Dividend Policy and Market Movements

Kathleen Fuller Terry College of Business, University of Georgia, Athens, GA 30602

Michael Goldstein*

Finance Department, Babson College, Babson Park, MA 02457

August 21, 2003

Abstract

Using S&P 500 monthly returns as a proxy for market conditions, we investigate whether investors prefer dividend-paying stocks to non-dividend-paying stocks in declining markets. We find that dividend-paying firms have higher returns than non-dividend-paying firms. These results are robust for adjustments for risk using CAPM adjusted deciles, CAPM excess returns, the Fama-French three-factor model, and dividing the sample into size and book-to-market quartiles. Furthermore, we find that the simple payment of dividends, and not the level of the dividend yield, drives returns’ asymmetric behavior relative to market movements, consistent with the signaling hypothesis of dividends. JEL Classification Code: G35 Keywords: Dividend policy, asymmetry, market movements *Corresponding author: Michael Goldstein, Finance Department, 223 Tomasso Hall, Babson College, Babson Park, MA 02457-0310 tel: (781) 239-4402. fax: (781) 239-5004 email: Goldstein@babson.edu. We thank Deepak Agarwal, Jeff Bacidore, Jennifer Bethel, Wayne Ferson, Paul Irvine, Jon Karpoff, Gautam Kaul, Laurie Krigman, Marc Lipson, James Mahoney, Donna Paul, Tyler Shumway, John Scruggs, Chris Stivers, and seminar participants at the 2001 All Georgia Conference, the 2001 Financial Management Association Meetings, the 2002 Eastern Finance Association Meetings, and the University of Michigan Lunch Seminar series. Kathleen Fuller acknowledges financial support from the Terry-Sanford Research Grant. Michael Goldstein acknowledges support from the Babson College Board of Research.

Dividend Policy and Market Movements

Abstract

Using S&P 500 monthly returns as a proxy for market conditions, we investigate whether

investors prefer dividend-paying stocks to non-dividend-paying stocks in declining markets. We find that

dividend-paying firms have higher returns than non-dividend-paying firms. These results are robust for

adjustments for risk using CAPM adjusted deciles, CAPM excess returns, the Fama-French three-factor

model, and dividing the sample into size and book-to-market quartiles. Furthermore, we find that the

simple payment of dividends, and not the level of the dividend yield, drives returns’ asymmetric behavior

relative to market movements, consistent with the signaling hypothesis of dividends.

JEL Classification Code: G35

Keywords: Dividend policy, asymmetry, market movements

Dividend Policy and Market Movements

Companies provide investors with returns in two different ways: a regularly scheduled dividend,

or a probabilistic capital gain or loss. Previous theoretical and empirical research indicates that investors’

preferences for dividends vary across shareholder types. For example, depending on their tax bracket,

some shareholders may prefer high dividend-paying stocks while others may prefer non-dividend-paying

stocks. In this paper, we extend this line of research by exploring under what conditions investors care

how they get compensated. Specifically, we investigate if investors’ preferences for dividends depend on

market conditions; that is, do investors prefer dividend-paying stocks to non-dividend-paying stocks

depending on whether the overall market is doing well or not?1

Using S&P 500 returns as a proxy for market conditions, we examine the return behavior of

dividend-paying and non-dividend-paying firms in both up and down markets from January 1970 to

December 2000. We find that dividend-paying firms have higher returns than non-dividend-paying firms

for the 31-year period. These results are strongest in down markets, implying that dividends do provide a

differential benefit depending on market conditions. These results are also robust to various controls for

size, time period, and risk, including the CAPM and the Fama-French three-factor model, as well as

alternative definitions of up and down markets. Further, we find that the market reacts primarily to the

dividend-paying or non-dividend-paying nature of the stock, but that this reaction does not vary with

dividend yield, implying the ability to pay a dividend – and not its size – is of primary importance. In

addition, we find these results hold even during the months between dividend payments when the

dividend-paying firms did not pay a dividend, indicating that it is not the receipt of the cash that is driving

these results.

1 In fact, Fidelity advertises a mutual fund consisting of only dividend-paying stocks that began airing after the market downturn in 2000. The investor in the ad is seen agreeing with the Fidelity advisor that dividend-paying stocks would be a nice addition to his portfolio to help diversify and moderate losses in down markets. Further, as of October 2000 Standard & Poor’s predicted a revived interest in dividends, stating “market weakness may boost interest in dividends as investors begin to see the value of a ‘bird in the hand.’”

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This paper is the first to examine returns conditional on two dimensions: dividend policy and

overall market movements. Although there are several reasons why investors might prefer dividend-

paying stocks in down markets, traditional asset pricing models that examine returns symmetrically, such

as the Sharpe (1964) – Lintner (1965) CAPM or the Fama-French (1992, 1993) models, do not account

for state-specific investor preferences. It is possible, however, that investors may not have symmetric

preferences. For example, Harvey and Siddique (2000) find that risk-averse investors dislike negative

skewness. An increasing body of work examines asymmetric responses of returns to market movements,

and finds different return characteristics in up or down markets.2 Ang and Chen (2001) find that

correlations between stocks’ returns and the market increase when the market declines. DeBondt and

Thaler (1987) find different upside and downside betas for previous winners, although Ang, Chen, and

Xing (2001) find that it is downside correlations, and not downside betas, that investors price.

Additionally, they find that firms whose correlations with the market increase when the market is

declining have higher expected returns. Karceski (2002), citing institutional reasons, finds that mutual

funds prefer high-beta stocks in up markets. Other studies, such as Goldstein and Nelling (1999), find

that the returns on REITs have different risk characteristics in advancing and declining markets, with

different correlation structures and betas with the S&P 500 depending on whether the market has a

positive or negative return. Papers such as Faugère and Shawky (2002), examine markets during

downturns exclusively. Internationally, Longin and Solnik (2001) find that large negative correlations are

2 The idea that investors may prefer stocks that pay dividends at times when they sense future uncertainty or bad states of the world, but prefer non-dividend-paying stocks when the market is going up is consistent with prospect theory. Prospect theory, developed by Kahneman and Tversky (1979), indicates that people respond differently to certain verses probabilistic gains and losses, and care more about losses than they do to gains. First-order risk aversion utility functions such as in Gaul (1991) provide a similar result. Markowitz (1959) notes that investors may care about downside risk differentially. In addition to the signaling benefits, investors may prefer stocks whose dividend payment provides a return where at least part of the return is a certain gain over those non-dividend-paying firms for which the entire gain or loss is uncertain. In markets that are moving upward, this preference for loss avoidance is mitigated, and investors, while still valuing the relatively more certain gain, may value it less so. During periods of market decline, however, investors prefer dividends as a cushion to their returns, particularly if they are downside risk-averse.

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much higher than upside correlations, thereby reducing the benefit of international diversification.3

There are a variety of reasons why investors might condition their preference for dividend-paying

stocks on the state of the market. According to the theoretical literature, dividend-paying firms have

greater ability to signal managers’ expectations of future cash flows and growth rates credibly than do

non-dividend-paying firms. Previous theoretical research argues that dividends either signal managers’

private information regarding future earnings [e.g., Bhattacharya (1979), John and Williams (1985), and

Miller and Rock (1985)] or that dividends signal that managers will not waste excess cash [e.g.,

Easterbrook (1984), Jensen (1986), and Lang and Litzenberger (1989)]. As noted in Allen and Michaely

(2003), empirical tests of these two hypotheses fail to pick an overwhelming winner.

In this paper, we argue that such signals are likely to be more valuable in some markets than

others. Broadly rising or falling markets tend to indicate – albeit imperfectly – investors’ perceptions of the

state of the economy in the future. In particular, broadly falling markets indicate either an increase in

interest rates or a reduced expectation of future cash flows across most firms. When future projections of

the economy are poor or uncertain, investors are likely to look to managers for information regarding

their firm’s financial health and future prospects. Given the probability and costs of financial distress

generally rise in down economies, this information is particularly valuable. During these times of reduced

expectations, investors may be searching for signals to help reduce future uncertainty. In down markets by

maintaining or increasing dividend payments, dividend-paying firms can credibly signal positive

information, especially during times when other companies are decreasing their dividend payment or

going out of business altogether. Non-dividend-paying firms, however, cannot. On the other hand, in up

markets the value of dividend signals is likely to be lower; firms generally perform well, and the

3 There is also a large body of research that examines dividend and non-dividend-paying stocks separately, but that does not consider the state of the market. Papers such as Blume (1980), Litzenberger and Ramaswamy (1980, 1982), and Elton, Gruber, and Rentzler (1983) examine dividend yields in a modified version of Brennan (1970)’s after-tax CAPM that explicitly accounts for non-dividend-paying firms. These papers find that although there is a relation between expected returns and dividend yields for those firms that pay dividends, this relation does not hold for non-dividend-paying firms. Christie (1990) examines non-dividend-paying firms explicitly and finds that non-dividend-paying firms underperform firms of similar size.

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probability of, and costs associated with, financial distress are lower. It is possible, therefore, that a

policy of paying dividends during up markets conveys less information than a policy of paying dividends

during down markets, since during up markets investors know that things are generally going well.4

In any case, just the knowledge that a signal will be received reduces some uncertainty for

investors. Indeed, it need not be that each individual dividend payment has great signaling value.

