Does stock liquidity determine dividend policy? New evidence from an emerging market

Abstract

This paper aims to test the relationship between stock liquidity and dividend policy using a sample of UAE-listed firms during the period from 2013 to 2019. A panel regression model was applied on data from 42 firms listed on Dubai’s financial market and the Abu Dhabi stock exchange. The findings, which show that dividend policy is positively related to stock liquidity, are robust across different stock liquidity measures. Furthermore, we found that the impact of stock liquidity on dividend policy is stronger in small firms where the level of information is low. This paper provides evidence that stock liquidity has a positive impact on dividend policy, which supports the argument that stock liquidity provides information to the market and therefore encourages insiders to pay out dividends. The findings of this study can help researchers, analysts and investors to better understand the implications of stock liquidity on corporate policies. The study also contributes to our understanding of whether managers use dividend policy as a corporate tool to deal with information asymmetry.