenceNon-Div.DividendDifference Small-3.69%-1.42%-2.27% **,w,k -5.05%-3.37%-1.68% **,w,k %-2.57%-1.79% **,w,k -6.93%-5.30%-1.63% **,w,k %-3.37%-0.48%-5.45% 0.21% Large-2.11%-3.50%1.39% **,w,k -4.76%-5.47%0.71%

November 5, 2004Burridge Center Investment Conference 16 Table 5 Fama-French Adjusted Returns

November 5, 2004Burridge Center Investment Conference 17 Table 6 Fama-MacBeth Returns

November 5, 2004Burridge Center Investment Conference 18 Table 7 Cumulative Abnormal Returns for Dividend Changes in Up and Down Markets

November 5, 2004Burridge Center Investment Conference 19 Table 8 Average Return for Up and Down Markets for Dividend-Paying Stocks during Months with No Dividend Payments

November 5, 2004Burridge Center Investment Conference 20 Table 9 Fama-French Risk Adjusted Returns Removing Smallest (and Largest) Firms

November 5, 2004Burridge Center Investment Conference 21 Table 10 Returns for both Bull and Bear Markets

November 5, 2004Burridge Center Investment Conference 22 Table 11 Fama-French Risk Adjusted Returns Controlling for Volatility

November 5, 2004Burridge Center Investment Conference 23 Table 12 Fama-French Risk Adjusted Returns Controlling for NYSE and NASDAQ

November 5, 2004Burridge Center Investment Conference 24 Table 13 Fama-French Risk Adjusted Returns by Dividend Yield

November 5, 2004Burridge Center Investment Conference 25 Table 14 Fama-French Risk Adjusted Returns by Size

November 5, 2004Burridge Center Investment Conference 26 Table 15 Fama-French Risk Adjusted Returns by Volume

November 5, 2004Burridge Center Investment Conference 27 Conclusion Results indicate that dividend paying firms outperform non-dividend paying firms more after controlling for risk. –CAPM, Fama-French, Fama-MacBeth –Robust to volume, volatility, exchange, etc. Maintaining a dividend results in a sig. positive return in down market while increasing a dividend results in sig. more positive return in down market than up market. Dividend-paying stocks outperform non-dividend-paying stocks even during non-dividend paying months. Results are not a function of dividend yield, but are a function of size and volume. –Consistent with a signaling theory explanation.  Dividends are valued more by investors in declining markets because they signal information when most needed.