Communicating Private Information to the Equity Market Before a Dividend Cut: An Empirical Analysis
Thomas Chemmanur and
Journal of Financial and Quantitative Analysis, 2014, vol. 49, issue 5-6, 1167-1199
This paper presents the first empirical analysis of the choice of firms regarding whether to release private information (â€œprepare the marketâ€ ) in advance of a possible dividend cut and the consequences of such market preparation. We use a hand-collected data set of dividend cutting firms, which allows us to distinguish between prepared and nonprepared dividend cutters and to test the implications of two alternative theories: the â€œsignaling through market preparationâ€ theory and the â€œstock return volatility reductionâ€ theory. We document several important differences between prepared and nonprepared dividend cutters. Overall, our empirical results are consistent with the signaling theory.
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