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Dividend policy and probability of extreme returns

Mohammed Bouaddi (The American University in Cairo, Cairo, Egypt)
Omar Farooq (School of Business, ADA University, Baku, Azerbaijan)
Neveen Ahmed (Institute of National Planning, Cairo, Egypt)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 22 October 2020

Issue publication date: 8 July 2021

468

Abstract

Purpose

This study examines the effect of dividend policy on the ex ante probability of stock price crash and the ex ante probability stock price jump.

Design/methodology/approach

We use the data of publicly listed non-financial firms from France and the ex ante measures of crash and jump probabilities (based on the Flexible Quadrants Copulas) to test our hypothesis during the period between 1997 and 2019.

Findings

Our results show that dividend payments are negatively associated with the ex ante probability of crash and positively associated with the ex ante probability of jump. Our results are robust across various sub-samples and across different proxies of dividend policy. Our findings also hold when we use ex-post measures of crash and jump probabilities.

Originality/value

Unlike prior literature, we use ex ante measures of crash and jump probabilities. The main advantage of this forward looking measure is that it allows for more flexibility by modeling the dependence between market returns and stock returns as functions of their actual state. Our measure is also consistent with the behavior of investors and market participants in a way that the market participants do not know the future outcome with certainty, but rather they are anticipating the future.

Keywords

Citation

Bouaddi, M., Farooq, O. and Ahmed, N. (2021), "Dividend policy and probability of extreme returns", International Journal of Managerial Finance, Vol. 17 No. 4, pp. 640-661. https://doi.org/10.1108/IJMF-01-2020-0023

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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