Instead, the commitment to pay regular dividends allows the firm to send a signal that the future prospects

for the firm remain positive. More importantly, investors know when to expect this signal. A dividend-

paying firm currently has a regularly scheduled signal to send to its shareholders (through maintaining,

increasing, or reducing its dividend); a non-dividend-paying firm does not (though at any moment it could

choose to initiate a dividend and then commit to provide this signal in the future). Investors in non-

dividend-paying firms do not know when they will next receive credible information about their

investment.5 In particular, the value of dividend-paying stocks should be highest in those states of the

world where the signal is of the most value, i.e., when there is either increased uncertainty or when

expectations of the future have become less rosy. Whether the signal is the maintenance or increase in

future earnings or the reduction of waste of free cash flows, the ability to signal should be most valuable

in periods of poor overall stock market performance. As a result, investors may prefer dividend-paying

stocks to non-dividend-paying stocks even in the months when the dividend-paying stock does not pay a

4 A similar signaling argument can be made for the free cash flow hypothesis as developed by Jensen and Meckling (1976) and Jensen (1986), which suggests that managers can credibly signal they will not invest in negative NPV projects through the “bonding” of maintaining dividend payments. This signal of avoidance of future negative NPV projects should be most valuable when the market is down, since the probability that the bonding will be a binding constraint increases as the state of the economy decreases. Thus, we are not concerned with what managers are signaling (a reduction in agency costs or maintenance or increase of future earnings), but rather whether investors value the signal offered by dividend payments. 5 While investors in non-dividend-paying firms could mimic this cash flow by selling stock, they would be doing so at depressed prices (given the market downturn) and incur potentially non-trivial transaction costs (a guaranteed loss). It is possible, therefore, that in these states of the world investors would prefer dividends, while in more positive states of the world the receipt of dividends would be less valuable. Allen, Bernardo, and Welch (1998) also note that firms prefer to pay out dividends rather than repurchase shares. Brennan and Thakor (1990) note that uninformed investors would prefer dividends to share repurchases due to adverse selection effects. Further, as a great deal of stock is now held in tax-deferred accounts, it is no longer clear that dividends are tax-disadvantaged to selling stock. See Clements (2002) for a larger discussion on this point.

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dividend, as investors reasonably expect to get a signal within a few months for dividend-paying stocks.6

Recent studies on dividends have focused more on the tendency of firms to pay or not pay

dividends. Fama and French (2001) show that firms tend to view dividends as less necessary now than in

the past, although DeAngelo, DeAngelo, and Skinner (2002) find that this trend has occurred due to very

small dividend payers omitting dividends; increases by large dividend payers have more than offset these

omissions in value. On the other hand, Allen, Bernardo, and Welch (1998) note that firms have continued

to pay out more of their earnings in dividends than in repurchases. Baker and Wurgler (2003) find some

evidence that when investors value dividends, managers will initiate dividend payments and when

investors value non-dividend-paying stocks, managers omit dividend payments. These papers have not,

however, examined investors’ responses across advancing or declining markets.

The remainder of the paper is organized as follows. Section I presents the data and methodology.

Section II describes the empirical results from CAPM and Fama-French three-factor model tests. Section

III provides some robustness checks for our results by examining liquidity issues and dividend changes.

Section IV concludes.

I. Data and Methodology

We identify a sample of dividend- and non-dividend-paying firms from the Center for Research

in Security Prices (CRSP) monthly master file by examining all NYSE, AMEX, and Nasdaq listed stocks

with data in CRSP over the 31-year period from January 1970 to December 2000. For each firm, we

collect its monthly return, market capitalization and share volume data from CRSP. Since studies of

returns and dividend yields such as Blume (1980), Litzenberger and Ramaswamy (1980, 1982), Elton,

Gruber, and Rentzler (1983), and Christie (1990) note a U-shaped pattern in returns due to the unusual

6 For example, if a stock pays dividends in March, June, September, and December, the non-dividend-paying months are January, February, April, May, July, August, October, and November. While Easterbrook (1984) noted that “designing an empirical test [of constant-payout policies] is formidable,” Section II.E provides an empirical test of dividend-paying firms in non-dividend-paying months to examine the benefit of such constant dividend-payout policies.

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nature of non-dividend-paying stocks, we identify dividends by comparing the CRSP total return to the

CRSP return that does not include dividends. If the returns are different, the firm is considered to have

paid a dividend in that month, and the difference is considered to be the dividend. Although this method

might result in the calculation of negative dividends, these likely errors were retained so as to not impart

any bias by correcting errors on only one side.

Next, we used the distribution code in CRSP to determine if the dividend was a special, annual,

semi-annual, quarterly, or monthly. As we are concerned with the signaling aspect of dividends, we only

examine quarterly-dividend-paying stocks. Choosing quarterly-dividend-paying stocks increases the

frequency of the possibility of signal observations while decreasing the length of time between potential

signals. Thus, only quarterly-dividends were considered when determining whether a firm was a

dividend-paying firm. All other dividend payments were considered as non-dividend-paying. In this

way, to the extent that non-quarterly-dividends are at all considered positive, we will bias our results

against finding any results for quarterly-dividend-paying firms.7

For each month we classify firms as either dividend-paying or non-dividend-paying. If a firm

paid a quarterly-dividend in that month, it is classified as a dividend-paying firm. Further, the months

between quarterly-dividend payments are also classified as dividend-paying months. If a firm does not

pay a dividend and then begins paying a dividend, it is classified as a non-dividend-paying firm until the

month after the dividend is paid. That is, if a firm lists on January 1989 but does not pay a quarterly-

dividend until June 1992, then the firm is considered a non-dividend-firm from January 1989 through

June 1992 and is classified as a dividend-paying firm as of July 1992 until the firm stops paying a

dividend, the firm is delisted, or the sample period ends. In this way, any positive return in the stock

7 As one area of concern is the response of dividend-paying stocks, we chose a classification method that, if anything, will bias downwards the returns of dividend-paying stocks. In particular, this classification method does not bias upward the results for the dividend-paying stocks due to initiations and omissions. To insure that these rules did not affect our results, we re-ran our tests using alternate definitions of dividend-paying stocks. For example, we also included all regularly scheduled dividend payments (monthly, quarterly, and yearly) when classifying firms as dividend-paying. As another alternative classification method, we dropped all non-quarterly-dividend payments from the sample so non-dividend-paying firms never paid any type of cash dividend. Results are qualitatively similar and available upon request.

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price due to the initiation of a dividend will be attributed to the non-dividend-paying stock group, thereby

biasing our results against finding outperformance by dividend-paying stocks. If a firm pays a dividend

and then stops paying a dividend, it is classified as a dividend-paying firm until the month after the

scheduled quarterly-dividend payment. That is, a firm lists on January 1989 and begins paying a

quarterly-dividend as of March 1989 but does not pay the June 1992 dividend, then the firm is considered

a non-dividend-paying firm for January, February, and March 1989, a dividend-paying firm from April

1989 to June 1992 (the month of the expected quarterly-dividend), and a non-dividend-paying firm from

July 1992 until it is either delisted, pays a dividend, or the sample period ends.8 Thus, any negative

surprise due to the cessation of a dividend will be attributed to the dividend-paying group, further biasing

our results against finding outperformance by dividend-paying stocks.

Because we want to examine if investors value firms that pay dividends, we must look at those

periods where dividend payments should be most valuable. We use down markets as a proxy for those

times when investors should more highly value dividend payment. Similar to Goldstein and Nelling

(1999), we collect the S&P 500 returns for each month from CRSP and classify an up market as a month

during which the monthly return on the S&P 500 was positive, while a down market is one where the

S&P 500 posted a negative monthly return. Other papers examining asymmetric market responses have

defined up/down markets differently. For example, Ang and Chen (2001) define up and down markets by

looking at returns in excess of the one-month Treasury bill. Ang, Chen, and Xing (2001) define up and

down markets by whether the excess market return is below its mean in the previous year. Given that the

market historically has a positive excess return, these alternate definitions would result in more months

being classified as down markets than will our more restrictive definition. As we are primarily interested

in different responses in down markets, we use the more conservative definition.9

8 As a robustness check, we also ran the results requiring that for a firm to be called a dividend-paying firm, the firm must pay dividends for the entire time period. All of the results were substantively unchanged. 9As a robustness check, we also ran tests defining down markets as negative excess returns. The results on excess returns (not reported here) are substantively similar. In the robustness section, we classified up and down markets based on bull and bear market definitions provided by Ned Davis Research Inc.

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Overall, our sample includes 20,315 NYSE, Amex and NASDAQ listed firms from January 1970

to December 2000. Each firm was classified as either dividend-paying or non-dividend-paying for every

month of the sample period in which data was available, resulting in a total of 2,161,688 firm months in

our time period, of which 1,392,422 are non-dividend-paying firm months and 769,266 are dividend-

paying firm months. Table 1 describes the dividend- and non-dividend-paying firm months in our

sample. As Panel A indicates, the average market capitalization of firms during the months when they

were classified as dividend paying is almost five times that of firms classified as non-dividend-paying.

This larger size is due to having twice as many shares outstanding and an average price about 2.5 that of

the non-dividend-paying firms. Trading volume was relatively similar for dividend-paying firms and

non-dividend-paying firms. Betas for non-dividend-paying firms were slightly larger than those classified

as dividend-paying firms. Finally, non-dividend-paying firms on average returned 1.01% per month,

while dividend-paying firms had a larger average return of 1.375%. For exposition, we provide data on

four sample months at the end of each decade. As shown in Panel B, the overall results in Panel A were

generally the same for the months of December 1970, December 1980, December 1990, and December

2000.

