Dividend Crash Risk PDF

The Bright Side of Paying Dividends: Evidence from Stock Price Crash Risk
Jeong-Bon Kim*
Department of Accountancy
City University of Hong Kong
Kowloon, Hong Kong, China
Email: jeongkim@cityu.edu.hk
Le Luo
Department of Accounting
Huazhong University of Science and Technology
Wuhan 430074, China
Email: luole@hust.edu.cn
Hong Xie
Von Allmen School of Accountancy
University of Kentucky
Lexington, Kentucky 40506, USA
Email: hongxie98@uky.edu
First draft: October 2013

Current version: September 2018
* Corresponding author (phone: +852 34427909).
We thank Leonce Bargeron, Brian Bratten, Monika Causholli, Ken Y. Chen, Mei Feng, Kristine Hankins, Paul Hribar,
Ying Huang, Bin Ke, Jing Liu, Matt Sooy, Ya Tang, Wei Zhu, participants at the 2013 University of Kentucky Fall
Accounting Colloquium, 2014 CKGSB Accounting Colloquium, 2014 AAA Annual Meeting, the joint workshop
between National Taiwan University and Peking University, Southwestern University of Finance and Economics
accounting workshop, and University of Kentucky finance brownbag for comments and suggestions. Hong Xie
acknowledges financial support from Gatton College of Business and Economics at University of Kentucky.

Electronic copy available at: https://ssrn.com/abstract=3127275

ABSTRACT: We examine the economic benefits of paying dividends from the perspective of
stock price crash risk. We find that dividend payments mitigate stock price crash risk. In addition,
we show that dividend payments reduce bad news hoarding (overinvestment) while bad news
hoarding (overinvestment) is positively associated with stock price crash risk, suggesting that
curbing bad news hoarding and curtailing overinvestment are two channels through which
dividend payments mitigate crash risk. Finally, our main results are robust to various sensitivity
checks including controls for potential endogeneity concerns. Our findings are important because
they (1) suggest that dividend payments, an easily observable cue, can help investors assess crash
risk and thus adjust their investment portfolios, (2) support some policymakers’ proposition that
dividend payments constrain managerial misreporting and protect shareholders (e.g., Breeden,
2003; Glassman, 2005), and (3) complement a recent literature about dividend payments
enhancing earnings quality (e.g., Skinner and Soltes, 2011) by adding that dividend payments
generate a net economic benefit in the form of reduced crash risk, curbed bad news hoarding, and
curtailed overinvestment.
Keywords: Dividends; Crash risk; Information asymmetry; Agency theory; Managerial

disclosure quality
Data Availability: Data used in this study are available from public sources identified in the text.


1. Introduction
A recent literature documents that earnings quality of dividend-paying firms is higher than
that of non-dividend-paying firms, where earnings quality is proxied by earnings persistence
(Skinner and Soltes, 2011), absolute discretionary accruals and accruals quality (Tong and Miao,
2011), fraudulent reporting (Caskey and Hanlon, 2013), and audit fees (Lawson and Wang, 2016).
These findings support some policymakers’ beliefs that paying dividends constrains managerial
earnings manipulation (Breeden, 2003) and protects shareholders (Glassman, 2005).1 However,
prior studies focus primarily on various aspects of earnings quality and have largely neglected the
economic consequences or benefits of paying dividends, which are important for us to have a
complete understanding of the governance role that dividends play.2 In this study, we fill this void
and examine the economic benefits of paying dividends by exploring whether a firm’s dividend
payments affect stock price crash risk—the occurrence of extreme negative stock returns—and, if
yes, the channels through which dividend payments affect stock price crash risk.
Stock price crash risk is a particularly relevant avenue for examining economic benefits.
First, stock price crashes cause significant losses in investors’ wealth and in their confidence in

1
In a 149-page report titled “Restoring Trust,” Richard Breeden, the WorldCom’s court-appointed corporate monitor,
states that “dividends are another method of gauging the reality of reported earnings. The ability to pay dividends is
dependent on the availability of cash, and significant differences between the levels of reported earnings and cash
available for dividends would eventually be a red flag of potential problems.” He recommends that WorldCom “should
set a target of paying annual dividends of at least 25% of the Company’s net income” because he believes that paying
dividends will make it harder for the company to play accounting games (Breeden, 2003). In 2002, when a
congressional committee asked James Glassman, a senior fellow at the American Enterprise Institute and a member
of the Investor Advisory Committee of the Securities and Exchange Commission (SEC) during 2012-2015, to testify
on “how to protect investors against another Enron,” he advised ending the double taxation of dividends in order to
give companies incentives to increase payouts and said that encouraging dividend payments is probably “the single
most important legislative step that can be taken to protect shareholders (emphasis added)” because dividends are the
most transparent evidence of profits (Glassman, 2005).
2
Dividends play a governance role by mitigating agency costs. This governance role can manifest itself in enhanced
earnings quality and reduced probability of fraudulent reporting as documented in prior studies or in reduced stock
price crash risk as documented in this study.
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the capital markets (DeFond et al., 2015) and thus are of great concern to both investors and
policymakers. The occurrence (non-occurrence) of stock price crashes, therefore, is itself a natural
gauge of economic costs (benefits). In agreement with this notion, Bao et al. (2018) use stock price
crash risk to gauge the net cost or benefit of adopting clawback provisions and document a net cost
in the form of increased crash risk after a firm voluntarily adopts clawback provisions in executive
officers’ compensation contracts. Our paper is similar to Bao et al. (2018) in using crash risk as a
gauge of economic costs or benefits. Second, prior studies on stock price crash risk hypothesize
but do not directly test that (i) bad news hoarding and (ii) overinvestment are two underlying causes
for stock price crashes. By examining the channels through which dividend payments affect stock
price crashes, we shed light on whether dividend payments curb bad news hoarding and curtail
overinvestment, thereby revealing additional economic benefits of paying dividends.
We predict that dividend payments reduce crash risk drawing on two lines of prior
literature. First, Jensen (1986) points out that managers tend to overinvest and to grow their firms
beyond the optimal size (empire-building). He identifies free cash flows, i.e., cash flows in excess
of what are needed to fund positive NPV projects, as a major source that enables managers to
overinvest and recommends paying dividends to reduce free cash flows. In reviewing the dividend
literature in the past two decades prior to 2014, Farre-Mensa et al. (2014, p. 77) conclude that
“[t]he accumulated evidence on payout and agency indicates that firms use payouts to reduce
potential overinvestment by management.” If dividends curtail overinvestment, they lower stock
price crash risk.
Second, dividend payments reduce the need for bad news hoarding because dividend
payments curtail overinvestment, which usually leads to subsequent bad news and the need for
hiding such bad news. In addition, Easterbrook (1984) and Jensen (1986) point out that dividend
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payments increase the possibility that firms need to access external capital markets to raise funds.
Dividend payments, thus, subject managers to external scrutiny and discipline by outside capital
providers and market intermediaries, which, in turn, reduces managers’ abilities to hide bad news.
To the extent that dividend payments curb managerial bad news hoarding, they reduce stock price
crash risk.
We first test our baseline hypothesis that dividend payments are negatively associated with
stock price crash risk. Following Chen et al. (2001), Hutton et al. (2009), and Kim et al. (2011),
we adopt two measures of firm-specific stock price crash risk: (1) the likelihood of the occurrence
of extreme negative firm-specific weekly returns and (2) the negative conditional skewness of
firm-specific weekly returns. Using a large sample of 74,435 firm-year observations during 1991-
2015 from the intersection of Compustat and CRSP, we find that crash risk is significantly and
negatively associated with dividend yield. This suggests that dividend-paying firms are less prone
to stock price crashes than non-dividend-paying firms, consistent with our first hypothesis.
Second and more importantly, prior literature suggests that bad news hoarding and
overinvestment are two underlying causes for stock price crashes but provides only indirect
evidence consistent with bad news hoarding causing stock price crashes. For example, Kim and
Zhang (2016) show that the negative association between conservatism and stock price crashes
varies in the cross-section and is more pronounced for firms with greater information asymmetry,
i.e., information asymmetry moderates the negative association between conservatism and crash
risk. Since information asymmetry is related to bad news hoarding, they interpret the finding as
suggesting that conservatism mitigates crash risk by curbing bad news hoarding.3 We argue that

3
When developing Hypothesis 2, Kim and Zhang (2016, p. 416) state that “a key point underlying Hypothesis 1 is
that conservatism curbs managerial incentives to hide private negative information. … in an environment of high
information asymmetry, conservatism plays a more important role in countering managerial incentive to withhold
negative information and has a stronger impact on crash risk.”
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such studies based on a cross-sectional moderating analysis provide only indirect evidence. To
provide direct evidence that bad news boarding and overinvestment are two underlying causes for
stock price crashes, we explicitly measure bad news hoarding and overinvestment and follow a
two-stage mediation analysis procedure outlined in Hammersley (2006) and He and Tian (2013).
Specifically, we adopt a novel measure of bad news hoarding from Roychowdhury and
Sletten (2012) and a measure of misinvestment (i.e., over- or under-investment) from Chen et al.
(2011) and Biddle et al. (2009). In the first stage, we regress bad news hoarding (misinvestment)
on dividends and control variables for bad news hoarding (misinvestment). In the second stage,
we regress crash risk on bad news hoarding (misinvestment), dividend payments, and control
variables for crash risk. We find that dividend payments reduce bad news hoarding in the first
stage regression whereas bad news hoarding associates positively with stock price crashes in the
second stage regression, suggesting that curbing bad news hoarding is equivalent to reducing crash
risk because bad news hoarding is positively related to crash risk. Similarly, we document that
dividend payments reduce overinvestment but exacerbate underinvestment in the first stage
regression; however, only overinvestment associates positively with stock price crashes in the
second stage regression. This suggests that curtailing overinvestment is equivalent to reducing
crash risk because overinvestment is positively related to crash risk. To sum, the above findings
are consistent with our second hypothesis and provide direct evidence that curbing bad news
hoarding and curtailing overinvestment are two channels (or mediating variables) through which
dividend payments mitigate crash risk.
Third, we address potential endogeneity concerns for dividend payments using three
approaches. Our first approach is to exploit an exogenous shock—the Jobs and Growth Tax Relief
Reconciliation Act of 2003 (the 2003 Tax Act) which reduced tax rates on both capital gains and
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dividends and also removed the tax penalty on dividends. This exogenous shock motivated many
firms to initiate dividends for the first time (Chetty and Saez, 2005). Using a difference-in-
differences design, we find that dividend initiators experience a decrease in crash risk subsequent
to the 2003 Tax Act, relative to control firms that do not pay dividends both before and after the
Act. Our second approach is to directly control for potential self-selection bias using the Heckman
(1979) two-stage regressions. We continue to find that dividends are negatively associated with
crash risk after controlling for self-selection. Our third approach is to use a matching method,
which mitigates a specific type of endogeneity called functional form misspecification (Shipman
et al., 2017). Following DeFond et al. (2017), we use the Coarsened Exact Matching (CEM) to
pair dividend-paying firms with non-dividend-paying firms on a set of firm characteristics. Again,
we find that dividend payments are negatively associated with crash risk using the CEM sample.
In short, our main results remain robust to above controls for potential endogeneity. Finally, our
main finding that dividend payments are negatively associated with stock price crash risk is robust
to several additional sensitivity checks. We also find no association between dividend payments
and the likelihood of stock price jumps, a diametrical opposite of stock price crashes. This suggests
that dividend payments are not associated with fat-tailed distributions of stock returns (i.e., the
extreme negative tail and extreme positive tail) in general but are specifically associated with the
reduction in the extreme negative tail of stock return distributions.
There is a significant change in corporate payout policy in the past decades with the
percentage of firms paying dividends (engaging in stock repurchases) decreasing (increasing) over
time (Fama and French, 2001; DeAngelo et al., 2004; Skinner, 2008). Similar to Skinner and Soltes
(2011), we include stock repurchases along with dividends in all our tests. We find that stock
repurchases, similar to dividends, also reduce crash risk. Out of our five measures of crash risk,
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the effects of stock repurchases are smaller than (equal to) the effects of dividends in three (two)
measures. Thus, we find some evidence that stock repurchases reduce crash risk to a lesser extent
than dividends. This is consistent with the notion that stock repurchases are payout of transitory
increases in earnings (Skinner, 2008) and are a weaker commitment to distribute cash than
dividends (Skinner and Soltes, 2011). Another difference is that stock repurchases are significantly
positively associated with the likelihood of stock price jumps while dividends are not associated
with the likelihood of stock price jumps at all.
Our study contributes to the literature in several ways. First, we are the first to document a
net economic benefit of paying dividends in the form of reduced crash risk, in the same spirit as
Bao et al. (2018) who document a net economic cost of adopting clawback provisions in the form
of increased crash risk. Our finding is important to investors because it suggests that dividend
payments, an easily observable cue, can help investors assess stock price crash risk and thus adjust
their investment portfolios.4 Our finding is also important to policymakers because it supports
some policymakers’ proposition that dividend payments constrain managerial misreporting and
protect shareholders (e.g., Breeden, 2003; Glassman, 2005).
Second, we explicitly measure bad news hoarding following Roychowdhury and Sletten
(2012) and show that dividends curb bad news hoarding, i.e., dividend payments mitigate the
managerial “asymmetric disclosure behavior” (good news is leaked to the market early whereas
bad news is withheld to the last minute) documented in Kothari et al. (2009) and Roychowdhury
and Sletten (2012). This finding is important because it complements a recent literature about
dividend payments enhancing earnings quality. 5 Our finding suggests that dividend payments

