The Global Preference for Dividends in Declining Markets

• DOI: http://doi.org/10.1111/fire.12078
• Published date: 01 November 2015
• Date: 01 November 2015

The Financial Review 50 (2015) 575–609

The Global Preference for Dividends

in Declining Markets

Michael A. Goldstein

Babson College

Abhinav Goyal∗

University of Liverpool

Brian M. Lucey

Trinity CollegeDublin, University of Ljubljana

Cal B. Muckley

University College Dublin

Abstract

Investors globally prefer dividend-paying stocks over nondividend-paying stocks more

in declining than in advancing markets, even accounting for firm-level growth opportunities,

size and risk effects. Dividend-paying stocks outperform nondividend-paying stocks, from

0.63% (China) to 3.79% (Canada) more per month in declining than in advancing markets. In

declining markets, dividend-paying firms outperform by more than any underperformance in

advancingmarkets. The results are robust across dividend taxation regimes, legal environments,

∗Corresponding author: G-05, Management School, Chatham Building, University of Liverpool, Liver-

pool, L69 7ZH, UK; Phone: +44-151-795-2150; Fax: +44-151-795-3001; E-mail: agoyal@liv.ac.uk.

The authors would like to thank Robert VanNess for suggestions, and the participants in Financial Man-

agement Association annual meeting 2013 in Chicago (October: 2013) and Auburn University (January:

2015). Cal Muckley is thankful to the Fulbright Commission for financial support and for the hospitality

shown by colleagues at the finance group in the YaleUniversity School of Management, where part of this

research was undertaken. We are grateful to the authors’ respectiveinstitutions for financial support. We

are responsible for all the remaining errors and the usual caveat applies.

C2015 The Eastern Finance Association 575

576 M. A. Goldstein et al./The Financial Review 50 (2015) 575–609

emerging and developed markets, periods prior to and after the 2008 global financial crisis,

the exclusion of the dividend declaration month and in respect to segmented or integrated

international capital markets.

Keywords: dividend policy, market movement, G-7, BRICS

JEL Classifications:F3,G35

1. Introduction

Around the globe, some corporations send returns to their shareholders via

dividends, while others do not. These corporations exist in different countries, with

different economic systems at different levels of development, different taxation

systems, different legal systems and protections, and so on. Investors (whether local

or global) in stock markets around the globe therefore have a choice of investing

in corporations from which they will receive a dividend and those from which they

will not. While the question of the role and importance of dividends has generated

hundreds of papers over the decades since Lintner’s (1956) seminal work, much

of this research has been on the corporate, institutional and legal determinants of

particular payout policies, the effects of changes in policies on future asset returns,

or on the managerial elements of payout policy setting. Much less work has been

undertaken on whether dividends are preferred under different market conditions. If

we take the Modigliani-Miller propositions as holding, then regardless of whether

markets are advancing or declining dividends should not matter to the returns of

stocks.1Recent research by Fuller and Goldstein (2011) suggests that dividends do

matter, and matter more in declining (as opposed to advancing) markets, although

those results were only examined in one large developed country (the United States),

and therefore only under one economic and legal system.

In this paper, we evaluate dividend and nondividend-paying stocks across the

market cycle around the globe, across a variety of developedand emerging economies

with different legal systems and tax regimes. We find substantial international evi-

dence that investors differentially prefer dividend-paying stocks over nondividend-

paying stocks, more in declining markets than in advancing markets. This finding

is robust across markets at different levels of economic development, different legal

environments, and different dividend taxation regimes. These results therefore have

implications for the relative importance that investors place on dividends under dif-

ferent market conditions regardless of the tax policies, legal systems, or economic

development of the markets.

1Even following for the incompleteness of the Modigliani-Miller propositions, as demonstrated by DeAn-

gelo and DeAngelo (2006), dividends matter if only for the ability of dividend-paying stocks to destroy

wealth via suboptimal payout policies.

M. A. Goldstein et al./The Financial Review 50 (2015) 575–609 577

We look at dividend-paying and nondividend-paying listed firms in seven de-

veloped (Canada, France, Germany,Italy, Japan, the United Kingdom and the United

States) and five developing markets (Brazil, China, India, Russia and South Africa),

from January 1995 to December 2011. This sample includes a variety of legal, eco-

nomic, and tax systems across periods that include boom and bust cycles, including

the recent global Great Recession and recovery period. Examining raw returns (with-

out adjustments for risk) across all 12 countries, we find that dividend-paying stocks

outperform nondividend-paying stocks.2When just examining raw returns when the

local market index is declining, we also find that dividend-paying stocks do better

than nondividend-paying stocks in declining markets, although this effect is stronger

in the developed markets. When just examining raw returns when the local market

index is advancing, we find that for nine of the 12 markets nondividend-payingstocks

statistically do better than dividend-paying stocks in advancing markets. However,

notably, for all 12 countries we find that the outperformance of dividend-paying

stocks over nondividend-paying stocks is larger in declining markets than in advanc-

ing markets. This effect is stronger in the developed marketsand in South Africa than

it is in Brazil, India, and China, but it is statistically significant in all countries.

Fama-MacBeth (1973) regressions controlling for (local market) beta, size,

and book value confirm these results, with the United States showing a 3.25% per

month outperformance of dividend-paying firms in declining markets overadvancing

markets, followed by Russia at 3.10% and Canada at 3.07%,3while the lowest results

were 1.40% for the United Kingdom and 1.48% for India. The outperformance for

dividend-paying stocks over nondividend-paying stocks in declining over advancing

markets held both for the 1995–2007 pre-Crisis period and the 2008–2011 Great

Recession and recovery period for both developed and emerging nations. The effects

were, interestingly, slightly weaker during the more recent period for the developed

nations, but not notably different for the emerging markets (except for Brazil, where

the effect was slightly stronger in the recent period). The results also hold if we

instead use the MSCI All Country WeightedIndex (MSCI ACWI) instead of the local

country index to determine advancing or declining markets. While we find the results

hold for both developed and emerging economies, we find that the outperformance

of dividend-paying stocks in declining versus advancing markets over nondividend-

paying stocks are even stronger in emergingeconomies than in the developed markets.

Likewise, while we find that the results hold for countries with Common Law legal

systems (Canada, India, South Africa, the United Kingdom, and the United States)

as compared with Civil Law legal systems (Brazil, China, France, Germany, Italy,

Japan, and Russia), the results are slightly larger in the Civil Law countries. Other

2Interestingly, the overall stock return for nondividend-paying stocks was negative for all developed

countries, except for the United States.

3For the Fama-MacBeth regressions, all markets (including the United States) showed outperformance of

dividend-paying stocks over nondividend-paying stocks in both advancingand declining markets.