Insert Table 1 here

II. Results

To examine investors’ preferences for dividends in up and down markets, we examine returns of

dividend-paying and non-dividend-paying stocks overall and in up and down markets separately. In

addition to showing results for all markets, Table 2 presents evidence for the 217 months in our sample

where the S&P 500 had a positive return (“up markets”) and the 155 months where it did not (“down

markets”). Panel A shows that overall, dividend-paying firms significantly outperformed non-dividend-

paying firms by 0.37% per month. Further, dividend-paying firms outperformed non-dividend-paying

firms in both up and down markets, with the differences statistically significant at the 1% level for non-

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parametric tests, as indicated by the Wilcoxon sign-rank test and the Kruskal-Wallis test, and dividend-

paying firms outperformed non-dividend-paying firms in down markets at the 1% level using the

Student’s t-test. The magnitude of the difference, however, depended on the state of the market.

Although dividend-paying firms returned only 0.16% more than non-dividend-paying firms during up

markets, they provided 0.90% more than non-dividend-paying firms during down markets. We find

similar results for all markets and down markets for the three-decade sub-periods examined – January

1970 to December 1979, January 1980 to December 1989, and January 1990 to December 2000. (In the

1970s and 1990s, non-dividend-paying firms significantly outperform dividend-paying firms in up

markets.) Finally, the difference between dividend-paying firms and non-dividend-paying firms was

more than twenty times larger in down markets than in up markets (and is statistically significant). These

results are consistent overall and in each of the three sub-periods; an indication that investors value

dividend-paying firms much more than non-dividend-paying firms during down markets.

Insert Table 2 here

A. CAPM Results

Although the state of the market affects the magnitude of the difference, so too does the level of

risk of the stock.10 To adjust for any differences in risk across stocks, firms were assigned into ten groups

based on their CRSP beta decile classification: Group 1 had the most risky firms according to the CRSP

beta decile, while Group 10 had the least risk. The results in Panel B of Table 2 indicate that in up

markets the risk of the stock is positively associated the outperformance of dividend-paying stocks over

non-dividend-paying stocks. The least risky stocks (decile 10) show no difference in returns for all

markets. In addition, dividend-paying firms on average outperform non-dividend-paying firms in down

markets, even after controlling for risk. A comparison of the differences indicates that for all beta deciles

except decile 9, the dividend-paying stocks outperformed the non-dividend-paying stocks by more in the

10 Based on the issues raised in Christie (1990), these tests were also performed on deciles sorted by market capitalization; the results were substantively similar and are available from the authors upon request.

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down markets than in the up markets. These differences in differences were mostly significant.

Collectively, these results indicate that in general investors’ dividend preference is a function of the state

of the market, and specifically that investors find a differential benefit to dividends in down markets.

To further control for risk, we also examine the abnormal return for each firm i using the capital

asset pricing model to determine expected returns; we estimate:

( )( )Abnormal Return ActualReturni i F i Mr r rβ= − − F−

(1)

where Actual Returni is the return for firm i for that month, rF is the three-month Treasury bill for that

month, rM is the return on the CRSP equally-weighted portfolio, and βi is the beta for stock i. We then

compare the abnormal returns for divided-paying and non-dividend-paying firms for all markets, up

markets and down markets. As shown in Table 3, we find that for all markets, dividend-paying firms

significantly outperform non-dividend-paying firms. For up markets, non-dividend-paying firms

outperform dividend-paying firms. Yet, once again, for down markets dividend-paying firms perform

significantly better (i.e., significantly less negative returns) than non-dividend-paying firms.

Insert Table 3 here

Thus, the answer to our central question, do investors prefer dividend-paying firms to non-

dividend-paying firms in down markets, is yes. Further, these results are robust to controlling for beta,

regardless of the time period. Dividend and non-dividend-paying stocks have dissimilar asymmetric

return characteristics in up and down markets. These differences appear to increase as risk increases. In

this way, our results differ from those in Ang and Chen (2001), which finds that stocks with lower betas

have a greater asymmetry of up/down correlation once correlations exceed a pre-specified level.11 Our

tests therefore measure something besides the asymmetric correlation result in Ang and Chen (2001).

11 Ang and Chen (2001) define “downside (upside) correlations to be correlations where both the equity portfolio and the market return are below (above) a pre-specified level.” They further develop a summary statistic to compare the difference in their up/down correlation measures to a particular distribution. Their tests and measures are therefore conditional on more extreme movements than those in this paper. In addition, they focus on the return itself; they do not partition into dividend and non-dividend-paying firms.

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B. Size and Market-to-Book Results

Fama and French (1992) and others have suggested that book-to-market and size are also

important determinants of returns. To test if the results are robust to segmentation by book-to-market and

size, we replicate the original Fama and French (1992) methodology by dividing our samples of dividend-

paying and non-dividend-paying stocks into four market capitalization quartiles and then further sub-

dividing those quartiles into four book-to-market quartiles, for a total of 16 sub-groups for each of the

dividend-paying and non-dividend-paying stocks.12 The end result is thirty-two portfolios: sixteen

portfolios of dividend-paying stocks based on book-to-market and size quartiles, and sixteen portfolios

for non-dividend-paying stocks. We then calculate the average excess return (return of a firm in month t

over the three-month Treasury bill rate in month t) for each portfolio.

Insert Table 4 here

Table 4 examines the excess return characteristics for the portfolios formed on size and book-to-

market. Overall, size seems not to matter as much as book-to-market in determining the difference

between the dividend-paying and non-dividend-paying groups for all markets. As shown in Panel A, non-

dividend-paying stocks seem to outperform dividend-paying stocks for the lower book-to-market groups

across all markets, with the reverse true for the higher book-to-market quartiles. However, as Panel B

shows, in up markets the non-dividend-paying stocks outperform the dividend-paying stocks for low

book-to-market quartiles, but for the higher book-to-market groups, size becomes a factor and only the

smaller stocks in the higher book-to-market quartiles have a significant difference. Panel C, however,

presents results that during down markets, dividend-paying stocks do better than non-dividend-paying

12 We thank Ken French for providing the cutoff points for the market capitalization and book-to-market quartiles.

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stocks for all book-to-market categories, but only for the smaller stocks. Thus, the results are strongest

for low book-to-market small stocks.13

C. Fama-French Three-Factor Model Results

Similar to Ang, Chen, and Xing (2001), we also use the Fama and French (1993) (FF) three-

factor model to estimate abnormal returns for monthly portfolios. This model controls for non-

independence of returns over time, size, and book-to-market effects. We estimate a modified FF three-

factor model as follows:

RMRF SMB HML DOWNit Ft iT iT t iT t iT t iT t itr r b s h dα ε− = + + + + + (2)

where rit is the monthly return on a portfolio i of dividend-paying or non-dividend-paying firms, rFt is the

monthly return on three-month Treasury bills, RMRF is the excess return on a value-weighted aggregate

market proxy, SMB is the difference in the returns of a value weighted portfolio of small stocks and large

stocks, HML is the difference in the returns of a value-weighted portfolio of high book-to-market stocks

and low book-to-market stocks as in Fama and French (1993), and DOWN is a dummy variable which

takes on the value one if the market is down and zero if the market is up. For each month we calculate the

excess return on an equally-weighted portfolio composed of either all dividend-paying firms or all non-

dividend-paying firms. We then regress this portfolio return on the factors in equation (2) and examine

the differences in coefficients. We would expect that if investors prefer dividend-paying firms in down

markets, that for the dividend-paying portfolio the coefficient on DOWN should be significantly higher

than that of the non-dividend-paying portfolio.

13 To determine if the results in Table 4 were driven by differences in size and book-to-market values for dividend-paying versus non-dividend-paying stocks within each individual size and book-to-market subgrouping, we examined the median size and book-to-market values for each group in the sixteen groupings. We found that only for the smallest firms were there significant differences between the median size of dividend-paying and non-dividend paying firms (dividend paying firms were significantly larger than non-dividend paying firms). There were no significant differences in median book-to-market ratios for dividend-paying and non-dividend paying firms across the sixteen groups.

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1. Econometric issues and weighting methodology

There are a number of factors in favor of equally weighting of portfolios. First, we are examining

the responses of dividend and non-dividend portfolios to up and down markets, where up is defined as a

positive S&P 500 return. The S&P 500 index is itself a value-weighted portfolio. Thus, the value-

weighted dividend and non-dividend portfolios will be very highly correlated with the variable that

conditions on the up and down market, namely S&P 500 index.14 Many of the same stocks will determine

the return characteristics of both the portfolios and the index that divides our sample. This effect will be

particularly exacerbated for the value-weighted dividend portfolio, given the structure of the S&P 500

index, which will further complicate comparisons across the dividend and non-dividend portfolios.15

A second issue related to the use of equally-weighted portfolios instead of value-weighted

portfolios is the increased transaction costs that may arise from increased trading due to more frequent

portfolio rebalancing. While holding an equally-weighted portfolio may incur more transaction costs and

therefore may be more difficult to trade, the issue in this paper is the differential asymmetric response of

dividend and non-dividend-paying stocks in up and down markets. Given that the state of the market is

fixed during any one month, investors cannot trade on this information; it is a state of the world for all

stocks. Furthermore, even if it were possible to trade on the state of the market, it would be prohibitively

expensive for investors to move from an all dividend-paying portfolio to an all non-dividend-paying

portfolio based on the state of the market. Therefore, given the focus of the question and the nature of

the test, trading considerations are not a primary concern.

