The Effect of Dividend Policy on Stock Price Volatility: Empirical Analysis of the S&P 100

Abstract

The purpose of this study is to empirically investigate whether the dividend policy affects the stock price volatility in the S&P 100. A sample of 34 companies was examined on a quarterly basis between 2010 and 2020. The 1,496 observations were analysed using a pooled ordinary least-squares regression, a fixed effect model, and a random effect model. The dependent variable of share price volatility was regressed against the dividend policy represented by the independent variables of dividend yield and payout ratio. To consider further influences on the stock price volatility the control variables leverage, size, asset growth, and earnings volatility were included. The results show that the dividend yield has a positive effect on share price volatility, while the payout ratio was insignificant. Apart from size, which was significantly negative, all other control variables were found insignificant. These findings support the dividend relevance theory and suggest that the share price risk is influenced by dividend policy in the form of dividend yield. Since the fixed effect model was the best estimator, these results are only applicable to the sample, not the population.