Dividend policy and stock price volatility: Australian evidence

Abstract

Dividend policy remains a source of controversy despite years of theoretical and empirical research, including one aspect of dividend policy: the linkage between dividend policy and stock price risk. A sample of 173 Australian listed companies is examined for a period from 1972 to 1985. The work features a cross-sectional regression analysis of the relationship between stock price volatility and dividend policy, after controlling for firm size, earnings volatility, leverage and growth. Contrary to Baskin's (1989) US results, no evidence is found that dividend yield is correlated with stock price volatility. On the other hand, consistent with expectations, there is evidence of significant positive correlations between stock price volatility and earnings volatility and leverage, plus a significant negative correlation with the payout ratio. It is also discovered that a significant positive correlation exists between size and stock price volatility but this is probably explained by the tendency for larger companies to incur more liabilities of all types. Indeed, the sample companies display a significant negative correlation between earnings volatility and size. The results do not support Baskin's suggestion that dividend policy per se can influence stock price volatility because it is not clear where the causality resides.