Third, the results in Table 4 for the sixteen size and book-to-market portfolios indicate that the

results vary with size, so making size-weighted portfolios would somewhat obfuscate the results. Ang

and Chen (2001) also note that these asymmetric results decrease with size; therefore, value-weighted

14 We also changed the definition of up/down markets to be based on whether the CRSP equally-weighted index had positive returns or not. The results provided even more support that dividend-paying stock outperform non-dividend-paying stocks even when portfolio returns were value-weighted. 15 For example, since the value-weighted dividend-paying portfolio returns are highly correlated with the S&P 500 return, we would expect that dividend-paying portfolios to always do worse than non-dividend-paying firms in down markets.

13

portfolios would tend to understate the magnitude of the results. In addition, Fama and French (1993,

1996a) find that three-factor models have systematic problems explaining returns for small stocks,

making this methodology not as useful. As Fama (1998) notes, the weighting structure of the portfolio

should determined by the underlying question. Because the question under investigation is more a

question about the particular nature of an individual stock – does it or does it not pay a dividend – and not

particularly about a portfolio, Fama (1998) implies that equally weighting is appropriate. Further,

equally-weighted portfolios allow for an examination of individual characteristics of a stock by treating

each stock similarly, while value weighted portfolios can be primarily driven by a limited number of

stocks. Results from equally-weighted portfolios therefore better represent the “average” stock. A

number of recent papers, such as Lowry (2003), have therefore presented equally-weighted results. More

importantly, dividend policy is a management choice variable. As managers do not control a portfolio of

firms, but instead a single firm, managers are more concerned with the results for an average stock.

Finally, another issue related to the use of equally-weighted portfolios instead of value-weighted

portfolios is the issue of small stock bias due to poor performance of the Fama-French model with respect

to small stocks. One can mitigate the small stock issue by removing some of the smaller stocks from the

analysis and verifying the results. To this end, we re-ran all of our tests removing the bottom quartile of

stocks based on market capitalization. As we found substantively similar (or stronger) results on this

subset, we have retained the full sample for presentation in the paper. 16

2. Fama-French overall results

We first verify that the FF three-factor model using our sample provides consistent results with

prior research. Below are the results for equally-weighted dividend-paying and non-dividend-paying

16 For evenness, we also re-ran the results removing the top quartile as well, so as not to impart any bias. In this case, we truncated the distribution of firms at both the upper and lower 25% points, so that the tests were run on the middle 50% of the firms. All of the results were substantively similar and are available from the authors upon request.

14

portfolios for the pure Fama-French three-factor model:

Intercept RMRF SMB HML Adjusted R2

Non-Dividend-paying -0.0016 1.0054** 1.1211** 0.2761** 89.4%

Dividend-paying 0.0002 0.9680** 0.4163** 0.5122** 92.3%

Differences ** **

The coefficients on the FF three-factors indicate that the data load properly on the factors, do not have

significant alphas, and have very high adjusted R2, of around 90% for all portfolios, indicating that the FF

model works well with this data. In addition, although the factor loadings are significantly different from

each other, unlike the hypotheses in Brennan (1970) or the empirical results in Black and Scholes (1974),

Litzenberger and Ramaswamy (1979, 1980, 1982), and Blume (1980), we do not find differences between

dividend-paying and non-dividend-paying stocks overall.

3. Modified Fama-French results

Table 5 presents the results for the modified FF model with the additional dummy variable

DOWN. Panel A examines the differences between dividend-paying and non-dividend-paying stocks. In

general, we find that the return-generating process is different for dividend-paying stocks than for stocks

that do not pay a dividend. In particular, we find that the state of the market affects the return of the

portfolios when the market is going down, and that this difference between the two portfolios is

significant. More specifically, we find that the down market dummy variable is significant for non-

dividend-paying firms, indicating that non-dividend-paying firms have a different return-generating

function in down markets. Furthermore, the coefficient on the down dummy variable is more negative for

non-dividend-paying firms than it is for dividend-paying firms and the difference between the two

coefficients is significant, indicating that dividend-paying firms, on average, outperform non-dividend-

paying firms.

Insert Table 5 here

15

D. Dividend Yield, Tax Clienteles, and Signaling

The previous tests focus only on whether or not firms pay dividends, and not the magnitude of

dividend payments. In this way, we control for the U-shaped pattern in dividend yields that resulted from

non-dividend-paying stocks. A question arises, however, whether these results are sensitive to the size of

the dividend yield. After all, the results found above may be an asset pricing result due to some form of

tax clientele or dividend-capture strategy. Alternatively, investors might reevaluate positively the benefit

of the ability of dividend-paying firms to signal issues related to future performance during periods when

the future performance of all stocks is being devalued (hence the downturn in prices across the market

resulting in the decline).

In either case, because non-dividend-paying firms do not credibly provide this signal, investors

may discover that their state preferences for dividend payments cause them to value dividend-paying

firms higher than non-dividend-paying firms during market downturns.17 If the results found in this paper

were due to an asset pricing result, it should be true that dividend yields are positively associated with

differences in returns in up and down markets. Alternatively, if the additional value of the dividend were

due to the signaling nature of dividends, it may matter more that the firm pays a dividend at all and not

the magnitude of the dividend.

To investigate further whether the results in the paper are due to more of an asset pricing or

signaling nature, we divide stocks that paid dividends into quintiles based on yearly dividend yield. If the

previous results are due to an asset pricing strategy, the results should be stronger for high-dividend-yield

stocks than for low-dividend-yield stocks. In addition, there should not be much of a difference between

the low-dividend-yield and the non-dividend-paying stocks. Alternatively, if the signaling nature of

17 While non-dividend-paying firms can initiate stock repurchase plans, these repurchases are discretionary and are not observable by investors, as noted by Howe, He and Kao (1992). Thus, these plans have a different signaling ability than regular dividend payments.

16

dividends is important, there should be little difference between the high- and low-yield-dividend

portfolios and a much larger difference between the low-yield and non-dividend-paying firms.18

The results in Panel B of Table 5 for the quintile portfolios based on dividend yield of dividend-

paying stocks indicate that each quintile loads differently on the Fama-French factors. In particular, the

smallest two dividend yield quintiles have statistically significant positive alphas, while the highest

dividend yield has a statistically significant negative alpha. Not surprisingly, the F-test rejects the null of

equality of the alphas across the quintiles at the 1% level. However, we cannot reject the hypothesis that

the coefficients on the DOWN variable are statistically different across the quintiles. This result indicates

that the results presented in Panel A of Table 5 and in previous tables on the asymmetric response of non-

dividend and dividend-paying stocks to down markets are not related to dividend yield, but rather to the

existence of dividend payments themselves. In fact, all of the coefficients on the DOWN variable are

insignificantly different from zero for all quintiles (except for the lowest dividend yield quintile), as was

the case in Panel A.

As a further test, Panel C of Table 5 examines the difference between the non-dividend-paying

group and the quintile with the lowest dividend yield. In this case, the coefficients on the alphas and the

HML book-to-market variables were not significantly different from each other. However, the

coefficients on the DOWN variable were significantly different for the non-dividend-paying and lowest

dividend yield portfolios, further indicating that it is the dividend payment, and not the magnitude of the

payment, that drives previous results.

The results in Panels B and C indicate a much larger difference between the non-dividend-paying

and low dividend yield portfolios than among the dividend-paying portfolios themselves. These results

support the signaling hypothesis over the tax clientele/dividend capture hypotheses for explaining the

18 Again, we are not suggesting that each individual dividend payment has great signaling value, but that the regular payment of a dividend sends a signal as does increasing or decreasing a dividend. In addition, investors know when to expect this signal. Alternatively, from a prospect theory perspective, the two tests examine different parts of the loss avoidance that makes investors prefer a certain gain: is it the level of certainty (similar to the signaling theory) or the size of the gain (similar to the asset pricing theory)?

17

reason for the asymmetric responses in up and down markets shown by the data. These results do not

support Brennan (1970) or Litzenberger and Ramaswamy (1979, 1980, 1982), in that the lower dividend

yield stocks seem to outperform the high dividend yield stocks on a pre-tax nominal return basis. Instead,

these results are consistent with the findings in Miller and Scholes (1982).

Collectively, the results in Tables 2, 3, 4, and 5 indicate that it is the payment or non-payment of

dividends – not the level of the payment – that drives the results that dividend-paying firms outperform

non-dividend-paying firms in down markets. To this extent, they support earlier findings by Blume

(1980), Litzenberger and Ramaswamy (1980, 1982), Elton, Gruber, and Rentzler (1983), and Christie

(1990) that non-dividend-paying stocks are different from dividend-paying stocks. Further, it seems less

likely that the tax clientele/dividend capture hypothesis is driving the results, but that dividend signaling

(either the dividend-signaling hypothesis or the free-cash-flow hypothesis) is more likely the cause.

E. Dividend-paying stocks during non-dividend-paying months

Possibly, dividend-paying firms outperform non-dividend paying firms simply because of the

return in the month the firm paid the dividend, and in the remaining months when no dividend is paid

returns for dividend and non-dividend paying firms are similar. If this is true, then there may be no

information or signal in the fact that a firm continues to pay a dividend but only a signal in the dividend

payment itself when it is received.19 Alternatively, it could be that the knowledge that a signal will be

received (via the dividend payment) is in itself valued as well.

To test this hypothesis, we eliminate the returns for dividend paying firms in the month the

dividend is paid and compare the returns of non-dividend-paying firms to the returns of dividend-paying

firms in months with no dividend payments. As indicated in Table 6, we find that for up markets,

dividend-paying and non-dividend-paying firms have the same average monthly return, but in down

markets, dividend-paying firms still significantly outperform non-dividend-paying firms, even when the

19 Similarly, any asset pricing strategy that involves dividend capture or tax clienteles should not have different results in non-dividend-paying months.

