â€œPreparingâ€ the Equity Market for Adverse Corporate Events: A Theoretical Analysis of Firms Cutting Dividends
Thomas Chemmanur and
Journal of Financial and Quantitative Analysis, 2012, vol. 47, issue 5, 933-972
This paper presents the first theoretical analysis of the choice of firms between â€œpreparingâ€ and not preparing the equity market in advance of a possible dividend cut. In our model, insiders have private information about their firmâ€™s intermediate cash flow as well as about the net present value of its growth opportunity. We show that, in equilibrium, firms in temporary financial difficulties but with good long-term growth prospects are more likely to prepare the market in advance of dividend cuts, while those with permanently declining earnings are less likely to prepare the market. Our model generates several new testable predictions.
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