Dividend Policy

In their article, "Dividend Yields and Stock Returns: Evidence of Time Variation Between Bull and Bear Markets," Gombola and Liu suggest that there are persistent shifts in the relationship between stock returns and dividend yields among bull and bear markets. This research examines the article and considers the ramifications of the article on managers' decision-making process and capital budgeting techniques.

Gombola and Liu find that dividend yield is positively related to return during bear markets, but negatively related to return to bull markets. It is the time variance between the two markets which the authors suggest help explain the unusual results of earlier studies.

In order to conduct their study, the authors first set three definitions for bull (up) and bear (down) markets (

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planning their activities. Dividend policy is set by the board of directors of a corporation, but it is up to the management to ensure that enough resources are available to maintain that policy. Dividend policy is not a subject to be taken lightly since any deviations in policy can signal a downturn in the organization's fortunes, or a significant change in the company's strategy. Because of the long-term effect of dividend policy, most boards are reluctant to make significant changes in dividends. Increases are made slowly, to ensure that the company can sustain the additional demands on its resources without negatively affecting its competitive position. Thus it is that during bull markets, when the price of the stock is steadily advancing, that the yield would advance more slowly, or perhaps not at all, depending on the dividend strategy of the officers. If the dividend remains steady or increases at a slower rate than the price, the yield will drop. In this manner, there would be a negative relationship between yield and return during bull markets. Directors are even more cautious about reducing a dividend. Suspending a dividend or reducing it signals to the outside world that the company is in trouble, causing the s
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Approximate Word count = 1472
Approximate Pages = 6 (250 words per page)

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