18

dividend return is excluded. The difference of differences is significant at the 1% level. Further, we

estimate the modified FF model in equation (2) and find that again, the down market dummy variable is

significantly higher (less negative) for dividend-paying firms than for non-dividend paying firms.

These results indicate not only that the dividend-payment is valued as a signal, but that even

during the time periods when a dividend is not being paid (and thus no signal is being given), the mere

knowledge that within three months a signal will be received is valued as well. Our results not only

indicate that there is value in the signal of paying a dividend and not just the dividend payment itself, but

also that there is a value in the knowledge that a signal will be received. Overall, these results further

support the dividend signaling hypothesis.

F. Dividend Changes

Finally, we test whether dividend payments matter based on market conditions by examining the

market's reaction to dividend changes and no changes during up and down markets. From an asset

pricing or dividend capture/tax clientele perspective, we would expect that market responses to changes in

dividends would not be a function of the state of the market. In other words, the market should respond

similarly to increases in dividends in either an up or down market. Not changing a dividend would likely

have little effect from an asset pricing perspective regardless of the overall state of the market. From an

information or signaling perspective, however, we would expect an asymmetric response. In down

markets, investors’ perceptions of future profits tend to be lower, while investors tend to have positive

outlooks on future earnings during up markets. Increasing dividends in down markets therefore provides

a much stronger signal about the future than a similar increase during an up market. Similarly, not

changing a dividend during up markets likely provides little additional information to investors.

However, during a down market, when investors may be more pessimistic about the overall economic

outlook, not changing a dividend provides investors with a reassuring signal that the company is not

headed for bankruptcy. Finally, decreasing dividends in down markets may be expected by investors and

19

thus convey less information than when firms decrease dividends in up markets when everything is

supposedly going well.

Thus, we would expect that in down markets dividend increases should have higher price

reactions than in up markets, and dividend decreases would have lower (less negative) price reactions in

down markets than up markets. Further, if the maintenance of dividends provides information, then we

would also expect in down markets that for firms that had no changes, the abnormal return would be

higher than for firms with no dividend change in up markets.

To determine if investors’ value changes in dividends differentially, we examine changes in

quarterly-dividends gathered from CRSP from 1970 to 2000. The only restrictions we place on the

sample it that there must be five days of returns surrounding the announcement listed on CRSP, the

dividend is paid on ordinary common shares of U.S.-incorporated companies, and the change cannot be a

dividend initiation or omission.20 Our sample included 3,294 firms with 18,537 increases, 4,595

decreases, and 93,537 no changes. We follow Brown and Warner’s (1985) standard event study

methodology to calculate CARs for the five-day period (-2, 2) around the announcement date supplied by

CRSP.

We estimate the abnormal returns using a modified market model:

mii rrAR −= (3)

where ri is the return on firm i and rm is the equally-weighted market index return. We do not estimate

market parameters based on a time period before each change because some firms have frequent dividend

changes and thus, there is a high probability that previous changes would be included in the estimation

period thus making beta estimations less meaningful. Additionally, Brown and Warner (1980) show for

short-window event studies that weighting the market return by the firm's beta does not significantly

improve estimation.

20 If the results hold for dividend changes, one would expect the results to be even stronger for initiations and omissions.

20

As shown in Table 7, price reactions to dividend increases are less in up markets than in down

markets. In addition, dividend decreases have less negative returns if announced during down markets

than up markets. Further, firms that maintained their current dividend payments in down markets

experienced positive abnormal returns while firms that maintained their current dividend levels in up

markets had insignificant abnormal returns. For three groupings (increases, decreases, and no changes)

the differences-in-means between up and down markets were also statistically significant. Thus, when

firms cut dividends when the market is doing well, it is a clearer signal that they are having problems.

However, if firms cut dividends when the market is doing poorly, there is less information in the dividend

cut or the market may view the cut as an appropriate step by management to undertake given current

economic conditions.21 Thus, the results in Table 7 reconfirm the earlier results that the asymmetric

responses in up and down markets and provide further support for the dividend signaling hypothesis.

Insert Table 7 here

III. Robustness Checks: Bull/Bear, Sub-periods, and Liquidity Effects

Overall, the results provide convincing evidence that dividend-paying stocks outperform non-

dividend-paying stocks, particularly in down markets. To verify further that these results hold under a

variety of specifications, we examine alternative definitions of up and down markets, perform a further

examination of risk-adjusted sub-period results, and search for possible liquidity effects.

A. Bull and Bear Markets

To examine if the definition of up and down markets affects the results, we run two tests. The

first, not shown here, redefines an up month as a month with a positive excess return, i.e., a month where

the S&P 500 return exceeded the risk-free rate for that month, and a down month as a month with a

21 As a robustness check, we divided the sample into the 1970s, 1980s and the 1990s+2000. We find that the same pattern holds across both decades; firms that increase (decrease) dividends in high-price markets have higher (lower) abnormal returns than firms that increase (decrease) dividends in low-price markets. Similar to Amicus and Li (2002), the abnormal returns are lower in the 1990s than 1980s.

21

negative excess return. While this is a less stringent definition of a down month, it seems reasonable that

investors would require a positive market premium. All of the results in the paper continue to hold under

this alternate definition.

Another way to define advancing and declining markets is to use the concept of bull and bear

markets. The definitions of bull and bear markets are a bit circumspect, in that the beginning and ends of

these periods are only known ex post. The bull and bear markets used in this analysis are as defined by

Ned Davis Research. Overall, there were eight separate bull markets and eight bear markets in our

sample, resulting in 259 months being classified as a bull month, and 113 months classified as a bear

month. Table 8 replicates the appropriate part of Table 2 using the Ned Davis Research definitions of a

bull or bear market to define months in place of the previous definitions used for up and down markets.

The results for bull and bear markets support the results reported previously.

Insert Table 8 here

B. CAPM Sub-period results

To verify that one particular period is not driving these results, we divide our sample into three

sub-periods, one for each decade. As shown in Table 9, all three sub-periods support the main results.

During the 1970s (Panel A), non-dividend-paying firms outperformed dividend-paying firms in up

markets for all risk categories. However, dividend-paying firms outperformed non-dividend-paying firms

for riskier stocks in down markets. Even so, for all but the lowest two beta deciles, dividend-paying firms

performed relatively better in down markets than they did in up markets compared with non-dividend-

paying firms. These results support earlier findings that investors prefer dividend-paying stocks in down

markets, particularly for riskier stocks.

Insert Table 9 here

During the 1980s (Panel B), dividend-paying stocks did better than non-dividend-paying stocks

regardless of risk. However, the differences between dividend-paying and non-dividend-paying stocks

22

were generally larger in down markets than in up markets. Not surprisingly, during the 1990s and the

year 2000 (a period that includes the “Internet Bubble”), on average non-dividend-paying stocks

outperformed dividend-paying stocks for all risk categories during up markets (Panel C). However,

consistent with the theory that dividends are more valuable in down markets, dividend-paying stocks

outperformed non-dividend-paying stocks for all risk categories in down markets. Note that the

performance of dividend-paying stocks rose relative to non-dividend-paying stocks even during this time

period.

Overall, the sub-period results indicate that no one period is driving the results. Instead, these

results that dividend-paying firms outperform non-dividend-paying firms in down markets are consistent

throughout the sample.

C. Liquidity Effects

Although we demonstrate that the asymmetric results in this paper hold while controlling for beta,

market capitalization, book-to-market, and dividend yield, it is possible that these results may be a

function of liquidity. Liquidity is a desirable feature for most stocks; a number of papers, such as

Amihud and Mendelson (1986), indicate that returns may be positively related to liquidity. It is possible,

therefore, that we are capturing differences in liquidity between the dividend-paying stocks and the non-

dividend-paying stocks; that is, dividend-paying stocks may trade more and are somehow much more

liquid than non-dividend-paying stocks. For example, during down markets, investors may prefer more

liquid, high volume stocks. More liquid stocks with high volume enable investors to get in and out of

those stocks quickly and in a timely manner. The desire for liquidity would therefore differentially

depend on the state of the market. To the extent that dividend-paying stocks tend to have more volume, it

is possible that the previous tests, which did not control for trading volume, may have picked up a

volume/liquidity effect as well.

To verify that this is not the case, we divided the sample into quintiles based on yearly trading

volume in shares and then examined the results in each volume quintile for dividend-paying and non-

23

dividend-paying stocks. The results, as shown in Table 10 indicate that the basic results hold; in each of

the volume quintiles, dividend-paying stocks outperform non-dividend-paying stocks in down markets.

In addition, within the quintiles, the dividend-paying stocks tend to have lower, not higher volumes. For

each quintile, both the mean and the median volumes of the dividend-paying firms are less than that of the

non-dividend-paying firms. Thus, if anything, the volume results suggest that the dividend-paying firms

should underperform, not outperform, non-dividend-paying stocks. However, as shown by the results in

Table 10, this is not the case even when one controls for volume.22 Overall, the results from these

robustness tests collectively support the main findings of the paper. That is, dividend-paying stocks

outperform non-dividend paying stocks in down markets when the signal has the most value.

Insert Table 10 here

IV. Conclusion

Though convincing anecdotal and academic research shows that dividends are disappearing, we

find evidence that investors are concerned with firms’ dividend policies. Our results indicate that

dividend-paying stocks outperform non-dividend-paying stocks in down markets. These results provide

evidence that investors value the signaling ability of dividends during those times and for those stocks

that the signal is the most valuable. The results are robust to parametric and non-parametric tests.

Further, these results hold when we control for risk (using CAPM and FF three-factor model), size,

liquidity, and well as in subperiods.

