The role of leverage in the asymmetric valuation of dividends

Abstract

Fuller and Goldstein (2004) find that dividend payments are more valuable in down markets than in up markets. This research extends this study to determine whether the asymmetry in valuing dividend signals is influenced by debt financing. This is essential since firms with high debt financing are more likely to be affected by down markets than those with low debt financing. Consistent with this, the results show firms with greater indebtedness experience greater declines in returns during down markets. This decline, however, was observed to be mitigated by the payment of dividends, with the greatest improvement in returns concentrated with the most highly indebted firms. These results are robust to size, beta, and book-to-market values.