4
Lawson and Wang (2016) make a similar observation that dividend payments are “an easily observable cue to
auditors and others that can be used when assessing a firm’s earnings quality.”
5
Important papers in this literature include the following. Skinner and Soltes (2011) and Tong and Miao (2011)
document that dividends enhance earnings quality when earnings quality is proxied by earnings persistence, absolute
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mitigate a bias in corporate disclosure towards hiding bad news in addition to enhancing earnings
quality documented in prior studies. Curbing bad news hoarding enhances disclosure quality and
is related to but distinct from various measures of earnings quality examined in prior studies.
Moreover, our finding that dividend payments reduce crash risk further complements the recent
dividends-enhancing-earnings-quality literature by adding that dividend payments generate a net
economic benefit in the form of reduced crash risk, i.e., enhanced earnings quality for dividend-
paying firms documented in prior studies does matter economically. In sum, our study is closely
related to the recent dividends-enhancing-earnings-quality literature. We differ from prior studies
in our focus on crash risk, bad news hoarding, and overinvestment.
Third, we directly measure misinvestment and show that dividends curtail overinvestment
although they exacerbate underinvestment. Prior studies have examined the effect of dividends on
mitigating overinvestment. One line of research examines abnormal stock returns around dividend
announcements for firms with poor investment opportunities and excess cash (Lang and
Litzenberger, 1989; Lie, 2000; Officer, 2011). Positive abnormal returns are interpreted as
dividends reducing the agency costs of overinvestment or excess cash. Another line of research
examines dividend payments and firms’ life cycle. DeAngelo et al. (2006) and Denis and Osobov
(2008) document that dividend payments are concentrated among large, profitable, and mature
firms. Since it is reasonable to expect that firms in the mature stage of life cycle have positive free
cash flows, findings in this latter line of research are consistent with the view that dividend
payments reduce free cash flows. Importantly, both lines of research provide only circumstantial
evidence that dividends mitigate overinvestment or excess cash. In contrast, we explicitly measure

discretionary accruals, accruals quality, and earnings value relevance. Caskey and Hanlon (2013) find that paying
dividends discourages earnings manipulation and constrains fraudulent reporting. Lawson and Wang (2016) document
that dividend-paying firms pay lower audit fees than non-dividend-paying firms after controlling for common
determinants of audit fees, suggesting that auditors perceive earnings quality of dividend-paying firms as higher.
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over- or under-investment, and show directly that dividends reduce overinvestment but exacerbate
underinvestment. These findings are consistent with Ramalingegowda et al. (2013) who find that
dividends constrain firms’ total investment and that high-quality financial reporting mitigates such
a constraining effect. Our findings complement Ramalingegowda et al. (2013) by suggesting that
the constraining effect of dividends on total investment is harmful only for underinvestment firms;
constraining overinvestment, in contrast, is one of the economic benefits of paying dividends.
The paper proceeds as follows. Section 2 reviews the relevant literature and develops our
hypotheses. Section 3 describes the sample and variable measurement. Section 4 presents
descriptive statistics, regression models, and multivariate regression results. Section 5 contains
additional analyses. The final section concludes.
2. Literature review and hypothesis development
2.1. Dividends and agency costs
Modigliani and Miller (1958) show that dividend policy is irrelevant (i.e., does not affect
firm value) when (1) capital markets are perfect, (2) there are no agency conflicts and asymmetric
information, and (3) there are no taxes and transaction costs. Relaxing one or more of these
assumptions, a large literature has emerged that attempts to find a role for dividends and explain
why firms pay dividends. As the dividend literature is huge, we only review a strand of research
that hypothesizes and tests a role of dividends in mitigating agency costs.
2.1.1 Role of dividends in curtailing overinvestment
Jensen (1986) points out that free cash flows are a major source of agency conflicts because
free cash flows enable managers to overinvest and pursue other “empire-building” activities that
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maximize managers’ private benefits but reduce shareholder value. 6 He argues that paying
dividends reduces free cash flows and thus constrains managers’ ability to squander shareholder
wealth. Prior studies are generally consistent with the Jensen (1986) proposition that dividend
payments reduce agency costs of free cash flows. One line of prior studies examines abnormal
stock returns around dividend announcements for firms with poor investment opportunities and
excess cash. For example, Lang and Litzenberger (1989) use Tobin’s Q ratios as a proxy for
corporate investment opportunities with high (low) Tobin’s Q implying good (poor) investment
opportunities. They find significantly larger stock returns to an increase in dividend payment for
firms with poor investment opportunities (Tobin’s Q less than unity) than for those with good
investment opportunities (Tobin’s Q greater than unity), consistent with dividends reducing
agency costs of free cash flows. Using samples of firms with special dividends, regular dividend
increases, and share repurchases, Lie (2000) finds that all three types of firms tend to have funds
in excess of industry norms before the events. In addition, he shows that the market reaction to the
announcement of repurchases and large special dividends is positively related to the firm’s amount
of excess cash and negatively related to the firm’s investment opportunity set as measured by
Tobin’s Q. These results are consistent with the view that dividends reduce potential
overinvestment, especially for firms with limited investment opportunities, and enhance
shareholder wealth. Officer (2011) finds that firms with low Tobin’s Q and high cash flows have
significantly more positive dividend initiation announcement returns than do other firms. He

6
For example, Harford (1999) documents that cash-rich firms are more likely than other firms to attempt acquisitions
and that their acquisitions are value-destroying as evidenced by negative abnormal returns around acquisition
announcements. Bates (2005) examines the allocation of cash proceeds following 400 subsidiary sales. He finds that
firms that retain cash systematically overinvest relative to an industry benchmark. Finally, Richardson (2006) provides
large sample evidence that firms with high levels of free cash flows overinvest in non-value-maximizing projects or
activities.
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interprets this result as consistent with the hypothesis that dividends reduce the agency costs of
overinvestment for firms with poor investment opportunities and ample cash flows.
Another line of prior studies examines dividend payments and the life cycle of firms.
DeAngelo et al. (2006) examine U.S. firms, and find that the probability of firms paying dividends
is higher when these firms’ retained earnings scaled by total equity are higher. A high ratio of
retained earnings to total equity is characteristic of mature firms. Denis and Osobov (2008) find
that, in the U.S., Canada, U.K., Germany, France, and Japan, the propensity to pay dividends is
higher for larger and more profitable firms and firms whose retained earnings comprise a large
fraction of total equity. These two studies suggest that dividend payments are concentrated among
large, profitable, and mature firms. With the assumption that firms in the mature stage of life cycle
have positive free cash flows, the above studies support the notion that dividend payments reduce
free cash flows. In sum, the above two lines of studies provide circumstantial evidence that
dividend payments mitigate free cash flows and overinvestment.
2.1.2 Role of dividends in curbing bad news hoarding
Because dividends reduce overinvestment, they reduce managers’ need or incentives for
bad news hoarding. This is because overinvestment leads to bad news and thus the need for hiding
bad news. In addition, Easterbrook (1984) and Jensen (1986) posit that dividend payments increase
the possibility that firms will have to raise external funds, which subjects managers to close
scrutiny of the external capital markets. In brief, dividends curb bad news hoarding by reducing
(1) managers’ incentives for hiding bad news through reducing overinvestment and (2) managers’
ability to hide bad news by subjecting managers to external monitoring.
Several studies find evidence supporting the monitoring and disciplining role of dividends.
Rozeff (1982) finds that firms establish higher dividend payouts when insiders hold a lower
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fraction of the equity (i.e., greater agency conflicts) or a greater number of outside shareholders
(i.e., less outsider shareholder monitoring). This evidence supports the view that dividends serve
to reduce agency costs. Noronha et al. (1996) test Easterbrook’s (1984) monitoring rationale for
paying dividends, which, they argue, depends on the existence of alternative sources of monitoring.
They stratify their sample into subsamples according to the prevalence of non-dividend monitoring
mechanisms and growth-induced capital market monitoring, and then re-estimate the Rozeff
(1982) specification. They hypothesize that the Rozeff (1982) effects are present only for the
subsample with low non-dividend monitoring and low growth-induced capital market monitoring
(i.e., the subsample where dividends-induced monitoring is needed) and find evidence consistent
with their hypothesis. Finally, Leary and Michaely (2011) examine the determinants of dividend
smoothing (i.e., maintaining stable dividend payments). Consistent with dividends playing a
monitoring role to mitigate agency costs (Easterbrook, 1984; Jensen, 1986), they find that firms
that smooth dividends the most are those most susceptible to agency conflicts, i.e., firms that are
cash cows, with low growth prospects, and weaker governance. To sum, the above studies suggest
that dividend payments reduce agency costs and/or subject managers to the discipline of external
capital markets. To the extent that dividends reduce overinvestment and subject managers to
external scrutiny, they curb managers’ incentives and abilities to hoard bad news.
2.2. Determinants of stock price crash risk
A growing body of research has investigated external and internal determinants of stock
price crash risk. Chen et al. (2001) test a model in which investor heterogeneity in opinions,
coupled with short sale constraints for some investors, leads to stock price crashes. The underlying
cause for stock price crashes in their model is the accumulation of bad news induced by an external
financial market characteristic, short sale constraints, rather than a firm’s internal causes. In
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contrast, Jin and Myers (2006) develop and test a model where a firm’s internal characteristics,
such as agency conflicts between corporate insiders and outside investors, combined with
opaqueness of the firm to outside investors, cause stock price crashes. They find that information
opaqueness increases the lieklihood of stock price crashes, consistent with their model predictions.
Jin and Myers (2006) measure opaqueness at the country-year level, i.e., the average
opaqueness of all firms in a country in a year. Their opaqueness measure, therefore, is not a firm-
specific variable. Hutton et al. (2009) extend Jin and Myers (2006) by examining the relation
between the crash risk of individual firms and a firm-specific measure of financial reporting
opaqueness—the sum of absolute discretionary accruals in prior three years. They find that a firm’s
financial reporting opacity increases the probability of stock price crash occurrence.
Since Hutton et al. (2009), a growing body of research has investigated firm-level
determinants of crash risk. First, Kim et al. (2011) find that tax avoidance provides managers with
masks and tools to hide bad news from shareholders and thus increases crash risk. Second, Kim et
al. (2016a) find that financial statement comparability alleviates bad news hoarding and thus
reduces crash risk. Hong et al. (2017) show that the deviation of ownership rights from control
rights in dual class firms, combined with financial reporting opacity, increases stock price crash
risk, because opaque firms with higher ownership-control deviation can withhold bad news more
aggressively. Third, Callen and Fang (2015) argue that religion, as a set of social norms, helps
curb managerial bad news hoarding and find that firms headquartered in counties with higher
religiosity are less prone to stock price crashes. To summarize, the above studies identify
determinants of stock price crashes that are related to bad news hoarding.
Agency theory suggests that managers have incentives to overinvest or delay the
termination of negative NPV projects to maximize their own private benefits (Jensen, 1986).
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Recent studies investigate whether managerial tendency to overinvest or to keep bad projects alive
for too long leads to stock price crashes. First, in analyzing the problems of historical cost
accounting, Bleck and Liu (2007) analytically show that historical costs enable managers to hide
bad news about unprofitable projects and keep these unprofitable projects alive for too long by
recording these projects at historical costs when their market values are lower, thereby, increasing
the likelihood of asset price crashes. Second, Benmelech et al. (2010) show that stock-based
compensation induces managers to conceal bad news about growth options and to choose sub-
optimal investment policies to support the pretense of high growth. Thus, bad news and
unprofitable investments accumulate over time and eventually lead to stock price crashes. Third,
Kim et al. (2016b) argue that overconfident CEOs tend to ignore bad news, which is equivalent to
hoarding bad news. Moreover, overconfident CEOs may misperceive negative NPV projects as
value increasing and thus keep negative NPV projects alive for too long. The accumulated bad
news and unprofitable investments will lead eventually to stock price crashes. To summarize, the
above studies identify determinants of stock price crashes that are related to overinvestment.
2.3. Hypotheses
Our review of the dividend literature suggests that dividends curb bad news hoarding and
curtail overinvestment. Our review of the crash risk literature reveals two fundamental causes for
stock price crashes: bad news hoarding and overinvestment. Our literature review thus suggests
that dividend payments reduce stock price crash risk. We state our first hypothesis in alternative
form below:
H1: Dividend payments are negatively associated with stock price crash risk, ceteris
paribus.
After establishing a negative association between dividend payments and stock price crash
risk, we further investigate whether dividend payments reduce bad news hoarding and
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overinvestment, thereby reducing crash risk. Note that prior literature reviewed above provides
only indirect or circumstantial evidence that dividends reduce bad news hoarding and
overinvestment. We are interested in directly examining whether curbing bad news hoarding and
curtailing overinvestment are two channels (or mediating variables) through which cash dividends
reduce crash risk. To this end, we explicitly measure bad news hoarding and overinvestment and
follow a two-stage mediation analysis procedure used in Hammersley (2006) and He and Tian
(2013). In the first stage, we regress bad news hoarding (or overinvestment) on dividends. In the
second stage, we regress crash risk on bad news hoarding (or overinvestment), along with dividend
payments. If dividend payments reduce crash risk through curbing bad news hoarding (curtailing
overinvestment), we predict that dividend payments are negatively associated with bad news
hoarding (overinvestment) in the first stage regression, while bad news hoarding (overinvestment)
is positively associated with crash risk in the second stage regression. Findings consistent with
these expectations establish curbing bad news hoarding and curtailing overinvestment as two
channels through which dividend payments reduce crash risk (Hammersley, 2006; He and Tian,
2013). We state our second hypothesis in alternative form below:
H2: Dividend payments are negatively associated with bad news hoarding
(overinvestment) while bad news hoarding (overinvestment) is positively associated with
stock price crash risk, ceteris paribus.
3. Sample and variable measurement
3.1. Sample selection
Our initial sample is obtained from the Compustat and CRSP merged files during 1991-
2015. We then delete firm-year observations where: (1) the book value of equity or total assets are
non-positive; (2) the fiscal year-end stock price is less than $1 per share; (3) there are less than 26
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weeks of stock returns in a 12-month period ending three months after the fiscal year-end; (4)
stocks are not traded on NYSE, AMEX, or NASDAQ; (5) firms are in financial and public utilities
industries (Skinner and Soltes, 2011); (6) dividends are not paid in U.S. dollars; and (7) control
variables (see below for definitions) are missing. The above process yields a sample of 74,435
firm-year observations during 1991-2015 (year t).
3.2. Measurement of dividend payments and firm-specific crash risk
We measure dividend payments in the prior year, year t–1, because we measure stock price
crashes in the current year, year t. In terms of year t–1, our sample period is from 1990 to 2014.
We adopt two dividend payment measures. First, DIV_YLDjt–1 is cash dividend yield, measured as
cash dividends paid in year t–1 (according to CRSP) divided by the fiscal year-end stock price.
For firms that do not pay cash dividends in year t–1, their DIV_YLDjt–1 is zero. We adjust for stock
splits and stock dividends so that dividends and stock prices are on the same split-adjusted basis.
Second, DIV_DUMjt–1 is a dummy variable set to one if firm j pays cash dividends in year t–1 (i.e.,
DIV_YLDjt–1 > 0) and zero otherwise.
We adopt two measures of firm-specific crash risk. Following Hutton et al. (2009), Kim et
al. (2011), and Kim and Zhang (2016), our first measure of crash risk is an indicator variable for
the existence of crash weeks in a year. To identify crash weeks, we first calculate firm-specific
weekly returns (Wjτ) for each firm-year observation in our sample. Wjτ is defined as the natural log
of one plus the residual return (εjτ), i.e., Wjτ = log(1 + εjτ), and εjτ is estimated from the following
expanded market model:
rjτ = aj + b1jrmτ–2 + b2jrmτ–1 + b3jrmτ + b4jrmτ+1 + b5jrmτ+2 + εjτ, (1)
where rjτ is the raw stock return for firm j in week τ of year t and rmτ is the CRSP value-weighted
market index return in week τ of year t. As in Kim et al. (2011), we include the lead and lag terms
- 15 -


