Dividends and Losses

Harry DeAngelo, Linda DeAngelo and Douglas J Skinner

Journal of Finance, 1992, vol. 47, issue 5, 1837-63

Abstract: An annual loss is essentially a necessary condition for dividend reductions in firms with established earnings and dividend records: 50.9 percent of 167 NYSE firms with losses during 1980-85 reduced dividends, versus 1.0 percent of 440 firms without losses. As hypothesized by Merton H. Miller and Franco Modigliani, dividend reductions depend on whether earnings include unusual items that are likely to temporarily depress income. Dividend reductions are more likely given greater current losses, less negative unusual items, and more persistent earnings difficulties. Dividend policy has information content in that knowledge that a firm has reduced dividends improves the ability of current earnings to predict future earnings. Copyright 1992 by American Finance Association.

Date: 1992
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