We also find that these results are not a function of dividend yield, but rather whether the firm

pays a dividend at all. We find a much larger difference between the non-dividend-paying and low

dividend yield portfolios than among the dividend-paying portfolios themselves, indicating more support

for the signaling hypothesis than a tax clientele/dividend capture hypothesis. In addition, we show

22As a further robustness check, we separated firms based on their primary market listing (NASDAQ or NYSE-Amex) and examined the modified FF three-factor model for dividend-paying and non-dividend-paying firms on each market separately. Dividend-paying firms outperformed non-dividend paying firms in down markets for both NYSE-Amex and Nasdaq. Thus, neither NASDAQ or NYSE-Amex firms are primarily driving the results.

24

investors respond asymmetrically to dividend increases, decreases, and no changes based on the state of

the market. Our results are robust to differences in trading volume, and thus are not due to investors’

differential preferences for more liquid stocks in down markets.

We conclude investors are not indifferent to dividend policy. Instead, they value dividends most

highly in the states of the world and for those stocks where the signal dividends can provide is the most

valuable. Were investors indifferent, it would cast doubt on the entire dividend signaling literature; why

should managers use dividends to send a signal if investors do not value the signal? By comparing low

dividend-paying stocks and high dividend-paying stocks, and then comparing low dividend-paying stocks

and non-dividend-paying stocks, we find that it is the act of paying a dividend, and not the size of the

dividend yield, that is of primary importance. An examination of dividend increases, decreases, and no

changes indicate that investors have a differential response to dividend changes based on the direction of

the overall market. Notably, investors respond differently to a lack of change in a dividend depending on

the state of the market, providing a positive response to a lack of change during down markets.

Therefore, even the lack of change of a dividend provides a signal to investors during market downturns.

This study therefore finds support for the dividend signaling literature, in that we find that

investors value dividends in a manner consistent with their valuing the signal. Risky firms that most need

to signal are thus differentially rewarded, particularly during times of economic uncertainty. Investors in

dividend-paying stocks do better than investors in non-dividend-paying stocks, particularly in market

downturns.

25

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Miller, M., and K. Rock, 1985, “Dividend Policy under Asymmetric Information,” Journal of Finance 40, 1031-1051.

Miller, M., and M. Scholes, 1982, “Dividends and Taxes: Empirical Evidence,” Journal of Political Economy 90, 1118-1141.

Norris, F., “Business Dividends Evaporate in Hot Market: Today’s Top Stocks Chase Capital Gains, Put Dividends on Back Burner,” New York Times, January 16, 2000, 1H.

Sharpe, William F., 1964, Capital asset prices: A theory of market equilibrium under conditions of risk, Journal of Finance 19, 425-442.

28

Tab

le 1

Sum

mar

y St

atis

tics

Sum

mar

y st

atis

tics f

or 2

1,48

8 N

YSE

, Am

ex a

nd N

ASD

AQ

list

ed fi

rms f

rom

Janu

ary

1970

to D

ecem

ber 2

000.

The

re a

re 2

,061

,688

firm

mon

ths o

f w

hich

1,3

92,4

22 a

re n

on-d

ivid

end-

payi

ng fi

rm m

onth

s and

769

,266

are

div

iden

d-pa

ying

firm

mon

ths.

All

data

is fr

om C

RSP

.

N

umbe

rof

Obs

erva

tions

Mon

thly

V

olum

e23

Pric

e

Mar

ket

Cap

italiz

atio

n D

ivid

end

($0.

00)

Bet

aM

onth

ly R

etur

n

Pa

nel A

: O

vera

ll N

on-D

ivid

end

1,39

2,42

2 18

,147

$1

1.21

$2

88,5

30,5

30

$0

.00

0.73

3 1.

011%

D

ivid

end

769,

266

20,4

76$2

5.30

$1,3

21,9

17,8

30

$0

.078

0.71

61.

375%

Pane

l B:

Yea

r End

Sta

tistic

s

Dec

embe

r197

0N

on-D

ivid

end

1,09

5 1,

474

$13.

39

106,

337,

160

0.0

00

1.

483

6.30

1%

Div

iden

d

1,18

71,

893

$28.

6944

1,66

2,44

0

0.06

90.

987

9.76

8%

Dec

embe

r198

0N

on-D

ivid

end

2,25

54,

344

$12.

4022

7,15

6,74

00.

000

0.95

2-4

.680

%D

ivid

end

2,

361

6,31

6$2

4.73

492,

986,

750

0.

095

0.79

7-1

.898

%

Dec

embe

r199

0N

on-D

ivid

end

4,17

17,

510

$6.6

711

9,52

3,88

00.

000

0.60

5-2

.021

%D

ivid

end

1,

966

16,1

93$2

1.32

1,26

5,75

1,98

0

0.08

90.

694

3.40

7%

Dec

embe

r200

0N

on-D

ivid

end

5,42

996

,590

$13.

561,

045,

565,

450

0.00

00.

640

-3.1

56%

Div

iden

d1,

933

103,

518

$26.

235,

098,

967,

830

0.08

70.

425

7.25

1%

23

The

num

ber o

f vol

ume

obse

rvat

ions

is le

ss th

an o

ther

var

iabl

es si

nce

som

e m

onth

s no

volu

me

was

repo

rted

on C

RSP

. In

stea

d of

thro

win

g ou

t tha

t ent

ire

obse

rvat

ion

for t

he m

onth

whe

n no

vol

ume

was

repo

rted,

we

sim

ply

igno

red

thos

e ob

serv

atio

ns w

hen

com

putin

g th

e av

erag

e m

onth

ly v

olum

e.

29

T

able

2

Ave

rage

Ret

urn

for

both

Up

and

Dow

n M

arke

ts

The

tabl

e re

ports

the

aver

age

mon

thly

retu

rn to

div

iden

d- a

nd n

on-d

ivid

end-

payi

ng st

ocks

in u

p an

d do

wn

mar

kets

from

197

0 to

200

0. U

p m

arke

ts a

re w

hen

the

S&P

500

inde

x re

turn

was

gre

ater

than

0 a

nd d

own

mar

kets

are

whe

n th

e S&

P 50

0 in

dex

retu

rn w

as 0

or l

ess.

Ove

rall,

ther

e w

ere

217

up m

onth

s and

155

dow

n m

onth

s in

our s

ampl

e. A

vera

ge m

onth

ly re

turn

s are

repo

rted

for a

ll st

ocks

and

for f

irms c

lass

ified

by

thei

r CR

SP b

eta

deci

les.

All

Mar

kets

Up

Mar

kets

D

own

Mar

kets

Non

-D

ivid

end-

payi

ng

Div

iden

d-pa

ying

D

iffer

ence

N

on-

Div

iden

d-p

ayin

g

Div

iden

d-p

ayin

g D

iffer

ence

N

on-

Div

iden

d-p

ayin

g

Div

iden

d-p

ayin

g D

iffer

ence

D

iffer

ence

of

diff

eren

cesa

Pa

nel A

: En

tire

Perio

d an

d by

Dec

ade

Ove

rall

1.01

%

1.

38%

-0

.37%

**,w

,k

3.72

3.

88%

-0

.16%

w,k

-3.0

3%

-2.1

3%

-0.9

0%**

,w,k

0.74

%**

1970

’s

1.

07

1.22

-0

.15**

,w,k

6.09

5.26

0.83

**,w

,k

-3.0

2-2

.55

-0.4

7**,w

,k

1.30

**

19

80’s

0.84

1.

68

-0.8

4**,w

,k

3.61

4.26

-0.6

5**,w

,k

-3.2

6-2

.03

-1.2

3**,w

,k

0.58

**

19

90’s

1.

10

1.

23

-0.1

3 **,

w,k

3.19

2.76

0.43

**,w

,k

-2.8

7

-1.7

0-1

.17*,

w,k

1.60

**

Pa

nel B

: En

tire

Perio

d by

Bet

a D

ecile

Bet

a D

ecile

H

igh

0.

741.

35-0

.61**

,w,k

5.22

5.69

-0.4

7**,w

,k

-5.8

0-4

.65

-1.1

5**, w

, k

0.6

8**

2

0.85

1.45

-0.6

0**,w

,k

4.53

5.16

-0.6

3**,w

,k

-4.6

0-3

.72

-0.8

8**, w

, k

0.2

5* 3

0.

971.

39-0

.42**

,w,k

4.22

4.70

-0.4

8**,w

,k

-3.8

6-3

.22

-0.6

4**, w

, k

0.1

64

1.

011.

42-0

.41**

,w,k

3.95

4.36

-0.4

1**,w

,k

-3.3

7-2

.70

-0.6

7**, w

, k

0

.26*

5

1.09

1.34

-0.2

5**,w

,k

3.66

4.00

-0.3

4*,w

,k

-2.7

9-2

.36

-0.4

3**, w

, k

0.0

96

1.

051.

40-0

.35**

,w,k

3.42

3.81

-0.3

9**,w

,k

-2.5

0-2

.01

-0.4

9**, w

, k

0.1

07

1.

141.

37-0

.23**

,w,k

3.25

3.48

-0.2

3 w

,k

-2.0

1-1

.62

-0.3

9**, w

, k

0.1

6* 8

1.

131.

41-0

.28**

,w,k

2.97

3.27

-0.3

0*,w

,k

-1.6

4-1

.19

-0.4

5**, w

, k

0.1

5* 9

1.

031.

36-0

.33**

,w,k

2.54

2.96

-0.4

2**,w

,k

-1.2

4-0

.87

-0.3

7**, w

, k

-0.0

5Lo

w

1.21

1.21

0.00

2.