for the market index return to allow for nonsynchronous trading (Dimson 1979; Scholes and
Williams 1977).
We estimate Eq. (1) for firm j in year t using its weekly returns in the 12-month period
ending three months after the firm’s fiscal year end, requiring at least 26 weekly returns in year t.
We define crash weeks for firm j in year t as those weeks in which firm-specific weekly returns
(Wjτ) are 3.2 standard deviations below the mean firm-specific weekly returns in year t.7 Following
prior literature (Hutton et al. 2009; Kim et al. 2011), our first measure of firm-specific crash risk,
CRASHjt, is an indicator variable set to one if there is at least one crash week for firm j in year t,
and zero otherwise.
Our second measure of firm-specific crash risk is the negative conditional skewness of
firm-specific weekly returns, NCSKEWjt, as used in Chen et al. (2001) and Kim et al. (2011).
Specifically, NCSKEWjt for firm j in year t is the negative of the third moment of firm-specific
weekly returns in year t, divided by the cubed standard deviation of firm-specific weekly returns.
That is,
/ /
NCSKEWjt = 𝑛 𝑛 1 ∑𝑊 / 𝑛 1 𝑛 2 ∑𝑊 , (2)
where Wjτ is the firm-specific weekly return for firm j in week τ of year t (defined earlier) and n is
the number of the firm-specific weekly returns in year t.
3.3. Control variables
Skinner (2008) documents that stock repurchases are increasingly used in place of
dividends, even for firms that continue to pay dividends, in the past three decades. Because stock
repurchases and dividends are alternative ways of payout, our arguments for why dividends reduce

7
In the normal distribution, 3.2 standard deviations below the mean indicate a frequency of less than 0.1%. A return
that is 3.2 standard deviations below the mean, thus, is an extreme negative tail event.
- 16 -


crash risk also apply to stock repurchases. However, stock repurchases represent a less strong
commitment to pay out cash than dividends (Skinner, 2008). Consequently, the effect of stock
repurchases on crash risk is likely to be smaller than the effect of dividends. We adopt two
measures of stock repurchases, repurchase amount (REP_AMTjt–1) and repurchase dummy
(REP_DUMjt–1), corresponding to the two measures of dividends (DIV_YLDjt–1 and DIV_DUMjt–
1). We control for REP_AMTjt–1 (REP_DUMjt–1) when the dividends variable is DIV_YLDjt–1
(DIV_DUMjt–1). See Appendix A for definitions of all variables.
Following Chen et al. (2001) and Hutton et al. (2009), we include nine additional control
variables in our analyses. First, the variable NCSKEWjt–1 is the negative conditional skewness of
firm-specific weekly returns in year t–1. We control for NCSKEWjt–1 because Chen et al. (2001)
find that firms with high return skewness in year t–1 are likely to have high return skewness in
year t as well. Second, the variable DTURNjt–1 is the detrended average monthly share turnover.
We control for DTURNjt–1 because Chen et al. (2001) use DTURNjt–1 as a proxy for differences of
opinions among investors and find that it is positively related to crash risk. Third, the variable
SIGMAjt–1 is the standard deviation of firm-specific weekly returns, a measure of return volatility.
We control for SIGMAjt–1 because Chen et al. (2001) show that more volatile stocks are more likely
to experience stock price crashes in the future. Fourth, the variable RETjt–1 is the average firm-
specific weekly returns. We control for RETjt–1 because Chen et al. (2001) document that past stock
returns are positively related to crash risk. Fifth, the variable SIZEjt–1 is firm size. We control for
SIZEjt–1 because Chen et al. (2001) show that larger firms are more likely to have stock price
crashes. Sixth, the variable LEVjt–1 is financial leverage. We control for LEVjt–1 because Hutton et
al. (2009) and Kim et al. (2011) both show that leverage is negatively related to crash risk. Seventh,
the variable MBjt–1 is the market-to-book ratio. We control for MBjt–1 because Chen et al. (2001)
- 17 -


and Hutton et al. (2009) both report that growth firms are more likely to experience stock price
crashes. Eighth, the variable ROAjt–1 is return on assets. We control for ROAjt–1 because Hutton et
al. (2009) and Kim et al. (2011) find that it is negatively related to crash risk although Kim and
Zhang (2016) show that it is positively related to crash risk when crash risk is measured using the
negative conditional skewness (NCSKEWjt). 8 Finally, the variable ACCMjt–1 is a measure of
financial reporting opaqueness used in Hutton et al. (2009). We control for ACCMjt–1 because
Hutton et al. (2009) show that it is positively related to crash risk. See Appendix A for details of
variable definitions.
4. Empirical Findings
4.1. Summary statistics
Table 1 reports the yearly distribution of our sample of 74,435 observations. The number
of observations in each year varies, with a minimum of 2,254 in 1991 and a maximum of 3,626 in
1999. The percentage of firms with stock price crashes (i.e., CRASHjt = 1) varies from 11.8%
(minimum) in 1995 to 23.9% (maximum) in 2015, with a mean of 17.2% in our sample period.
Our annual percentages of crashes are comparable to those reported in Kim et al. (2011) and other
prior studies. Overall, we also notice that the crash likelihood captured by CRASH is higher in the
later period of 2003-2015 than in the earlier period of 1991-2002.
[Insert Table 1 here]
Panel A of Table 2 presents descriptive statistics for our sample. To alleviate the influence
of extreme observations or outliers, we winsorize all continuous variables at the top and bottom
one percentiles in each year. The mean CRASHjt is 17.2% in our sample period. That is, 17.2% of

8
Callen and Fang (2015) find that return-on-equity, a measure closely related to return-on-assets, is positively related
to their measures of crash risk.
- 18 -


our sample observations experience one or more stock price crash weeks in year t. The mean and
median NCSKEWjt are -0.113 and -0.134, respectively. Regarding our dividend measures, the
mean (median) dividend yield, DIV_YLDjt–1, is 0.010 (0), suggesting that most firms in our sample
do not pay cash dividends. Similarly, the mean DIV_DUMjt–1 (dividend dummy) is 0.381,
suggesting that only 38.1% of our sample observations pay cash dividends.
Turning to control variables, the average amount of stock repurchases (REP_AMTjt–1) is
1.4% of market capitalization. The mean REP_DUMjt–1 is 0.410, suggesting that 41.0% of our
sample observations engage in stock repurchases. The descriptive statistics for other control
variables are roughly comparable to those reported in Kim et al. (2011). For example, our mean
and median ACCMjt–1 are 0.233 and 0.168, respectively. The counterparts in Kim et al. (2011) are
0.210 and 0.162, respectively.
Table 2, Panel B, reports Pearson correlations among our main variables. First, our two
measures of crash risk (CRASHjt and NCSKEWjt) are highly positively correlated with each other
(0.617, p-value = 0.000), consistent with prior studies. Second, cash dividend yield (DIV_YLDjt–1)
is negatively correlated with CRASHjt (-0.023, p-value = 0.000), consistent with H1, but is
positively correlated with NCSKEWjt (0.007, p-value = 0.067), inconsistent with H1. Third, our
two measures of crash risk are positively correlated with NCSKEWjt–1, DTURNjt–1, RETjt–1, SIZEjt–
1, MBjt–1, and ROAjt–1, but are negatively correlated with SIGMAjt–1. These findings are consistent
with Kim et al. (2011). Finally, our ACCMjt–1 is insignificantly correlated with CRASHjt but
significantly and negatively correlated with NCSKEWjt, consistent with Kim et al. (2011).
4.2. Multivariate tests of H1
- 19 -


We use the following regression model to test our first hypothesis that dividend payments
are negatively associated with stock price crash risk (H1):
CRASHVARjt = α0 + α1DIVVARjt–1 + ∑ 𝛼 (qth ControlVARjt–1)
+ Year fixed effects + Industry fixed effects + εjt, (3)
where CRASHVARjt is one of our two crash risk measures, CRASHjt and NCSKEWjt; DIVVARjt–1
is one of the two dividend payment measures; and qth ControlVARjt–1 is one of the ten control
variables defined earlier. We also include year fixed effects and industry fixed effects to control
for potential differences in dividend payments over time and across industries. DIVVARjt–1 is our
test variable and a significantly negative coefficient on DIVVARjt–1 (α1 < 0) supports H1 that
dividend payments reduce crash risk.
We estimate Eq. (3) using logistic regressions when the dependent variable is CRASHjt, a
dummy variable for the occurrence of extreme price drops, and OLS regression when the
dependent variable is NCSKEWjt, a continuous variable of negative conditional skewness in a
firm’s weekly stock return distribution. To mitigate the potential cross-sectional and time-series
dependence in our panel data, we report p-values based on robust standard errors corrected for
double (firm and year) clustering following Petersen (2009) and Gow et al. (2010).
Table 3, columns (1) and (2), reports our findings of estimating Eq. (3) when the dependent
variable is CRASHjt using logistic regressions. As shown in column (1), the coefficient on
DIV_DUMjt–1, an indicator variable for paying cash dividends, is significantly negative (-0.186, p-
value = 0.000). In column (2), the coefficient on DIV_YLDjt–1, a continuous measure of dividend
yield that is zero for those stocks that do not pay cash dividends, is again significant and negative
(-3.106, p-value = 0.000). These negative coefficients are consistent with H1 and suggest that
stocks that pay dividends are less crash-prone than stocks that do not pay dividends.
- 20 -


