The effect of dividend policy on share price volatility: an analysis of Mediterranean banks’ stocks

Abstract

Purpose The purpose of this paper is to investigate the relationship between the share price volatility of Mediterranean banks and their dividend policies, with particular emphasis on the variation of results across sub-samples and the outcomes when omitting outlier observations. Design/methodology/approach The authors use dividend yield and dividend payout as proxies of dividend policy, and regress these ratios together with other control variables to model volatility. The robustness of the results is assessed by re-using a data set which omits the outliers relating to the aftermath of the 2007 financial crisis and by forming sub-samples using cluster analysis. Findings The results show that the elimination of outliers and the setting up of sub-samples lead to different inferences about the underlying relationship between dividend policy and volatility. In addition traditional indicators of statistical significance may give the impression of a robust relationship, when this may not be the case. Practical implications The paper offers insights to stock traders and corporate managers in terms of better understanding the effect of dividend policies on share price volatility and its related risks and opportunities. Originality/value The study presents noteworthy empirical evidence in terms of its rigorous approach towards checking the robustness of results.