The relationship between dividend policy and share price volatility : a study on Mediterranean banks

Abstract

This empirical study investigates the relationship between share price volatility and corporate dividend policies when considering Mediterranean Banks. Various scholars such as Black (1976), Miller and Modigliani (1961) and DeAngelo et al. (1996) have studied the effect of a dividend policy on share prices, however lacked the empirical evidence to overcome the dividend puzzle. Others have criticised these theories for not considering stakeholders' theory, pecking order theory, agency costs, signalling theory, the bird-in-hand fallacy and clientele effects. This study aims to develop this school of dividend policy relevance by considering the effect the dividend yield and payout ratios, as proxies of a firm's dividend policy, have on the volatility of its share price. Data was collected for 138 Banks in the Mediterranean Region, between the 16-year period 2001 through 2016. The framework postulated by Baskin (1989) was then employed. This showed a positive relationship between dividend yield and share price volatility when regressed alongside payout ratio and other control variables. Following robustness checking in order to enhance the model, and subsequently omitting all control variables except for Leverage and Firm Size, a significant positive relationship between share price volatility and both dividend yield leverage was found, as well as a significant negative relationship between payout ratio and share price volatility. These results have various implications for both investors in Mediterranean Banks, as well as corporate managers of the firms utilised in the sample. It can allow for managers to better determine the effect their dividend policies will have on share price volatility, and give investors the opportunity to better determine the risk associated with the investment based on the variables used in the model.