692.

75-0

.06

w,k

-1.0

2-0

.78

-0.2

4**, w

, k

0.1

8*

a S

igni

fican

ce w

as o

nly

test

ed u

sing

par

amet

ric te

sts f

or th

e D

iffer

ence

s of D

iffer

ence

s. *

indi

cate

s t-te

st is

sign

ifica

nt a

t the

5%

leve

l

** in

dica

tes t

-test

is si

gnifi

cant

at t

he 1

% le

vel

w in

dica

tes t

he W

ilcox

on si

gn-r

ank

test

is si

gnifi

cant

at t

he 1

% le

vel

k ind

icat

es th

e K

rusk

al-W

allis

test

is si

gnifi

cant

at t

he 1

% le

vel

30

Table 3

CAPM Risk-Adjusted Abnormal Returns The table reports the average monthly abnormal return to dividend- and non-dividend-paying stocks in up and down markets from 1970 to 2000. Up markets are when the S&P 500 index return was greater than 0 and down markets are when the S&P 500 index return was 0 or less. Abnormal returns for each firm for each month were calculated as:

( )( )f f F fAbnormal Re turn ActualRe turn r r r= − +β M F− where Actual Returnf is the return for firm f for that month, rF is the three-month treasury bill for that month, rM is the return on the CRSP equally-weighted portfolio, and βf is the beta for stock f. * 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 Non-Dividend-paying Dividend-paying Abnormal Returns Abnormal Returns Difference All Markets 0.14% 0.27% -0.13%**,w,k Up Markets 0.85% 0.66% 0.19%**,w,k Down Markets -0.90% -0.30% -0.60%**,w,k Difference of Differences

0.79%**

31

Tab

le 4

E

xces

s Ret

urns

for

16 P

ortf

olio

s For

med

on

Size

and

BE

/ME

Th

is ta

ble

cont

ains

the

exce

ss re

turn

s for

por

tfolio

s of d

ivid

end-

payi

ng a

nd n

on-d

ivid

end-

payi

ng fi

rms b

ased

on

size

and

boo

k-to

-mar

ket o

f equ

ity.

Exce

ss re

turn

, rit –

r Ft,

is

the

retu

rn fo

r a fi

rm in

mon

th t

min

us th

e th

ree-

mon

th T

reas

ury

bill

retu

rn in

mon

th t.

Th

e da

ta is

from

CR

SP a

nd C

ompu

stat

and

runs

from

Janu

ary

1980

to D

ecem

ber

2000

. U

p m

arke

ts a

re w

hen

the

S&P

500

inde

x re

turn

was

gre

ater

than

0 a

nd d

own

mar

kets

are

whe

n th

e S&

P 50

0 in

dex

retu

rn w

as 0

or l

ess.

*

indi

cate

s t-te

st is

sign

ifica

nt a

t the

5%

leve

l

w

indi

cate

s the

Wilc

oxon

sign

-ran

k te

st is

sign

ifica

nt a

t the

1%

leve

l

** in

dica

tes t

-test

is si

gnifi

cant

at t

he 1

% le

vel

k ind

icat

es th

e K

rusk

al-W

allis

test

is si

gnifi

cant

at t

he 1

% le

vel

Boo

k –

to –

mar

ket q

uarti

les

Lo

w

2

3H

igh

Size

N

on-

Div

. D

iv.

Diff

eren

ceN

on-

Div

. D

iv.

Diff

eren

ce

Non

-D

iv.

Div

.D

iffer

ence

N

on-

Div

. D

iv.

Diff

eren

ce

Pane

l A:

All

Ma

r

ets

rket

s

rket

s

0.

85

kSm

all

2.

14%

2.29

%-0

.15%

,w,k

0.54

%1.

43%

-0.8

9%**

,w,k

-0.2

0% 0.

72%

-0.9

2%**

,w,k

-2.0

0%-0

.90%

-1.1

0%**

,w,k

23.

482.

01 1

.47**

,w,k

1.33

1.23

0.1

0

0.26

0.42

-0.1

6w,k

-1

.20

-1.3

0 0

.10

33.

921.

85 2

.07**

,w,k

1.38

1.11

0.2

7

0.23

0.29

-0.0

6

-0.8

0-1

.20

0.4

0La

rge

3.

86

1.84

2.0

2**,w

,k1.

31

1.16

0.1

5

0.

69

0.34

0.3

5w,k

-0

.40

-0.7

0

0.3

0

Pane

l B:

Up

Ma

Sm

all

4.

644.

21 0

.43**

,w,k

2.64

2.93

-0.2

9**,w

,k1.

71%

1.88

%-0

.17

w,k

-0

.16

0.59

-0.7

5**,w

,k

26.

514.

14 2

.37**

,w,k

3.93

3.03

0.9

0**,w

,k2.

89%

2.23

% 0

.66**

,w,k

2.

281.

37 0

.91**

,w,k

36.

874.

17 2

.70**

,w,k

3.90

3.08

0.8

2**,w

,k2.

68%

2.43

% 0

.25

2.03

1.77

0.2

6La

rge

7.

15

4.11

3.0

4**,w

,k3.

74

3.36

0.3

8

2.

60%

2.61

%

-0.0

1

2.

43

2.57

-0.1

4

Pane

l C:

Dow

n M

a

Smal

l

-2.2

8-1

.14

-1.1

4**,w

,k

-3

.25

-1.2

9-1

.96**

,w,k

-3.6

9%-1

.42%

-2.2

7**,w

,k

-5.0

5-3

.37

-1.6

8**,w

,k

2-2

.25

-1.8

2-0

.43*,

w,k

-3.3

1-2

.02

-1.2

9**,w

,k-4

.36%

-2.5

7%-1

.79**

,w,k

-6

.93

-5.3

0-1

.63**

,w,k

3-1

.98

-2.2

9 0

.31

-2.9

8-2

.46

-0.5

2*,w

,k

-3.8

5%-3

.37%

-0.4

8-5

.45

-5.6

60.

21La

rge

-1

.89

-2.3

9

0.5

0*-2

.79

-2.8

0

0.0

1

-2

.11%

-3.5

0%

1.3

9**,w

,k

-4.7

6

-5

.47

0.

71

Pane

l D:

Diff

eren

ces o

f Diff

eren

ces (

Up

– D

own

)

1.

57**

1.67

**2.

10**

0.93

**

2.

80**

2.19

**2.

45**

2.54

**

2.

39**

1.34

**0.

73*

0.05

2.

54**

0.37

-1.4

0**-

32

Table 5

Fame-French Risk Adjusted Returns Partitioned by Dividend Yield This table contains the coefficients of ordinary least squares regressions across equal-weighted portfolios of dividend-paying and non-dividend-paying firms. The regressions are of the form:

it Ft iT iT t iT t iT t iT t itr r b RMRF s SMB h HML d DOWN− = α + + + + + ε where rit – rFt is the return on a equal-weighted portfolio of either dividend or non-dividend-paying stocks in month t minus the three-month Treasury bill return in month t, RMRF is the excess return on a value-weighted aggregate market proxy for month t, SMB is the difference in the returns of a value-weighted portfolio of small stocks and large stocks for month t, HML is the difference in the returns of a value-weighed portfolio of high book-to-market stocks and low book-to-market stocks for month t, and DOWN is an indicator variable that equals one if the market is down and zero if the market is up. The data is from CRSP and runs from January 1970 to December 2000. Up markets are when the S&P 500 index return was greater than 0 and down markets are when the S&P 500 index return was 0 or less. * indicates significance at the 5% level. ** indicates significance at the 1% level.

Intercept RMRF SMB HML DOWN Adjusted R2

Panel A: Overall

Non-Dividend-paying 0.0042* 0.9210** 1.0580** 0.2641** -0.0134** 89.8%

Dividend-paying 0.0015 0.9497** 0.4027** 0.5096** -0.0029 92.3%

Differences ** ** **

Panel B: Dividend Yield

Lowest dividend yield 0.0092** 1.1117** 0.4625** 0.2911** -0.0067* 89.7%

2 0.0028* 1.0520** 0.4504** 0.5183** -0.0034 89.9%

3 -0.0001 0.9885** 0.4352** 0.5839** -0.0013 90.7%

4 -0.0020 0.8990** 0.3864** 0.5982** -0.0021 90.6%

Highest dividend yield -0.0025* 0.6985** 0.2804** 0.5568** -0.0008 85.0%

F-test for differences ** ** ** **

Panel C: Overall

Non-Dividend-paying 0.0042* 0.9210** 1.0580** 0.2641** -0.0134** 89.8%

Lowest dividend yield 0.0092** 1.1117** 0.4625** 0.2911** -0.0067* 89.7%

Differences ** ** *

33

Table 6

Average Return for Up and Down Markets for Dividend-Paying Stocks during Months with No Dividend Payments

The table reports the average monthly return to dividend- and non-dividend-paying stocks from 1970 to 2000. Dividend-paying stocks are only included for months during which a quarterly dividend-paying stock did not pay a dividend. Up markets are when the S&P 500 index return was greater than 0 and down markets are when the S&P 500 index return was 0 or less. Overall, there were 217 up months and 155 down months in our sample. Average monthly returns are reported for all stocks and for firms classified by their CRSP beta deciles. Panel A – Returns Up

Markets Down

Markets

Non-Dividend-paying

Dividend-paying

Difference Non-Dividend-paying

Dividend-paying

Difference Difference of differencesa

All Stocks

3.72% 3.72% 0.00% -3.03% -2.36% -0.67%**, w,k 0.67%**

Panel B – Fama-French Regressions

Intercept RMRF SMB HML DOWN Adjusted R2

Non-Dividend-paying 0.0042* 0.9210** 1.0580** 0.2641** -0.0134** 89.8% Dividend-paying -0.0008 0.9527** 0.4036** 0.5161** -0.0028 92.1% Differences * ** ** **

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

34

Table 7

Cumulative Abnormal Returns for Dividend Changes in Up and Down Markets Cumulative abnormal returns (CAR) are calculated for the five days (-2, 2) around the announcement (day 0) of a dividend change. Abnormal returns are estimated using a modified market model

i iAR r rm= − where ri is the return on firm i and rm is the equally-weighted market index return. The usual estimation period is eliminated due to the high probability of previous dividend changes for firms during the estimation period. Panel A reports the CARs for 18,537 increases, 4,595 decreases, and 93,537 no changes announced between 1970 to 2000 for 3,294 firms. Panel B reports the CARs for dividend increases and decreases in up and down markets from 1970 to 2000. Up markets are when the S&P 500 index return was greater than 0 and down markets are when the S&P 500 index return was 0 or less.

