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What explains the change in a firm’s idiosyncratic volatility after a dividend initiation?

Chintal A. Desai (Department of Finance, Insurance and Real Estate, Virginia Commonwealth University, Richmond, Virginia, USA)
Khoa H Nguyen (Department of Economics and Finance, The University of Texas-Pan American, Edinburg, Texas, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 9 November 2015




The purpose of this paper is to identify three (maturity, agency, and information) effects that help explain the change in idiosyncratic volatility after a firm initiates a dividend.


The paper uses a cross-sectional analysis where the standard errors are adjusted for heteroskedasticity. As for robustness check, the authors perform two-stage analysis to control for potential self-selection bias. The authors also control for 2003 Dividend Tax Cut effect, matching-firm volatility, and confounding events.


Using a sample of 688 dividend-initiating firms for a period of 1977 to 2010, the authors find evidence consistent with the hypotheses based on the maturity, agency, and information effects. The volatility changes upon the dividend initiation can be reliably explained by the changes in profit volatility and free cash flow per total assets, and whether the firm consummated a stock split prior to the dividend initiation. The information effect is also found to be economically significant.


By studying a firm’s decision to initiate a dividend and its impact on the change in its volatility, the research helps contribute to the payout policy and volatility literatures.



JEL Classification — G35, G12

The authors thank three anonymous reviewers and Editor (Don Johnson) for providing their valuable comments, which have markedly improved the paper. The authors graciously thank Robert Savickas for his valuable suggestions and comments. The authors also thank Haiwei Chen, Kevin Krieger (discussant), and seminar participants of the Midwest Finance Association ' s annual meeting 2012 and University of Texas-Pan American for their suggestions. Desai acknowledges the summer research support from the VCU School of Business. Ditina Desai contributed by proofreading the manuscript. The authors are solely responsible for errors and omissions.


Desai, C.A. and Nguyen, K.H. (2015), "What explains the change in a firm’s idiosyncratic volatility after a dividend initiation?", Managerial Finance, Vol. 41 No. 11, pp. 1138-1158.



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Copyright © 2015, Emerald Group Publishing Limited

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