Do Dividends Mitigate Bad News Hoarding, Overinvestment, and Stock Price Crash Risk?
61 Pages Posted: 1 Mar 2018 Last revised: 15 Jun 2020
Date Written: June 1, 2020
We examine the economic benefits of paying dividends. We find that dividend payments mitigate stock price crash risk. In addition, we show that dividend payments reduce bad news hoarding (overinvestment) while bad news hoarding (overinvestment) is positively associated with stock price crash risk, suggesting that curbing bad news hoarding and curtailing overinvestment are two channels through which dividends mitigate crash risk. Finally, our main results are robust to a battery of sensitivity checks including controls for potential endogeneity concerns. Our paper extends a recent literature about dividends enhancing earnings quality (e.g., Skinner and Soltes, 2011) by adding that dividend payments generate economic benefits in the form of mitigated bad news hoarding, overinvestment, and stock price crash risk.
Keywords: Dividends; Crash risk; Bad news hoarding; Overinvestment; Agency costs.
JEL Classification: G01; G35; M41
Suggested Citation: Suggested Citation