Dividend policy is a key aspect of today's business activities.

Set by the board of

directors, dividends are tracked by potential investors as indicators of a company's health and
may be used by investors seeking steady returns on their investment funds. Companies which
are characterized by high rates of growth and which have high requirements for research and
development are likely to have a low dividend payout because funds are needed for the
continuation of the business. Companies which are already established in the market and which
do not have immediate needs for funds may have higher payout ratios in order to attract
investors and provide a higher rate of return to shareholders.
In their article, "Dividend Yields and Stock Returns: Evidence of Time Variation Between
Bull and Bear Markets," Gombola and Liu suggest that there are persistent shifts in the
relationship between stock returns and dividend yields among bull and bear markets. This
research examines the article and considers the ramifications of the article on managers'
decision-making process and capital budgeting techniques.
Gombola and Liu find that dividend yield is positively related to return during bear
markets, but negatively related to return to bull markets. It is the time variance between the
two markets which the authors suggest help explain the unusual results of earlier studies.
In order to conduct their study, the authors first set three definitions for bull (up) and
bear (down) markets (