Dividend Stability and Firm Characteristics

Abstract

Dividend stability is studied on 1,968 dividend paying firms using quarterly data from 2000 through 2005. Three groups are established: Group 1 (traditional) has firms that pay dividends every year which represents a stable dividend payment approach; Group 2 (irrelevance) has firms that stop paying dividends; and Group 3 (residual) pays dividends somewhat randomly (not annually). The residual policy group is the largest of the three groups and also is rewarded by investors with the highest growth rate in market to book value ratio in deciles. After investigating the underlying variables, it appears that larger firms tend to follow a traditional policy of stable dividends while smaller firms are more likely to follow a residual or irrelevance approach.