Dividend policy and probability of extreme returns

Abstract

PurposeThis study examines the effect of dividend policy on the ex ante probability of stock price crash and the ex ante probability stock price jump.Design/methodology/approachWe use the data of publicly listed non-financial firms from France and the ex ante measures of crash and jump probabilities (based on the Flexible Quadrants Copulas) to test our hypothesis during the period between 1997 and 2019.FindingsOur results show that dividend payments are negatively associated with the ex ante probability of crash and positively associated with the ex ante probability of jump. Our results are robust across various sub-samples and across different proxies of dividend policy. Our findings also hold when we use ex-post measures of crash and jump probabilities.Originality/valueUnlike prior literature, we use ex ante measures of crash and jump probabilities. The main advantage of this forward looking measure is that it allows for more flexibility by modeling the dependence between market returns and stock returns as functions of their actual state. Our measure is also consistent with the behavior of investors and market participants in a way that the market participants do not know the future outcome with certainty, but rather they are anticipating the future.