Does Dividend Stability Provide a Promising Stock Return? Evidence from Bursa Malaysia

Abstract

This paper examines whether there is any significant impact between a stable dividend policy and firm performance. More recent empirical studies have looked at the association of dividend stability with risk factor. Stable dividend signals the stability of the underlying cash flow as this translates into lower level of uncertainty and business risk, while variable dividend stream will increase fluctuation of cash flows in the hands of shareholders. Thus they will require a higher rate of return in order to compensate them for the uncertainty of cash flows that they have to endure. Using 120 stocks from seven different industries in Malaysia covering over a period of six years from 2001 to 2005, our results suggest that there is no significant impact of dividend stability on stock market return. The results further reveal that dividend stability does differs significantly across different industry sectors.