We now turn to control variables in columns (1) and (2) of Table 3. The coefficient on
REP_DUMjt–1 in column (1) is significantly negative (-0.039, p-value = 0.066). This suggests that
stock repurchases, like dividends, also mitigate stock price crash risk. However, the coefficient on
REP_AMTjt–1 in column (2) is insignificant. As shown at the bottom of Table 3, the null hypothesis
that the coefficient on DIV_DUMjt–1 is equal to the coefficient on REP_DUMjt–1 in column (1) is
rejected (F-stat. = 16.32, p-value = 0.000). The null hypothesis that the coefficient on DIV_YLDjt–
1 is equal to the coefficient on REP_AMTjt–1 in column (2) is also rejected (F-stat. = 13.81, p-value
= 0.000). These results suggest that stock repurchases tend to mitigate crash risk to a lesser extent
than dividends when crash risk is measured by CRASHjt. The coefficients on other control variables
are mostly consistent with prior literature. For example, we find significantly positive coefficients
on NCSKEWjt–1, consistent with Chen et al. (2001) and Kim et al. (2011). Our coefficients on
DTURNjt–1 are significantly positive, again consistent with Chen et al. (2001) and confirming their
argument that differences of opinions among investors lead to stock price crashes. In addition, our
coefficients on RETjt–1, SIZEjt–1, MBjt–1, and ACCMjt–1 are all significantly positive, consistent with
Chen et al. (2001), Hutton et al. (2009), and Kim et al. (2011).
Table 3, columns (3) and (4), presents the findings of estimating Eq. (3) when stock price
crash risk is measured by NCSKEWjt using OLS regressions. As shown, the coefficient on
DIV_DUMjt–1 and that on DIV_YLDjt–1 are both significantly negative, consistent with H1 that
dividend payments are negatively associated with stock price crashes.
The coefficient on REP_DUMjt–1 in column (3) and that on REP_AMTjt–1 in column (4) are
both significantly negative. The null hypotheses that the coefficient on DIV_DUMjt–1 is equal to
the coefficient on REP_DUMjt–1 in column (3) and the coefficient on DIV_YLDjt–1 is equal to the
- 21 -


coefficient on REP_AMTjt–1 in column (4) cannot be rejected. This suggests that stock repurchases
reduce crash risk to a similar extent as dividends when crash risk is measured by NCSKEWjt.
4.3. Multivariate tests of H2
Following Hammersley (2006, footnote 14) and He and Tian (2013, pp. 875-876), we use
the following two-stage mediation analysis models to examine our second hypothesis that dividend
payments are negatively associated with bad news hoarding (overinvestment) while bad news
hoarding (overinvestment) is positively associated with stock price crash risk, i.e., curbing bad
news hoarding and curtailing overinvestment are two channels through which dividend payments
mitigate crash risk:
CHANNELjt–1 = β0 + β1DIV_YLDjt–1 + ∑ 𝛽 (qth ControlVARjt–1)
+ Year fixed effects + Industry fixed effects + εjt–1 (4)
CRASHVARjt = γ0 + γ1CHANNELjt–1 + γ2DIV_YLDjt–1 + ∑ 𝛾 (qth ControlVARjt–1)
+ Year fixed effects + Industry fixed effects + εjt, (5)
where CHANNELjt–1 refers to the channel through which dividends reduce crash risk, and is equal
to bad news hoarding (BNHRDjt–1) or misinvestment (MISINVESTjt–1). Roychowdhury and Sletten
(2012, p. 1683) predict and find that BNHRDjt–1 is larger in bad-news periods than in good-news
periods because managers have incentives to withhold bad news, i.e., BNHRDjt–1 being large is
due to withholding bad news to the last minute. We thus adopt BNHRDjt–1 as a measure of bad
news hoarding and larger values of BNHRDjt–1 indicate greater bad news hoarding. See Appendix
A for a more detailed definition of BNHRDjt–1 and explanation for why BNHRDjt–1 captures bad
news hoarding. Following Chen et al. (2011) and Biddle et al. (2009), we define MISINVESTjt–1
as the residuals from the investment model. Since a positive (negative) MISINVESTjt–1 indicates
overinvestment (underinvestment), we define OVERINVESTjt–1 (UNDERINVESTjt–1) as equal to
- 22 -


MISINVESTjt–1 when MISINVESTjt–1 is greater than (less than or equal to) zero. We include
DIV_YLDjt–1 in Eq. (5) following Hammersley (2006) and He and Tian (2013) to test whether
dividends remain significantly negative after controlling for the channel variable (BNHRDjt–1 or
MISINVESTjt–1). All other variables in Eqs. (4) and (5) are discussed in detail below.
4.4.1. Role of dividends in curbing bad news hoarding
We discuss our tests of the relation between dividend payments and bad news hoarding
and the relation between bad news hoarding and crash risk in this section. In the first stage, we
estimate Eq. (4) by regressing bad news hoarding (BNHRDjt–1) on DIV_YLDjt–1 and six control
variables. We include stock repurchases (REP_AMTjt–1) as our first control variable to examine
whether stock repurchases, like dividends, mitigate bad news hoarding. We control for firm size
(LogATjt–1), because prior studies (e.g., Botosan, 1997) find that firm size is positively associated
with disclosure level. Managers of larger firms, thus, may be less likely to hoard bad news. We
control for financial leverage (LEVjt–1) because Botosan (1997) find that leverage is positively
related to disclosure level. That is, firms with higher financial leverage are less likely to hoard bad
news. We control for the market-to-book ratio (MBjt–1). Growth firms have greater information
asymmetry and agency costs (Smith and Watts, 1992), and hence we expect that firm growth
opportunities are positively associated with disclosure level and negatively related to bad news
hoarding. We also control for profitability (ROAjt–1) because Lang and Lundholm (1993) argue
that disclosures are likely to be related to a firm’s profitability. However, empirical findings on
the relation between firm performance and disclosure is mixed. Lang and Lundholm (1993)
conclude that “the results from theoretical and empirical research suggest disclosure could be
increasing, constant, or even decreasing in firm performance.” Lastly, we control for Big N
- 23 -


auditors (BigNjt–1) because larger auditors, being economically less dependent on a client, may
demand the client to have greater disclosure.
In the second stage, we estimate Eq. (5) by regressing crash risk (CRASHjt or NCSKEWjt)
on the channel variable (BNHRDjt–1), dividends (DIV_YLDjt–1), and the same ten control variables
as in Eq. (3). A significantly negative coefficient on DIV_YLDjt–1 in Eq. (4) and a significantly
positive coefficient on BNHRDjt–1 in Eq. (5) are consistent with H2.
Panel A of Table 4 reports our findings from estimating Eq. (4) in the first stage regression.
The coefficient on DIV_YLDjt–1 is significantly negative (-49.365, p-value = 0.026), suggesting
that dividend payments mitigate bad news hoarding. The coefficient on REP_ATMjt–1, however, is
positive (35.451, p-value = 0.054). We conjecture that an important motivation for firms to
repurchase shares is to boost stock prices and thus firms may have incentives to withhold bad news
around the time of repurchases. The F-test at the bottom of Panel A rejects the null hypothesis that
the coefficient on DIV_YLDjt–1 is equal to that on REP_AMTjt–1 (F-stat. = 14.53, p-value = 0.000).
The coefficient on LogATjt–1 (firm size) is insignificant and the coefficients on LEVjt–1 and MBjt–1
are both significantly negative. The coefficient on ROAjt–1 is significantly positive and that on
BigNjt–1 is insignificant.
Panel B of Table 4 shows the regression results from estimating Eq. (5) in the second stage
regression. The coefficients on BNHRDjt–1 (bad news hoarding) are significantly positive,
irrespective of whether crash risk is measured by CRASHjt or NCSKEWjt. This suggests that bad
news hoarding is positively associated with crash risk. The coefficients on DIV_YLDjt–1 remain
significantly negative (-2.778, p-value = 0.000; -0.533, p-value = 0.017), and, as expected, the
magnitudes of the coefficients are smaller than their respective counterparts in columns (2) and (4)
- 24 -


of Panel A of Table 3 (-3.106, p-value = 0.000; -0.612, p-value = 0.010). Since controlling for the
channel variable (BNHRDjt–1) does not eliminate the significance of dividends, dividends have a
residual effect on crash risk beyond bad news hoarding (He and Tian, 2013).
To summarize, the results of our mediation analysis in Panels A and B of Table 4 show
that dividend payments reduce bad news hoarding and bad news hoarding is positively associated
with stock price crash risk. These findings suggest that curbing bad news hoarding reduces crash
risk and thus establish curbing bad news hoarding as a channel through which dividends reduce
crash risk (see Hammersley, 2006; He and Tian, 2013).
4.4.2. Role of dividends in curtailing overinvestment
In this section, we discuss our tests of the relation between dividend payments and
misinvestment (i.e., OVERINVESTjt–1 or UNDERINVESTjt–1) and the relation between
misinvestment and crash risk. In the first stage, we partition our full sample into the overinvestment
(MISINVESTjt–1 > 0) and underinvestment (MISINVESTjt–1 ≤ 0) subsamples. Because H2 is about
overinvestment and we do not make predictions for underinvestment, we discuss the tests, mainly,
for overinvestment. Specifically, we regress OVERINVESTjt–1 on DIV_YLDjt–1, REP_AMTjt–1, and
four other control variables suggested in Chen et al. (2011) using Eq. (4). The four other control
variables are firm size (LogATjt–1), firm age (LogAGEjt–1), tangible assets (TANGjt–1), and financial
slack (SLACKjt–1). See Appendix A for definitions of these and all other variables. In the second
stage, we estimate Eq. (5) by regressing crash risk (CRASHjt or NCSKEWjt) on the channel variable
(OVERINVESTjt–1), dividends (DIV_YLDjt–1), and the same ten control variables as in Eq. (3). A
significantly negative coefficient on DIV_YLDjt–1 in Eq. (4) and a significantly positive coefficient
on OVERINVESTjt–1 in Eq. (5) are consistent with H2.
- 25 -


We estimate Eqs. (4) and (5) using the overinvestment subsample and the underinvestment
subsample, separately. Panel C of Table 4 shows the findings from estimating Eq. (4) in the first
stage regression. As shown, the coefficient on DIV_YLDjt–1 for the overinvestment subsample is
significantly negative (-35.734, p-value = 0.001), suggesting that dividend payments curtail
overinvestment. The coefficient on DIV_YLDjt–1 for the underinvestment subsample is also
significantly negative (-4.527, p-value = 0.025), suggesting that dividend payments exacerbate
underinvestment. Stock repurchases (REP_AMTjt–1) reduce overinvestment (-44.139, p-value =
0.000) but have no effect on underinvestment (-0.299, p-value = 0.769). Finally, a comparison of
the coefficients on DIV_YLDjt–1 across the overinvestment and underinvestment subsamples (-
35.734 versus -4.527) suggests that the curtailing effect of dividends on overinvestment is more
pronounced than the exacerbating effects of dividends on underinvestment. Taken together, our
findings show that dividend payments curtail overinvestment although they exacerbate
underinvestment.
Panel D of Table 4 presents the results from estimating Eq. (5) in the second stage
regression. As shown in the Overinvestment subsample column, the coefficients on
OVERINVESTjt–1 are positive and significant at less than the 1% level, suggesting that
overinvestment increases stock price crash risk. In contrast, the coefficients on UNDERINVESTjt–
1 in the Underinvestment subsample column are insignificant, suggesting that underinvestment is
not related to stock price crashes. Importantly, we find that dividends remain significantly and
negatively associated with crash risk, irrespective of whether crash risk is measured by CRASHjt
or NCSKEWjt in both the overinvestment and underinvestment subsamples after the channel
variable (OVERINVESTjt–1 or UNDERINVESTjt–1) is controlled for. This finding suggests that
dividends have a residual effect on crash risk beyond overinvestment (He and Tian, 2013).
- 26 -


