Reaching for Dividends, Price Pressure, and The Implications for Corporate Dividend Policy

Dr. Shiyang HUANG received his Ph.D. degree in finance from the London School of Economics in 2015.  He also holds a master degree and a bachelor degree in economics from Tsinghua University.  He joined The University of Hong Kong in 2015.
Shiyang’s research agenda focuses on financial economics and empirical asset pricing.  He has published research papers in several academic journals including Journal of Financial Economics, Management Science and Journal of Economic Theory.  He also won the best paper awards at academic conferences, including Best Paper Award at 7th Melbourne Asset Pricing Meeting, Conference Best Paper Award at China International Conference in Finance of 2019, Best Paper Award at 14th Annual Conference in Financial Economics Research by Eagle Labs (IDC) of 2017, Yihong Xia Best Paper Award at hina International Conference in Finance of 2015, Conference Best Paper Award at Paris December Finance Meeting of 2014,  IdR QUANTVALLEY / FdR Quantitative Management Initiative Research Award of 2013.
 

We propose a stock-level measure of dividend demand based on the “dividend pay day effect.” We first show that there exists a price pressure on dividend pay day, and such price pressure completely reverts after the dividend pay day. To justify that the dividend pay day effect captures investors’ demand for dividends, we conduct two tests and find: (1) young investors are more likely to reinvest their dividends on dividend-paying stocks; (2) stocks more heavily held by mutual funds in 401K retirement accounts experience a larger price pressure on dividend payment days. Based on our stock-level measure of dividend demand, we draw two implications. First, we find that the dividend pay day effect can significantly and negatively predict corporate dividend payouts. This effect is weaker when firm managers are more overconfident, suggesting that firms have a dividend catering behavior. Second, consistent with “reaching for dividends,” the dividend pay day effect is stronger when interest rates are higher. We use the COVID-19 pandemic to pin down the causal link between interest rates and the dividend pay day effect. The impact of interest rates on the dividend pay day effect suggests that monetary policy affects financial markets through the price pressure on dividend payments.