Do Dividends Mitigate Bad News Hoarding, Overinvestment, and Stock Price Crash Risk?

61 Pages Posted: 1 Mar 2018 Last revised: 15 Jun 2020

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Le Luo

School of Management, Huazhong University of Science and Technology

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Date Written: June 1, 2020

Abstract

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

Kim, Jeong-Bon and Luo, Le and Xie, Hong, Do Dividends Mitigate Bad News Hoarding, Overinvestment, and Stock Price Crash Risk? (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3127275 or http://dx.doi.org/10.2139/ssrn.3127275

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Le Luo

School of Management, Huazhong University of Science and Technology ( email )

No. 1037, Luoyu Road, Hongshan District
Wuhan, Hubei 430074
China

Hong Xie (Contact Author)

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

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