In short, the results of our mediation analysis in Panels C and D of Table 4 show that
dividends mitigate overinvestment and aggravate underinvestment, but only overinvestment is
positively associated with stock price crash risk. These findings suggest that curtailing
overinvestment reduces crash risk and thus establish curtailing overinvestment as a channel
through which dividends reduce crash risk.
5. Additional analyses
5.1. Controlling for potential endogeneity
It is possible that high crash-prone firms choose not to pay dividends whereas low crash-
prone firms choose to pay dividends (i.e., reverse causality). It is also possible that firms self-select
into paying or not paying dividends, and thus their decision to pay dividends is a function of certain
observable firm characteristics (i.e., self-selection). Furthermore, it is possible that our Eq. (3) is
misspecified in that the relation between crash risk and our control variables is non-linear. As
pointed out in Shipman et al. (2017, p. 215), this misspecification, if any, engenders a specific type
of endogeneity called functional form misspecification. We address these endogeneity concerns
using three approaches: (1) a difference-in-differences design based on an exogenous shock; (2)
the Heckman (1979) two-stage regression approach; and (3) the Coarsened Exact Matching (CEM)
procedure.
5.1.1. A difference-in-differences test based on an exogenous shock
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (hereafter, the 2003 Tax Act)
was signed into law by President George W. Bush on May 28, 2003. The 2003 Tax Act
substantially reduced the tax rates on both capital gains and dividends. More importantly, it
equalized the tax rates on capital gains and dividends for the first time since 1990 and thus removed
- 27 -


the tax penalty on dividends. This exogenous shock is unrelated to firm fundamentals but motivates
some firms to initiate dividends due to the removal of dividend tax penalty. Chetty and Saez (2005)
examine the effect of the 2003 Tax Act on firms’ dividend payment behavior. They find a surge
in dividend initiations in the quarters immediately following the enactment of the 2003 Tax Act.
The percentage of firms paying dividends, which had declined steadily from 66.5% in 1978 to
20.8% in 1999 according to Fama and French (2001), increases significantly from about 20 percent
in the fourth quarter of 2002 to almost 25% in the second quarter of 2004. Chetty and Saez (2005)
further estimate that the 2003 Tax Act increases total regular dividend payments by about 20
percent. In addition, there is no decline in dividend payments before 2003, suggesting that
observed increase in dividend payments subsequent to the enactment of the 2003 Tax Act is not
due to intertemporal substitution (retiming) of dividend payments. Moreover, they find no change
in dividend payments in firms whose largest owner is a nontaxable institution (these firms are little
affected by the 2003 Tax Act), suggesting a causal link between observed increases in dividend
payments in the post-2003-Tax-Act period and the 2003 Tax Act. In short, the findings of Chetty
and Saez (2005) confirm that the 2003 Tax Act is an exogeneous event that motivates many firms
to initiate dividends.
We examine four years between 2001 and 2004, and identify a group of dividend initiators
that pay no dividends during 2001-2003 but start paying dividends in 2004. We employ a
difference-in-differences research design to compare the change in crash risk for dividend
initiators with the corresponding change in crash risk for a control group before and after the 2003
Tax Act using the following model:
CRASHVARjt = δ0 + δ1INITIATORj + δ2POSTt–1 + δ3INITIATORj × POSTt–1
+∑ 𝛿 (qth ControlVARjt–1) + Industry fixed effects + εjt, (6)
- 28 -


where INITIATORj is a firm-specific dummy variable, set to equal one if firm j pays no dividends
in all three years during 2001-2003 but pays dividends in 2004, and equal zero if firm j pays no
dividends in all of the four years (from 2001 to 2004); POSTt–1 is a dummy variable, set to equal
one if the year is 2004 and zero if the year is from 2001 to 2003; all other variables in Eq. (6) are
the same as those for Eq. (3).
We construct a sample during 2001 to 2004 from our full sample (74,435 observations)
and exclude all observations where INITIATORj is missing (i.e., not equal to one or zero). This
difference-in-differences sample, thus, contains only dividend initiators (INITIATORj = 1) and
firms whose dividend policies are not affected by the 2003 Tax Act (INITIATORj = 0).
We estimate Eq. (6) using the difference-in-differences sample and present the results in
Table 5. As shown, the coefficient on INITIATORj × POSTt–1 is significantly negative (-0.356, p-
value = 0.000) when the dependent variable is CRASHjt, and is also significantly negative (-0.234,
p-value = 0.000) when the dependent variable is NCSKEWjt. These negative coefficients suggest
that crash risk decreases for firms that initiate dividends after the 2003 Tax Act relative to control
firms that do not change their dividend policies in the post-2003 Tax Act period. These findings
suggest that dividend payments (or dividends initiations) lower stock price crash risk. They are
inconsistent with the reverse causality argument that firms anticipating future crashes pay no
dividends whereas firms anticipating no future crashes pay dividends.
5.1.2. The Heckman (1979) two-stage regression
We also use the Heckman (1979) two-stage treatment effect regressions to control for
potential self-selection bias. In the first stage, we model a firm’s choice of paying dividends using
the following probit choice model based on DeAngelo et al. (2006):
- 29 -


DIV_DUMjt–1 = θ0 + ∑ 𝜃 (qth VARjt–1) + Year fixed effects
+ Industry fixed effects + εjt, (7)
where DIV_DUMjt–1 refers to an ex ante likelihood of dividend payments and is ex post coded one
for firms with dividend payments and zero otherwise; and qth VARjt–1 is one of the five
determinants of dividend payments identified in DeAngelo et al. (2006): retained earnings to total
common equity (RE_TEjt–1), total common equity to total assets (TE_TAjt–1), firm size (LogATjt–1),
profitability (ROAjt–1), and assets growth rate (GRWjt–1). See Appendix A for detailed definitions
of all variables.
In the first stage, we estimate Eq. (7) using a probit regression procedure, and then obtain
the inverse Mills ratio (LAMBDAjt–1). In the second stage, we expand and re-estimate Eq. (3) after
incorporating LAMBDAjt–1 as an additional explanatory variable to correct for potential self-
selection bias. Since four of the five independent variables in the first stage are not included in the
second stage, our Heckman (1979) two-stage specification meets the exclusion restriction
requirement (Lennox et al., 2012).
Panel A of Table 6 presents findings from estimating the Heckman (1979) two-stage
regression. In the first stage, we find that firms with higher proportions of retained earnings
(RE_TEjt–1), firms with higher equity-to-assets ratios (TE_TAjt–1), larger firms (LogATjt–1), more
profitable firms (ROAjt–1), or firms with lower growth (GRWjt–1) are more likely to pay dividends.
In the second stage, we find that the coefficients on DIV_DUMjt–1 remain significantly negative
even after including the inverse Mills ratio (LAMBDAjt–1) as an additional explanatory variable.
The coefficient on stock repurchases (REP_DUMjt–1) is significantly negative only when crash risk
is measured by NCSKEWjt. The above results, taken together, suggest that our main results reported
earlier are robust to controlling for potential self-selection bias.
- 30 -


5.1.3. The Coarsened Exact Matching procedure
According to Shipman et al. (2017), a useful way to address endogeneity arising from
functional form misspecification is to use a matching method such as Coarsened Exact Matching,
Propensity Score Matching, or other matching methods under which dividend-paying firms are
matched with non-dividend-paying firms based on a set of observable firm characteristics.
Following DeFond et al. (2017), we use the Coarsened Exact Matching (CEM) procedure to
identify a sample consisting of observations with cash dividends and with no cash dividends.9
CEM is an adapted application of conventional exact matching. Instead of requiring exact matches
on the matching covariates, CEM requires non-dividend-paying firms to match dividend-paying
firms only within an acceptable range (i.e., exact matching on strata of covariates rather than exact
covariate values). By stratifying data into subgroups with identical observable characteristics,
CEM mitigates the significant data demands in exact matching. For CEM, the matched sample
size is determined by the chosen coarsening level for each covariate. Loose (refined) coarsening
specifies fewer (more) strata and generates more (fewer) matches between dividend-paying firms
and non-dividend-paying firms.
To perform CEM, we choose as matching covariates from the ten control variables in Eq.
(3) and the five determinants of dividend payments in Eq. (7). We, however, do not include as

9
DeFond et al. (2017) point out that propensity score matching (PSM) requires several subjective research design
choices that affect the identification of the matched sample and the estimation of the treatment effect. These choices
include the number of control firms matched to each treatment firm, the closeness of the match, the choice of non-
linear terms in the logit model used to estimate the propensity score, and the choice of matching with or without
replacement. They conclude that CEM has two advantages compared to PSM. First, CEM directly matches on the
multivariate distributions of the matching variables rather than on a single predicted probability (i.e. the propensity
score). This helps alleviate PSM’s dependence on one scalar where balancing on one matching variable may cause
imbalances on other matching variables. Second, CEM does not rely on the discriminative ability of the first-stage
propensity score model to distinguish between the treatment and control firms, which could significantly influence
estimation of the treatment effect, especially when the numbers of the treatment and control firms are balanced in the
data.
- 31 -


matching covariates SIZEjt–1, LEVjt–1, and MBjt–1 from Eq. (3) because they are highly correlated
with LogATjt–1, TE_TAjt–1, and GRWjt–1, respectively, from Eq. (7). From the above procedure, we
obtain eleven matching covariates: REP_DUMjt–1, NCSKEWjt–1, DTURNjt–1, SIGMAjt–1, RETjt–1,
ROAjt–1, ACCMjt–1, RE_TEjt–1, TE_TAjt–1, LogATjt–1, and GRWjt–1. All matching variables are
defined earlier and in Appendix A.
We then match between dividend-paying and non-dividend-paying firms based on the
multivariate distribution of the above matching covariates. To ensure best matching, we choose
the maximum number of bins for each covariate suggested by Doane’s formula (1976).10 Our
matching is on a 1-to-1 basis without replacement. After the CEM procedure is applied, we obtain
the CEM sample that consists of 12,675 observations with positive dividends (the dividend-paying
subsample) and 12,675 observations with zero dividends (the non-dividend-paying subsample).
We assess match quality of the CEM sample using three metrics following DeFond et al.
(2017, p. 3634): (1) the difference in means of a covariate between the dividend-paying and non-
dividend-paying subsamples; (2) |%bias| of a covariate between the dividend-paying and non-
dividend-paying subsamples; and (3) L1 of a covariate between the dividend-paying and non-
dividend-paying subsamples. Three metrics provide the same assessment: the difference in means
of each control variable in Eq. (3) between the dividend-paying subsample and the non-dividend-
paying subsample of our CEM sample is drastically reduced, compared to its counterpart in the
unmatched sample (i.e., the sample used in Table 3). However, the difference in means remains
significant for several variables. Shipman et al. (2017, p. 218) indicate that it is not always possible
to have a completely balanced matched sample (balanced means no difference in means of each

10
According to DeFond et al. (2017), Doane (1976) proposes a formula to determine the maximum number of bins
for a matching covariate. Maximum number of bins = 1 + log2 (n) + log2 (1 + |skew|/ ), where n is the
number of observations in the unmatched sample, and skew is the unmatched sample skewness of a matching covariate.
- 32 -


explanatory variable between the two subsamples). They recommend that the covariates that
remain significantly different between the two subsamples be included as control variables in a
multiple regression to examine the treatment effect.11
Following the recommendation of Shipman et al. (2017), we use multiple regression to
estimate the effect of dividends on crash risk. Specifically, we estimate Eq. (3) using the CEM
sample. Panel B of Table 6 presents our estimated results. The coefficient on the dummy variable
of dividend payments, DIV_DUMjt–1, is significantly negative when the dependent variable is
CRASHjt (-0.136, p-value = 0.000) and is also significantly negative when the dependent variable
is NCSKEWjt (-0.028, p-value = 0.016). These negative coefficients indicate that dividend
payments reduce stock price crash risk after differences in firm characteristics between dividend-
paying and non-dividend-paying firms are controlled for through CEM. The coefficient on stock
repurchases (REP_DUMjt–1) is insignificant in both regressions. To summarize, the CEM results
above suggest that the significantly negative relation observed between dividend payments and
crash risk is unlikely to be driven by endogeneity due to functional form misspecification.
5.2. Longer forecasting windows
Our analysis thus far focuses on the power of dividends to predict one-year ahead stock
price crash risk. In this section, we test whether dividends have the predictive power for crash risk
beyond one-year forecasting horizon. Following Kim et al. (2011), we expand the forecasting
windows to two years and three years ahead into the future. Specifically, we estimate the likelihood
of crash occurrence during the two-year window (CRASH[jt, jt+1]) and three-year window (CRASH[jt,
jt+2]). We require that at least 100 and 150 firm-specific weekly returns for each firm be available

