The Influence of Stock Market Liquidity on Dividend Changes in Europe.

Abstract

Although dividend changes are said to have an especially reliable signaling value concerning the value of the firm, various studies focus on detecting the driving determinants of dividend payout probabilities and dividend yields while the determinants of dividend changes are less well studied. The objective of the present dissertation is to put an additional piece of the dividend change puzzle in place by analyzing how stock market liquidity influences dividend changes for a panel of European firms from 2006 to 2014. The theoretical impact of stock liquidity on dividend changes is ambiguous: it can be either substitutive or complementary. Because the results can vary with the classification techniques applied, traditional techniques such as regression analysis and linear discriminant analysis are used alongside the tree-based machine learning methods decision tree, random forest and gradient boosting. Even though there are considerable differences among those classification techniques, the results provide a clear picture: stock liquidity influences dividend changes in Europe with statistical significance. Further, the panel logit and the linear discriminant and decision tree analysis show that the direction of influence is positive. When the liquidity level is high or increases in comparison to the previous year, companies more likely increase and less likely decrease their dividends. Since company size and stock analysts are frequently analyzed as having influence on both dividend changes and liquidity levels, a moderation and mediation analysis is employed to test whether stock liquidity influences the effect of company size and stock analysts on dividend changes. It is found that stock liquidity has a moderating effect on the impact of company size on dividend changes; when companies’ stock liquidity is high, firms increase their dividends rather than in low liquidity surroundings, regardless of their company size. It is further found that stock liquidity mediates the influence of analyst coverage on the propensity for dividend increases. These results give a further possible explanation as to why the effect of stock market liquidity on dividend changes is complementary.