The effects of the stock price crash on the dividend policy

The purpose of this study is to examine whether the stock price crash affects the dividend policy. The divided policy is measured by the amount of dividend paid, compared with the size of the firm. Firms that experience stock price crash have strong incentives to reduce agency costs. Specifically, we examine whether firms with stock price crash use dividend policy to reduce agency costs between the management and the outside investors and to inform an information about firm’s future profitability to the market. In particular, we analyze whether this relationship would be different depend on the level of agency problem. In addition, we investigate the dividend paying firm's future value. The sample of this study is 7,736 Korea listed firm-year observations from 2001 to 2016. Empirical findings are summarized as follows. First, we find that firms with stock price crash are more likely to pay dividend to reduce the agent cost and provide additional an information to outside investors, and this relationship is more pronounced with higher agent costs. In addition, we find that firm's value increase after the dividend payment. This paper contributes to extant literature by showing the empirical results for the signaling effect of the dividend, and provides an additional information for the firm with stock price crash.