11
When discussing whether to use a simple t-test or MR (i.e., multiple regression) to estimate the treatment effect,
Shipman et al. (2017) state that “[i]f covariate balance is truly achieved, then a t-test may be defensible. However,
because a researcher cannot accept the null hypothesis of covariate balance, we recommend the use of MR to adjust
for remaining differences in covariates between groups.”
- 33 -


for the two-year and three-year window forecasting horizons, respectively. Similarly, we calculate
negative conditional skewness for the two-year window (NCSKEW[jt, jt+1]) and three-year window
(NCSKEW[jt, jt+2]), respectively.
Table 7 reports the results of our main regression in Eq. (3) using these longer forecasting
windows. As shown, we find that the coefficients on DIV_YLDjt–1 are significantly negative across
all four regressions, suggesting that our dividend measures can predict crash risk over longer
forecasting horizons. The coefficient on REP_AMTjt–1 is significantly negative in three regressions
but is insignificantly negative when the crash risk is measured by CRASH[jt, jt+2].
5.3. Alternative measures of crash risk
Following previous studies (Chen et al. 2001; Hong et al. 2013), we use three other
measures of crash risk: the down-to-up volatility (DUVOLjt), the difference between the number
of stock price crashes and the number of stock price jumps for firm j in year t (COUNTjt), and extra
sigma (EXTRA_SIGMAjt). See Appendix A for detailed definitions of these variables.
We re-estimate Eq. (3) using these three alternative measures of crash risk as dependent
variables, and report the results in Table 8. As shown, we find that dividend payments, DIV_YLDjt–
1, is significantly and negatively associated with all three alternative crash risk measures (for
DUVOLjt, -0.461, p-value = 0.032; for COUNTjt, -0.488, p-value = 0.001; for EXTRA_SIGMAjt, -
0.664, p-value = 0.001). This suggests that our main finding that dividends are negatively
associated with stock price crash risk is robust to alternative measures of crash risk. In addition,
the coefficient on REP_AMTjt–1 is significantly negative in the first two regressions and is
insignificantly negative in the third regression. The coefficient on REP_AMTjt–1 is smaller in
absolute magnitude than its counterpart on DIV_YLDjt–1 in all three regressions. However, the F-
- 34 -


tests at the bottom of Table 8 suggest that dividends mitigate crash risk to a greater extent than
stock repurchases when crash risk is measured by COUNTjt or EXTRA_SIGMAjt, but to a similar
extent when crash risk is measured by DUVOLjt.
5.4. Dividends and stock price jumps
Following Hutton et al. (2009), we investigate whether dividend payments predict extreme
returns in general or only for extremely negative returns (i.e., stock price crashes). For this purpose,
we define a stock price jump dummy variable, JUMPjt, for the existence of at least one firm-
specific return jump week for firm j in year t (see Appendix A for variable definitions). JUMPjt is
a diametrical opposite of CRASHjt.
We replace CRASHjt in Eq. (3) with JUMPjt and then estimate this modified equation using
the full sample. Our findings are reported in Table 9. As shown, either including or excluding
NCSKEWjt–1 as an explanatory variable, the coefficient on DIV_YLDjt–1 is insignificant. This
suggests that dividends do not predict the likelihood of (both positive and negative) extreme return
occurrences in the future period in general. Rather, dividends predict the likelihood of occurrence
of extreme negative returns only, i.e., stock price crash risk, but not the probability of occurrence
of extreme positive returns, i.e., stock price jump risk. Interestingly, the coefficients on stock
repurchases (REP_AMTjt–1) are significantly positive in both regressions. This suggests that
investors may view stock repurchases as a credible signal for large positive returns in the future or
unusually good news forthcoming.
6. Conclusion
- 35 -


We examine the economic benefits of paying dividends from the perspective of stock price
crash risk using a large sample of U.S. firms over the period of 1991-2015. We find that cash
dividend payments mitigate stock price crash risk. In addition, we show that dividends payments
reduce bad news hoarding and overinvestment, while bad news hoarding and overinvestment are
positively associated with crash risk. These latter findings establish curbing bad news hoarding
and curtailing overinvestment as two channels through which dividends reduce crash risk. Finally,
our main findings are robust to various sensitivity checks, including controls for potential
endogeneity concerns.
We contribute to the literature in several ways. First, we provide hitherto undocumented
evidence that paying dividends generates a net economic benefit by reducing stock price crash
risk. This finding is of interest to investors and policymakers. Second, we explicitly measure bad
news hoarding and document that dividend payments curb bad news hoarding, which is different
from prior findings that dividend enhance earnings quality (Skinner and Soltes, 2011; Tong and
Miao, 2011; Caskey and Hanlon, 2013; Lawson and Wang, 2016). This finding coupled with the
finding that dividend payments mitigate crash risk complement the recent dividends-enhancing-
earnings-quality literature by adding that dividend payments curb bad news hoarding and generate
a net economic benefit in the form of reduced crash risk, i.e., enhanced earnings quality
documented in prior studies matters economically. Finally, prior studies provide only
circumstantial evidence that dividends reduce free cash flows and value-decreasing
overinvestment. In contrast, we explicitly measure misinvestment and show directly that dividends
reduce overinvestment but exacerbate underinvestment. These findings complement
Ramalingegowda et al. (2013), suggesting that the constraining effect of dividends on total
investment is detrimental only to underinvestment firms but is beneficial to overinvestment firms.
- 36 -


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Appendix A. Variable definitions
A.1. Dependent variables: measures of stock price crash risk and stock price jumps
CRASHjt is an indicator variable set to one if there is at least one firm-specific crash week
for firm j in year t, and zero otherwise. A firm-specific crash week is identified when the firm-
specific weekly return (Wjτ) is 3.2 standard deviations below the mean firm-specific weekly return
in year t. Wjτ = log(1 + εjτ) and εjτ is the residual from the following expanded market model
estimated for each firm-year with at least 26 weekly returns (the year is a 12-month period ending
three months after fiscal year end): rjτ = aj + b1jrmτ–2 + b2jrmτ–1 + b3jrmτ + b4jrmτ+1 + b5jrmτ+2 + εjτ,
where rjτ is the raw stock return for firm j in week τ of year t and rmτ is the CRSP value-weighted
market index return in week τ of year t.
NCSKEWjt is the negative conditional skewness of firm-specific weekly returns (Wjτ) for
firm j in year t, defined as the negative of the third moment of firm-specific weekly returns divided
by the cubed standard deviation of firm-specific weekly returns.
DUVOLjt is the down-to-up volatility, which is the log of the ratio between the standard
deviation of firm-specific weekly returns (Wjτ) in down-weeks of year t (Wjτ below its annual mean)
and the standard deviation of firm-specific weekly returns in up-weeks of year t (Wjτ above the
annual mean).
JUMPjt is an indicator variable set to one if there is at least one firm-specific jump week
for firm j in year t, and zero otherwise. A firm-specific jump week is identified when the firm-
specific weekly return (Wjτ) is 3.2 standard deviations above the mean firm-specific weekly return
in year t.
COUNTjt is the difference between the number of stock price crash weeks and the number
of stock price jump weeks for firm j in year t.
- 42 -


EXTRA_SIGMAjt is the number of standard deviations of firm-specific weekly returns (Wjτ)
by which a firm’s worst firm-specific weekly return in year t falls below the mean firm-specific
weekly return during year t following Hong et al. (2017). EXTRA_SIGMAjt = –Minimum
( ). Note that CRASHjt is dichotomous but EXTRA_SIGMAjt is continuous.
Specifically, CRASHjt is equal to one if EXTRA_SIGMAjt ≥ 3.2, and zero otherwise.
A.2. Measures of dividend payments
DIV_YLDjt–1 is cash dividend yield, measured as cash dividends paid (according to CRSP)
in year t–1 divided by the fiscal year-end stock price. If a firm pays no cash dividends in year t–1,
DIV_YLDjt–1 is equal to zero. Stock splits and stock dividends are adjusted so that dividends and
stock prices are on the same split-adjusted basis.
DIV_DUMjt–1 is a dummy variable set to one if firm j pays cash dividends in year t–1, and
zero otherwise.
A.3. Control and other variables
REP_AMTjt–1 is a continuous variable, calculated as the amount of stock repurchases in
year t–1 divided by the market value of equity at the end of year t–1.
REP_DUMjt–1 is a dummy variable set to one if REP_AMTjt–1 > 0, and zero otherwise
following Skinner and Soltes (2011).
NCSKEWjt–1 is the negative conditional skewness of firm-specific weekly returns in year
t–1.
DTURNjt–1 is the detrended average monthly share turnover, measured as the average
monthly share turnover in year t–1 minus the average monthly share turnover in the previous year
(year t–2), where the monthly share turnover is calculated as the number of shares traded in a
month divided by the total number of shares outstanding in that month.
- 43 -


SIGMAjt–1 is the standard deviation of firm-specific weekly returns in year t–1.
RETjt–1 is the average firm-specific weekly return in year t–1, multiplied by 100.
SIZEjt–1 is the natural log of the market value of equity at the end of year t–1.
LEVjt–1 is the leverage ratio, defined as long-term debts divided by total assets at the end
of year t–1.
MBjt–1 is the market-to-book ratio, measured as the market value of equity divided by the
book value of equity at the end of year t–1.
ROAjt–1 is return on assets, measured as income before extraordinary items divided by
beginning-of-the-year total assets.
ACCMjt–1 is a measure of financial reporting opaqueness used in Hutton et al. (2009),
defined as the three-year moving sum of the absolute values of discretionary accruals during year
t–3 to year t–1 where discretionary accruals in a year is calculated using the modified Jones model.
| |
BNHRDjt–1 is equal to | |
× 100, where EARjt–1 (NEARjt–1) is the market-adjusted
buy-and-hold returns during the annual earnings announcement (non-annual earnings
announcement) period in year t–1, i.e., BNHRDjt–1 measures the proportion of news released in
the earnings announcement period (|EARjt–1|) relative to news released in the non-announcement
period (|NEARjt–1|). Following Roychowdhury and Sletten (2012), annual earnings announcement
returns (EARjt–1) are defined as the market-adjusted buy-and-hold returns on trading days –1 to +1
relative to the annual earnings announcement date of year t–1. Annual returns (RETjt–1) are defined
as the market-adjusted buy-and-hold returns starting two trading days after the annual earnings
announcement of year t–2 and ending one trading day after the annual earnings announcement of
year t–1. Thus, NEARjt–1 = – 1. We require at least 100 trading days to calculate RETjt–1
and use the CRSP value-weighted market index return for market adjustment. Roychowdhury and
- 44 -


Sletten (2012) propose that “the earnings reporting process is geared toward uncovering
information that has not as yet been disclosed via alternative sources; in particular, negative
information.” They (p. 1683) predict that “a greater proportion of news reaching the market in a
given quarter is released at the time of the earnings announcement when the news is negative than
when the news is positive” because managers have incentives to withhold bad news to the last
minute. That is, when the news is negative, managers will withhold it until earnings announcement
time. Consequently, the proportion of news released in the earnings announcement period relative
to news released in the non-announcement period (BNHRDjt–1) is larger when the news is negative
than when the news is positive. Consistent with their prediction, they find that BNHRDjt–1 is larger
in bad-news periods than in good-news periods. We thus adopt BNHRDjt–1 as a measure of bad
news hoarding. Larger values of BNHRDjt–1 indicate greater bad news hoarding.
MISINVESTjt–1 is measured as the residuals from the investment model below: INVESTjt–1
= α0 + α1NEGjt–2 + α2REVGRWjt–2 + α3NEGjt–2 × REVGRWjt–2 + εjt–1. The investment model
follows Chen et al. (2011) and Biddle et al. (2009). INVESTjt–1 is the sum of research and
development expenditure, capital expenditure, and acquisition expenditure less cash receipts from
sale of property, plant, and equipment in year t–1 multiplied by 100 and scaled by lagged total
assets. The indicator variable NEGjt–2 is set to one for negative sales growth in year t–2, and zero
otherwise. REVGRWjt–2 is the sales growth percentage from year t–3 to year t–2. The investment
model is estimated cross-sectionally with at least ten observations in each of the Fama-French 48
industries in a year. A positive (negative) MISINVESTjt–1 indicates overinvestment
(underinvestment).
OVERINVESTjt–1 is a measure of overinvestment, and is equal to MISINVESTjt–1 when
MISINVESTjt–1 > 0.
- 45 -


UNDERINVESTjt–1 is a measure of underinvestment, and is equal to MISINVESTjt–1 when
MISINVESTjt–1 ≤ 0.
LogATjt–1 is the log value of total assets at the end of year t–1.
LogAGEjt–1 is the log value of the age of firm j in year t–1.
TANGjt–1 is the ratio of net value of property, plant, and equipment to total assets at the end
of year t–1.
SLACKjt–1 is the ratio of cash and cash equivalents to total assets at the end of year t–1.
RE_TEjt–1 is the retained earnings divided by total common equity at the end of year t–1.
TE_TAjt–1 is the total common equity divided by total assets at the end of year t–1.
GRWjt–1 is the assets growth percentage from year t–2 to year t–1.
LAMBDAjt–1 is the inverse Mills ratio calculated from the probit regression of cash dividend
payments on their determinants.
INITIATORj is a firm-specific dummy variable, which equals one if firm j pays no
dividends in all three years in and prior to 2003 when the Jobs and Growth Tax Relief
Reconciliation Act of 2003 (the 2003 Tax Act) became effective but pays dividends in 2004, and
equals zero if firm j pays no dividends in all of the years (from 2001 to 2004).
POSTt–1 is a dummy variable, which equals one if the year is 2004 and zero if the year is
from 2001 to 2003.
All continuous variables are winsorized at 1 and 99 percentiles by year.
- 46 -


Table 1 Sample distribution and descriptive statistics for stock price crashes
This table reports the yearly distribution of the sample and descriptive statistics for annual stock price crashes. Stock
price crashes are indicated when CRASHjt is equal to 1 as defined in Appendix A.
Number of firms with Percentage of firms with
stock price crashes stock price crashes
Fiscal year Number of firms (CRASHjt = 1) (CRASHjt = 1)
1991 2,254 273 0.121
1992 2,540 338 0.133
1993 2,755 344 0.125
1994 2,945 383 0.130
1995 3,097 364 0.118
1996 3,279 445 0.136
1997 3,285 410 0.125
1998 3,356 480 0.143
1999 3,626 441 0.122
2000 3,432 559 0.163
2001 3,105 490 0.158
2002 3,297 658 0.200
2003 3,295 516 0.157
2004 3,392 696 0.205
2005 3,222 711 0.221
2006 3,138 651 0.208
2007 2,978 639 0.215
2008 2,687 564 0.210
2009 2,729 422 0.155
2010 2,808 477 0.170
2011 2,689 509 0.189
2012 2,670 611 0.229
2013 2,651 582 0.220
2014 2,652 629 0.237
2015 2,553 609 0.239
Total 74,435 12,801 0.172
- 47 -


