The Frequency Factor: Unraveling the Impact of Dividend Payout Frequency on Stock Valuation and Institutional Ownership : An Empirical Study of Dividend Policy Dynamics in the U.S. Market

Abstract

By conducting event studies, we demonstrate a significant positive market reaction to increases in dividend payout frequency in the short-term (−1 + 1) day and (−3 + 3) days event windows. Conversely, decreases in payout frequency do not uniformly trigger a negative market reaction, suggesting a nuanced interpretation by investors. Through logistic regression, and by adopting both a conventional two-way fixed effect setup and the difference-in-difference method proposed by Callaway and Sant’Anna (2021), we establish a novel and causal link between payout frequency and institutional holdings. Specifically, an increase in dividend frequency leads to an average 6.1 percentage points increase in institutional holdings, peaking at 9.9 percentage points three years post-change, equivalent to 2.3 times the median standard deviation in institutional holdings within a firm. These insights may prove crucial for decision makers, and highlight dividend payout frequency as a strategic tool for shaping the share of institutional investors. Consequently, this thesis contributes to understanding dividend policy design and its influence on investor composition, opening new avenues for further exploration in corporate finance.