Panel A

Dividend Increase Dividend Decrease No Change 1.013%** -0.360%** 0.102%**

Panel B Up Market Down Market Difference Dividend Increase 0.857%**

1.206%** -0.349%*,w,k

Dividend Decrease -0.375%**

-0.324%* -0.051%w,k

No Change 0.046%

0.170%** -0.124%**,w,k

* 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

35

Table 8

Average Return for both Bull and Bear Markets The table reports the average monthly return to dividend- and non-dividend-paying stocks in bull and bear markets from 1970 to 2000. Bull and bear markets are defined by Ned Davis research. Overall, there were 259 bull months and 113 bear months in our sample. Average monthly returns are reported for all stocks and for firms classified by their CRSP beta deciles. Up

Markets Down

Markets

Non-Dividend-paying

Dividend-paying

Difference Non-Dividend-paying

Dividend-paying

Difference Difference of differencesa

All Stocks

2.09% 2.23% -0.14%**, w, k -2.37% -0.53% -1.84%,w, k 1.70%**

Beta Decile

High 2.39 2.55 -0.16 w, k -3.96 -1.23 -2.73**, w, k 2.57** 2 2.27 2.48 -0.21**, w, k -3.36 -0.92 -2.44**, w, k 2.23** 3 2.19 2.39 -0.20**, w, k -2.67 -0.97 -1.70**, w, k 1.50** 4 2.21 2.37 -0.16*, w, k -2.69 -0.79 -1.90**, w, k 1.74** 5 2.08 2.19 -0.11 w, k -2.12 -0.57 -1.55**, w, k 1.44** 6 2.02 2.25 -0.23**, w, k -2.10 -0.56 -1.54**, w, k 1.31** 7 2.03 2.14 -0.11 w, k -1.78 -0.39 -1.39**, w, k 1.28** 8 1.90 2.13 -0.23**, w, k -1.43 -0.23 -1.20**, w, k 0.97** 9 1.72 2.03 -0.31**, w, k -1.25 -0.07 -1.18**, w, k 0.87** Low 1.95 1.98 -0.03 w,k -1.18 -0.14 -1.04**, w, k 1.01** 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

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Table 9

Returns by Beta Decile by Decade This table contains average monthly returns of dividend (Div) and non-dividend (Non) paying stocks by beta decile for three decades from January 1970 to December 2000. Returns are expressed as a percent. Data is from CRSP. Down markets are defined as those months when the S&P 500 had returns less than zero and up markets are those months when the S&P 500 had a positive return. Firms are segmented by beta decile based on their classification by CRSP. * 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 Up Markets Down Markets

Non Div Difference Non Div Difference Difference Beta Decile of differences Pane1 A: January 1970 to December 1979 High 7.97% 7.72% 0.25w,k -5.47% -4.35% -1.12**,w,k 1.37%** 2 7.45 6.83 0.62**,w,k -4.63 -3.75 -0.88**,w,k 1.50** 3 7.06 6.19 0.87**,w,k -3.92 -3.54 -0.38*,w,k 1.25** 4 6.35 5.96 0.39w,k -3.70 -2.97 -0.73**,w,k 1.12** 5 6.05 5.51 0.54**,w,k -2.98 -2.68 -0.30*,w,k 0.84** 6 5.40 5.18 0.22w,k -2.55 -2.60 0.05w,k 0.17 7 5.20 4.75 0.45*,w,k -2.18 -2.45 0.27w,k 0.18 8 5.01 4.35 0.66**,w,k -1.68 -1.99 0.31**,w,k 0.35 9 4.26 3.99 0.27w,k -1.26 -1.70 0.44** -0.17 Low 4.26 3.53 0.73**,w,k -0.65 -1.49 0.84** -0.11 Panel B: January 1980 to December 1989 High 4.93 5.36 -0.43*,w,k -5.81 -5.46 -0.35*,w,k -0.08 2 4.36 5.27 -0.91**,w,k -4.67 -4.21 -0.46**,w,k -0.45 3 4.29 4.87 -0.58**,w,k -4.40 -3.52 -0.88**,w,k 0.30 4 4.19 4.61 -0.42**,w,k -3.75 -2.85 -0.90**,w,k 0.48** 5 3.58 4.27 -0.69**,w,k -3.12 -2.33 -0.79**,w,k 0.10 6 3.33 4.20 -0.87**,w,k -2.98 -1.95 -1.03**,w,k 0.16 7 3.31 3.85 -0.54**,w,k -2.28 -1.47 -0.81**,w,k 0.27 8 3.10 3.66 -0.56**,w,k -1.91 -0.90 -1.01**,w,k 0.45** 9 2.62 3.22 -0.60**,w,k -1.26 -0.61 -0.65**,w,k 0.05 Low 2.62 2.91 -0.29,w,k -1.52 -0.37 -1.15**,w,k 0.86** Panel C: January 1990 to December 2000 High 4.70 4.50 0.20w,k -6.08 -4.42 -1.66**,w,k 1.86** 2 3.93 3.79 0.14w,k -4.46 -3.44 -1.02**,w,k 1.16** 3 3.56 3.42 0.14w,k -3.63 -2.91 -0.72**,w,k 0.86** 4 3.34 3.00 0.34**,w,k -3.00 -2.57 -0.43*,w,k 0.77** 5 3.20 2.75 0.45**,w,k -2.57 -2.33 -0.24,w,k 0.69** 6 3.10 2.63 0.47**,w,k -2.36 -1.70 -0.66**,w,k 1.13** 7 2.82 2.34 0.48**,w,k -2.02 -1.11 -0.91**,w,k 1.39** 8 2.58 2.27 0.31**,w,k -1.62 -0.82 -0.80**,w,k 1.11** 9 2.02 2.00 0.02w,k -1.19 -0.32 -0.87**,w,k 0.89** Low 2.42 1.84 0.58**,w,k -0.79 -0.47 -0.32w,k 0.90*

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Table 10

Fame-French Risk Adjusted Returns by Volume This table contains the coefficients of ordinary least squares regressions across value-weighted portfolios of dividend-paying and non-dividend-paying firms by volume groups. The regressions are of the form:

it Ft iT iT t iT t iT t iT t itr r b RMRF s SMB h HML d DOWN− = α + + + + + ε where rit – rFt is the return on a equally-weighted portfolio of either dividend or non-dividend-paying stocks in month t minus the three-month Treasury bill return in month t, RMRF is the excess return on a value-weighted aggregate market proxy for month t, SMB is the difference in the returns of a value-weighted portfolio of small stocks and large stocks for month t, HML is the difference in the returns of a value-weighed portfolio of high book-to-market stocks and low book-to-market stocks for month t, and DOWN is an indicator variable that equals one if the market is down and zero if the market is up. The data is from CRSP and runs from January 1970 to December 2000. Up markets are when the S&P 500 index return was greater than 0 and down markets are when the S&P 500 index return was 0 or less. * indicates significance at the 5% level. ** indicates significance at the 1% level. Intercept RMRF SMB HML DOWN Adj. R2 Mean Median

Panel A: Lowest Volume Non-Dividend-paying -0.0122** 0.7230** 0.8198** 0.4980** -0.0065 74.1% 345.46 216 Dividend-paying -0.0033** 0.6731** 0.5251** 0.5123** 0.0006 82.1% 319.33 202 Differences ** ** * Panel B: 2 Non-Dividend-paying -0.0111** 0.9953** 1.1023** 0.7269** -0.0069 83.3% 1539 1095 Dividend-paying -0.0027** 0.9083** 0.6354** 0.6260** 0.0006 88.8% 1236 797 Differences ** * ** * * Panel C: 3 Non-Dividend-paying 0.0015 1.0813** 1.1926** 0.5375** -0.0113** 86.7% 4297 3165 Dividend-paying 0.0014 1.0122** 0.5680** 0.5939** -0.0014 90.8% 3207 1996 Differences ** ** Panel D: 4 Non-Dividend-paying 0.0156** 1.1656** 1.1928** 0.2320** -0.0151** 90.5% 12121 8816 Dividend-paying 0.0047** 1.0829** 0.3790** 0.5246** -0.0050 89.9% 8647 5323 Differences ** ** ** ** Panel E: Highest Volume Non-Dividend-paying 0.0312** 1.2073** 1.2567** -0.1641** -0.0175** 90.1% 88107 36808 Dividend-paying 0.0057** 1.1313** 0.0405 0.3627** -0.0063** 91.6% 67409 27133 Differences ** ** ** *

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