Stock market liquidity and dividend policy in Korean corporations

Abstract

The liquidity hypothesis predicts a negative relationship between stock liquidity and dividend payout propensity, i.e., a firm will decide to pay dividends to compensate for the liquidity demand of investors. This study comprehensively examines whether the liquidity hypothesis applies to the sample of Korean firms listed in the KOSPI and KOSDAQ markets. The main results of this paper are as follows. First, the dividend policy in Korean firms does not support the liquidity hypothesis, contradictory to the existing empirical studies. Next, the explanatory power of the liquidity hypothesis is even weaker for the KOSDAQ market, inconsistent with international evidence. Finally, even when we focus on the firm-year observations with non-negligible dividend payments, the liquidity hypothesis does not explain the dividend policy of Korean firms either. Our findings significantly contribute to the literature by robustly confirming the very limited role of the liquidity hypothesis for Korean financial markets.