The Market Reaction to Discontinuing Regular Stock Dividends

Aaron L Phillips, H Kent Baker and Richard B Edelman

The Financial Review, 1997, vol. 32, issue 4, 801-19

Abstract: This paper investigates the behavior of returns to shareholders of NYSE and AMEX firms that publicly announce the discontinuance of regular stock dividends. Using event-type methodology, the results show that the average abnormal return for NYSE and AMEX firms is negative but not statistically significant on the event date. Partitioning the sample by stock-related characteristics shows that for small firms with low stock prices and low institutional ownership, management's decision to drop regular stock dividends conveys a significantly negative signal, which, in turn, causes stock prices to decline. Firms that drop a stock payment and simultaneously initiate or increase cash dividends experience a significant increase in shareholder wealth. However, firms that drop the stock dividend policy and do not begin a cash dividend policy experience a sharp decline in shareholder wealth. Copyright 1997 by MIT Press.

Date: 1997
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