Table 2 Descriptive statistics and correlations
Panel A reports descriptive statistics for stock price crash risk, dividend payments, and control variables. Panel B
reports the Pearson correlations among these variables with the two-tailed p-values reported in parentheses. Variables
are defined in Appendix A.
Panel A: Descriptive statistics
Variables N Mean STD 5% 25% Median 75% 95%
Crash risk measures:
CRASHjt 74,435 0.172 0.377 0 0 0 0 1
NCSKEWjt 74,435 -0.113 0.804 -1.384 -0.557 -0.134 0.287 1.271
Dividend payment measures:
DIV_YLDjt–1 74,435 0.010 0.020 0 0 0 0.013 0.047
DIV_DUMjt–1 74,435 0.381 0.486 0 0 0 1 1
Control variables:
REP_AMTjt–1 74,435 0.014 0.033 0 0 0 0.010 0.079
REP_DUMjt–1 74,435 0.410 0.492 0 0 0 1 1
NCSKEWjt–1 74,435 -0.108 0.778 -1.329 -0.545 -0.133 0.281 1.242
DTURNjt–1 74,435 0.002 0.100 -0.131 -0.024 -0.000 0.025 0.147
SIGMAjt–1 74,435 0.060 0.031 0.023 0.037 0.053 0.076 0.122
RETjt–1 74,435 -0.227 0.265 -0.737 -0.284 -0.137 -0.066 -0.026
SIZEjt–1 74,435 5.838 2.154 2.505 4.243 5.738 7.271 9.666
LEVjt–1 74,435 0.159 0.166 0 0.002 0.116 0.265 0.489
MBjt–1 74,435 3.016 3.348 0.611 1.229 2.006 3.415 8.836
ROAjt–1 74,435 0.013 0.168 -0.308 -0.010 0.042 0.089 0.195
ACCMjt–1 74,435 0.233 0.211 0.044 0.098 0.168 0.291 0.662
- 48 -


Table 2 (continued)
Panel B: Pearson correlations
Variables CRASHjt B C D E F G H I J K L M
NCSKEWjt B 0.617
(0.000)
DIV_YLDjt–1 C -0.023 0.007
(0.000) (0.067)
REP_AMTjt–1 D 0.010 0.004 0.047
(0.005) (0.313) (0.000)
REP_DUMjt–1 E 0.015 0.032 0.091 0.499
(0.000) (0.000) (0.000) (0.000)
NCSKEWjt–1 F 0.044 0.067 0.044 0.063 0.065
(0.000) (0.000) (0.000) (0.000) (0.000)
DTURNjt–1 G 0.027 0.040 0.006 -0.008 -0.020 0.002
(0.000) (0.000) (0.094) (0.023) (0.000) (0.620)
SIGMAjt–1 H -0.038 -0.098 -0.249 -0.112 -0.248 -0.087 0.151
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
RETjt–1 I 0.040 0.098 0.195 0.096 0.203 0.119 -0.167 -0.951
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
SIZEjt–1 J 0.066 0.185 0.178 0.090 0.230 0.165 0.040 -0.504 0.415
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
LEVjt–1 K -0.016 -0.002 0.106 0.025 -0.001 0.011 0.013 -0.125 0.111 0.134
(0.000) (0.530) (0.000) (0.000) (0.776) (0.002) (0.000) (0.000) (0.000) (0.000)
MBjt–1 L 0.038 0.062 -0.065 -0.040 -0.030 -0.024 0.116 0.072 -0.095 0.208 0.012
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.001)
ROAjt–1 M 0.034 0.084 0.139 0.098 0.190 0.058 0.029 -0.395 0.383 0.235 0.023 -0.152
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
ACCMjt–1 N 0.002 -0.030 -0.171 -0.088 -0.167 -0.044 -0.008 0.408 -0.365 -0.255 -0.164 0.174 -0.298
(0.568) (0.000) (0.000) (0.000) (0.000) (0.000) (0.040) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
49


Table 3 The effect of dividends on stock price crash risk

This table reports the effect of dividends on stock price crash risk. *, **, and *** indicate significance at the 0.10,
0.05, and 0.01 levels, respectively. Numbers in parentheses are two-tailed p-values based on standard errors clustered
by firm and year (Petersen 2009). Variables are defined in Appendix A.
CRASHjt CRASHjt NCSKEWjt NCSKEWjt
Variables (1) (2) (3) (4)
Dividend payment measures:
DIV_DUMjt–1 -0.186*** -0.040***
(0.000) (0.000)
DIV_YLDjt–1 -3.106*** -0.612***
(0.000) (0.010)
Control variables:
REP_DUMjt–1 -0.039* -0.024***
(0.066) (0.000)
REP_AMTjt–1 -0.235 -0.400***
(0.521) (0.001)
NCSKEWjt–1 0.088*** 0.087*** 0.030*** 0.030***
(0.000) (0.000) (0.000) (0.000)
DTURNjt–1 0.697*** 0.691*** 0.263*** 0.262***
(0.000) (0.000) (0.000) (0.000)
SIGMAjt–1 3.297 4.864** 3.069*** 3.406***
(0.120) (0.025) (0.000) (0.000)
RETjt–1 0.700*** 0.832*** 0.433*** 0.461***
(0.003) (0.001) (0.000) (0.000)
SIZEjt–1 0.056*** 0.045*** 0.066*** 0.063***
(0.000) (0.000) (0.000) (0.000)
LEVjt–1 -0.021 0.010 -0.070*** -0.061**
(0.784) (0.897) (0.009) (0.025)
MBjt–1 0.012*** 0.012*** 0.006*** 0.006***
(0.004) (0.002) (0.000) (0.000)
ROAjt–1 0.586*** 0.569*** 0.265*** 0.260***
(0.000) (0.000) (0.000) (0.000)
ACCMjt–1 0.136** 0.159*** 0.051*** 0.057***
(0.023) (0.007) (0.002) (0.000)
Intercept -2.736*** -2.838*** -0.681*** -0.704***
(0.000) (0.000) (0.000) (0.000)
Year dummies Included Included Included Included

Industry dummies Included Included Included Included
N 74,435 74,435 74,435 74,435

Pseudo R2 or Adjusted R2 0.026 0.026 0.053 0.053
H0: DIV_DUMjt–1 = REP_DUMjt–1 16.32 1.68
(0.000) (0.195)
H0: DIV_YLDjt–1 = REP_AMTjt–1 13.81 0.70
(0.000) (0.403)
- 50 -


Table 4 The effect of dividends on stock price crash risk through curbing bad news hoarding and curtailing
overinvestment
Panel A presents the effect of dividends on bad news hoarding. Panel B presents the effect of bad news hoarding on
stock price crash risk. Panel C presents the effect of dividends on misinvestment. Panel D presents the effect of
misinvestment on stock price crash risk. *, **, and *** indicate significance at the 0.10, 0.05, and 0.01 levels,
respectively. Numbers in parentheses are two-tailed p-values based on standard errors clustered by firm and year
(Petersen 2009). Variables are defined in Appendix A.
Panel A: Regression of BNHRDjt–1 on
dividend yield Panel B: Regression of crash measures on BNHRDjt–1
Variables BNHRDjt–1 Variables CRASHjt NCSKEWjt
Dividend payment
Bad news hoarding measure:
measure:
DIV_YLDjt–1 -49.365** BNHRDjt–1 0.000*** 0.000**
(0.026) (0.003) (0.016)
Dividend payment measure:
DIV_YLDjt–1 -2.778*** -0.533**
(0.000) (0.017)
Control variables: Control variables:
REP_AMTjt–1 35.451* REP_AMTjt–1 -0.307 -0.420***
(0.054) (0.419) (0.001)
LogATjt–1 0.433 NCSKEWjt–1 0.086*** 0.030***
(0.187) (0.000) (0.000)
LEVjt–1 -6.697** DTURNjt–1 0.689*** 0.267***
(0.012) (0.000) (0.000)
MBjt–1 -0.378** SIGMAjt–1 7.042*** 3.893***
(0.037) (0.000) (0.000)
ROAjt–1 23.589*** RETjt–1 1.060*** 0.520***
(0.000) (0.000) (0.000)
BigNjt–1 0.811 SIZEjt–1 0.054*** 0.064***
(0.677) (0.000) (0.000)
Intercept 61.922*** LEVjt–1 0.003 -0.066**
(0.000) (0.964) (0.019)
MBjt–1 0.012*** 0.007***
(0.002) (0.000)
ROAjt–1 0.568*** 0.258***
(0.000) (0.000)
ACCMjt–1 0.151** 0.057***
(0.012) (0.000)
Intercept -2.957*** -0.709***
(0.000) (0.000)
Year dummies Included Year dummies Included Included

Industry dummies Included Industry dummies Included Included
N 70,660 N 70,660 70,660

Adjusted R2 0.016 Pseudo R2 or Adjusted R2 0.025 0.051
H0: DIV_YLDjt–1 14.53 11.47 0.21
= REP_AMTjt–1 (0.000) (0.001) (0.645)
- 51 -


Table 4 (continued)
Panel C: Regression of misinvestment on dividend yield
Overinvestment subsample Underinvestment subsample
Variables OVERINVESTjt–1 UNDERINVESTjt–1
DIV_YLDjt–1 -35.734*** -4.527**
(0.001) (0.025)
Control variables:
REP_AMTjt–1 -44.139*** -0.299
(0.000) (0.769)
LogATjt–1 -0.278*** 0.271***
(0.002) (0.000)
LogAGEjt–1 -2.302*** 0.146**
(0.000) (0.015)
TANGjt–1 -4.232*** 3.975***
(0.001) (0.000)
SLACKjt–1 -9.119*** 1.657***
(0.000) (0.000)
Intercept 13.356*** -8.258***
(0.000) (0.000)
Year dummies Included Included

Industry dummies Included Included
N 25,860 45,285
Adjusted R2 0.098 0.228
(0.468) (0.047)
- 52 -


Table 4 (continued)
Panel D: Regression of crash measures on misinvestment
Overinvestment subsample Underinvestment subsample
Variables CRASHjt NCSKEWjt CRASHjt NCSKEWjt
Misinvestment measure:
OVERINVESTjt–1 0.005*** 0.002***
(0.000) (0.000)
UNDERINVESTjt–1 0.003 0.000
(0.363) (0.675)
DIV_YLDjt–1 -3.132** -0.659* -3.354*** -0.674***
(0.036) (0.066) (0.000) (0.004)
Control variables:
REP_AMTjt–1 -1.887*** -0.636*** 0.410 -0.226*
(0.002) (0.003) (0.331) (0.061)
NCSKEWjt–1 0.056** 0.015* 0.094*** 0.038***
(0.014) (0.052) (0.000) (0.000)
DTURNjt–1 0.717*** 0.292*** 0.562*** 0.197***
(0.001) (0.000) (0.000) (0.000)
SIGMAjt–1 6.895* 4.454*** 2.314 2.688***
(0.078) (0.000) (0.247) (0.001)
RETjt–1 1.058** 0.578*** 0.535** 0.370***
(0.025) (0.000) (0.017) (0.000)
SIZEjt–1 0.061*** 0.068*** 0.031*** 0.058***
(0.000) (0.000) (0.002) (0.000)
LEVjt–1 -0.147 -0.118*** 0.095 -0.031
(0.108) (0.000) (0.377) (0.297)
MBjt–1 0.007 0.004* 0.011** 0.006***
(0.234) (0.072) (0.020) (0.000)
ROAjt–1 0.674*** 0.277*** 0.939*** 0.400***
(0.000) (0.000) (0.000) (0.000)
ACCMjt–1 0.088 0.008 0.185* 0.065***
(0.310) (0.744) (0.061) (0.003)
Intercept -3.121*** -0.739*** -2.622*** -0.686***
(0.000) (0.000) (0.000) (0.000)

N 25,860 25,860 45,285 45,285

H0: DIV_YLDjt–1 = REP_AMTjt–1 0.55 0.00 25.92 2.63
(0.456) (0.953) (0.000) (0.105)
- 53 -


Table 5 The effect of dividends on stock price crash risk: An exogenous shock
This table presents the effect of dividends on stock price crash risk based on an exogenous shock using a difference-
in-differences design. INITIATORj is a firm-specific dummy variable, which equals 1 if firm j pays no dividends in all
three years in and prior to 2003 when the Jobs and Growth Tax Relief Reconciliation Act of 2003 became effective
but pays dividends in 2004, and equals 0 if firm j pays no dividends in all years during 2001-2004. POSTt–1 is a dummy
variable, which equals 1 if the year is 2004 and 0 if the year is from 2001 to 2003. *, **, and *** indicate significance
at the 0.10, 0.05, and 0.01 levels, respectively. Numbers in parentheses are two-tailed p-values based on standard
errors clustered by firm and year (Petersen 2009). Variables are defined in Appendix A.
Variables CRASHjt NCSKEWjt
Difference-in-differences:
INITIATORj -0.275 -0.008
(0.116) (0.906)
POSTt–1 0.124 -0.018
(0.114) (0.772)
INITIATORj × POSTt–1 -0.356*** -0.234***
(0.000) (0.000)
Control variables:
REP_DUMjt–1 -0.044 -0.016
(0.349) (0.557)
NCSKEWjt–1 0.023 -0.017**
(0.420) (0.011)
DTURNjt–1 0.820** 0.137
(0.015) (0.138)
SIGMAjt–1 3.004 6.425***
(0.208) (0.000)
RETjt–1 0.438* 0.691***
(0.097) (0.000)
SIZEjt–1 0.163*** 0.122***
(0.000) (0.000)
LEVjt–1 0.039 -0.046
(0.838) (0.480)
MBjt–1 0.009 0.004
(0.570) (0.585)
ROAjt–1 0.962*** 0.259**
(0.007) (0.018)
ACCMjt–1 -0.053 -0.016
(0.729) (0.735)
Intercept -2.607*** -0.856***
(0.000) (0.000)
N 6,885 6,885
Pseudo R2 or Adjusted R2 0.037 0.061
- 54 -


Table 6 The effect of dividends on stock price crash risk: More analyses of the treatment effect
This table reports the effect of dividends on stock price crash risk with more analyses of the treatment effect arising
from dividend payment. Panel A presents the effect of dividends using the Heckman (1979) two-stage regression.
Panel B presents the effect of dividends using the matched sample between observations with cash dividends and
those without cash dividends based on 1-to-1 Coarsened Exact Matching (CEM). *, **, and *** indicate significance
at the 0.10, 0.05, and 0.01 levels, respectively. Numbers in parentheses are two-tailed p-values based on standard
errors clustered by firm and year (Petersen 2009). Variables are defined in Appendix A.
Panel A: Heckman Two-Stage Regression
First Stage: Determinants of dividend payment Second Stage: The effect of dividends on crash risk
Variables DIV_DUMjt–1 Variables CRASHjt NCSKEWjt
RE_TEjt–1 0.004*** DIV_DUMjt–1 -0.154*** -0.023**
(0.003) (0.000) (0.025)
TE_TAjt–1 0.565*** REP_DUMjt–1 -0.019 -0.015**
(0.000) (0.354) (0.015)
LogATjt–1 0.352*** NCSKEWjt–1 0.085*** 0.029***
(0.000) (0.000) (0.000)
ROAjt–1 1.780*** DTURNjt–1 0.674*** 0.256***
(0.000) (0.000) (0.000)
GRWjt–1 -0.421*** SIGMAjt–1 2.242 2.572***
(0.000) (0.275) (0.001)
Intercept -1.607*** RETjt–1 0.599*** 0.388***
(0.000) (0.008) (0.000)
SIZEjt–1 0.093*** 0.086***
(0.000) (0.000)
LEVjt–1 -0.005 -0.068**
(0.954) (0.019)
MBjt–1 0.007 0.003**
(0.117) (0.023)
ROAjt–1 0.689*** 0.318***
(0.000) (0.000)
ACCMjt–1 0.089 0.026
(0.154) (0.113)
LAMBDAjt–1 0.845*** 0.452***
(0.000) (0.000)
Intercept -3.344*** -0.969***
(0.000) (0.000)
Year dummies Included Year dummies Included Included

Industry dummies Included Industry dummies Included Included
N 73,570 N 73,570 73,570

Pseudo R2 0.291 Pseudo R2 or Adjusted R2 0.027 0.055
H0: DIV_DUMjt–1 12.91 0.38
= REP_DUMjt–1 (0.000) (0.540)
- 55 -


Table 6 (continued)
Panel B: Coarsened Exact Matching
Variables CRASHjt NCSKEWjt
Dividend measure:
DIV_DUMjt–1 -0.136*** -0.028**
(0.000) (0.016)
Control variables:
REP_DUMjt–1 -0.025 -0.015
(0.465) (0.246)
NCSKEWjt–1 0.068** 0.025**
(0.033) (0.021)
DTURNjt–1 0.330 0.132**
(0.153) (0.025)
SIGMAjt–1 8.613* 8.114***
(0.087) (0.000)
RETjt–1 1.280 1.247***
(0.167) (0.000)
SIZEjt–1 0.061*** 0.062***
(0.000) (0.000)
LEVjt–1 0.129 0.054
(0.331) (0.103)
MBjt–1 0.021** 0.011***
(0.014) (0.000)
ROAjt–1 1.219*** 0.649***
(0.000) (0.000)
ACCMjt–1 0.265 0.026
(0.178) (0.608)
Intercept -3.064*** -0.718***
(0.000) (0.000)

N 25,350 25,350
H0: DIV_DUMjt–1 7.22 0.68
= REP_DUMjt–1 (0.007) (0.411)
- 56 -


Table 7 The effect of dividends on stock price crash risk: Longer forecasting windows
This table reports the effect of dividends on stock price crash risk during the next two-year and three-year windows.
*, **, and *** indicate significance at the 0.10, 0.05, and 0.01 levels, respectively. Numbers in parentheses are two-
tailed p-values based on standard errors clustered by firm and year (Petersen 2009). Variables are defined in Appendix
A.
Two-year window Three-year window
Variables CRASH[jt, jt+1] NCSKEW[jt, jt+1] CRASH[jt, jt+2] NCSKEW[jt, jt+2]
DIV_YLDjt–1 -2.216*** -0.927*** -2.355*** -1.000***
(0.000) (0.000) (0.000) (0.000)
Control variables:
REP_AMTjt–1 -0.636** -0.543*** -0.359 -0.545***
(0.020) (0.000) (0.305) (0.000)
NCSKEWjt–1 0.078*** 0.035*** 0.068*** 0.038***
(0.000) (0.000) (0.000) (0.000)
DTURNjt–1 0.590*** 0.339*** 0.553*** 0.308***
(0.000) (0.000) (0.000) (0.000)
SIGMAjt–1 4.226*** 4.334*** 4.481*** 4.323***
(0.005) (0.000) (0.003) (0.000)
RETjt–1 0.786*** 0.605*** 0.858*** 0.637***
(0.000) (0.000) (0.000) (0.000)
SIZEjt–1 0.052*** 0.086*** 0.052*** 0.093***
(0.000) (0.000) (0.000) (0.000)
LEVjt–1 -0.007 -0.032 0.018 0.003
(0.930) (0.331) (0.859) (0.951)
MBjt–1 0.013*** 0.006*** 0.016*** 0.007***
(0.003) (0.000) (0.002) (0.000)
ROAjt–1 0.500*** 0.253*** 0.479*** 0.278***
(0.000) (0.000) (0.000) (0.000)
ACCMjt–1 0.182*** 0.072*** 0.171** 0.082***
(0.001) (0.001) (0.013) (0.002)
Intercept -1.420*** -0.853*** -0.870*** -0.918***
(0.000) (0.000) (0.001) (0.000)

N 67,071 67,071 59,775 59,775

H0: DIV_YLDjt–1 6.43 1.52 6.92 2.15
= REP_AMTjt–1 (0.011) (0.218) (0.009) (0.143)
- 57 -


Table 8 The effect of dividends on stock price crash risk: Alternative measures of crash risk
This table reports the effect of dividends on stock price crash risk by using three alternative measures of stock price
crash risk. *, **, and *** indicate significance at the 0.10, 0.05, and 0.01 levels, respectively. Numbers in parentheses
are two-tailed p-values based on standard errors clustered by firm and year (Petersen 2009). Variables are defined in
Appendix A.
Variables DUVOLjt COUNTjt EXTRA_SIGMAjt
DIV_YLDjt–1 -0.461** -0.488*** -0.664***
(0.032) (0.001) (0.001)
Control variables:
REP_AMTjt–1 -0.438*** -0.182** -0.121
(0.000) (0.018) (0.213)
NCSKEWjt–1 0.026*** 0.019*** 0.028***
(0.000) (0.000) (0.000)
DTURNjt–1 0.251*** 0.164*** 0.237***
(0.000) (0.000) (0.000)
SIGMAjt–1 2.592*** 1.940*** 1.668**
(0.000) (0.000) (0.016)
RETjt–1 0.386*** 0.251*** 0.277***
(0.000) (0.000) (0.000)
SIZEjt–1 0.057*** 0.037*** 0.020***
(0.000) (0.000) (0.000)
LEVjt–1 -0.069*** -0.013 -0.020
(0.007) (0.456) (0.454)
MBjt–1 0.006*** 0.003*** 0.005***
(0.000) (0.000) (0.000)
ROAjt–1 0.281*** 0.152*** 0.198***
(0.000) (0.000) (0.000)
ACCMjt–1 0.046*** 0.035*** 0.058***
(0.001) (0.003) (0.000)
Intercept -0.631*** -0.441*** 2.267***
(0.000) (0.000) (0.000)
Year dummies Included Included Included

Industry dummies Included Included Included
N 74,435 74,435 74,435

Adjusted R2 0.062 0.029 0.034
H0: DIV_YLDjt–1 = REP_AMTjt–1 0.01 3.54 7.03
(0.918) (0.060) (0.008)
- 58 -


Table 9 The effect of dividends on stock price jumps

This table reports the effect of dividends on stock price jumps. *, **, and *** indicate significance at the 0.10, 0.05,
and 0.01 levels, respectively. Numbers in parentheses are two-tailed p-values based on standard errors clustered by
firm and year (Petersen 2009). Variables are defined in Appendix A.
Variables JUMPjt JUMPjt
DIV_YLDjt–1 0.411 0.452
(0.560) (0.519)
Control variables:
REP_AMTjt–1 0.903*** 0.935***
(0.008) (0.007)
NCSKEWjt–1 -0.036***
(0.007)
DTURNjt–1 -0.381*** -0.380***
(0.000) (0.000)
SIGMAjt–1 -8.133*** -7.697***
(0.000) (0.000)
RETjt–1 -0.888*** -0.836***
(0.000) (0.000)
SIZEjt–1 -0.199*** -0.196***
(0.000) (0.000)
LEVjt–1 0.137* 0.137*
(0.079) (0.079)
MBjt–1 -0.008*** -0.009***
(0.010) (0.005)
ROAjt–1 -0.413*** -0.414***
(0.000) (0.000)
ACCMjt–1 -0.066 -0.065
(0.261) (0.262)
Intercept 0.148 0.112
(0.525) (0.624)

N 74,435 74,435
(0.602) (0.607)
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The Bright Side of Paying Dividends: Evidence from Stock Price Crash Risk

First draft: October 2013

* Corresponding author (phone: +852 34427909).

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Keywords: Dividends; Crash risk; Information asymmetry; Agency theory; Managerial

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that of non-dividend-paying firms, where earnings quality is proxied by earnings persistence

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overinvestment, thereby revealing additional economic benefits of paying dividends.

potential overinvestment by management.” If dividends curtail overinvestment, they lower stock

price crash risk.

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dividend payments mitigate crash risk.

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reduction in the extreme negative tail of stock return distributions.

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with the likelihood of stock price jumps at all.

protect shareholders (e.g., Breeden, 2003; Glassman, 2005).

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dividends-enhancing-earnings-quality literature by adding that dividend payments generate a net

related to the recent dividends-enhancing-earnings-quality literature. We differ from prior studies

in our focus on crash risk, bad news hoarding, and overinvestment.

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constraining overinvestment, in contrast, is one of the economic benefits of paying dividends.

additional analyses. The final section concludes.

2. Literature review and hypothesis development

2.1. Dividends and agency costs

that hypothesizes and tests a role of dividends in mitigating agency costs.

2.1.1 Role of dividends in curtailing overinvestment

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dividend payments mitigate free cash flows and overinvestment.

2.1.2 Role of dividends in curbing bad news hoarding

ability to hide bad news by subjecting managers to external monitoring.

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2.2. Determinants of stock price crash risk

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2013). We state our second hypothesis in alternative form below:

3. Sample and variable measurement

3.1. Sample selection

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firm-year observations during 1991-2015 (year t).

3.2. Measurement of dividend payments and firm-specific crash risk

DIV_YLDjt–1 > 0) and zero otherwise.

expanded market model:

rjτ = aj + b1jrmτ–2 + b2jrmτ–1 + b3jrmτ + b4jrmτ+1 + b5jrmτ+2 + εjτ, (1)

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and zero otherwise.

the number of the firm-specific weekly returns in year t.

3.3. Control variables

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measures of stock repurchases, repurchase amount (REP_AMTjt–1) and repurchase dummy

(REP_DUMjt–1), corresponding to the two measures of dividends (DIV_YLDjt–1 and DIV_DUMjt–

(DIV_DUMjt–1). See Appendix A for definitions of all variables.

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negative conditional skewness (NCSKEWjt). 8 Finally, the variable ACCMjt–1 is a measure of

4.1. Summary statistics

later period of 2003-2015 than in the earlier period of 1991-2002.

[Insert Table 1 here]

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