The effect of growth opportunities on the market reaction to dividend cuts: evidence from the 2008 financial crisis

Xin Che (), Andre P. Liebenberg (), Ivonne A. Liebenberg () and Brandon C. L. Morris ()
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Xin Che: University of Mississippi
Andre P. Liebenberg: University of Mississippi
Ivonne A. Liebenberg: University of Mississippi
Brandon C. L. Morris: Wright State University

Review of Quantitative Finance and Accounting, 2018, vol. 51, issue 1, No 1, 17 pages

Abstract: Abstract Dividend cuts are typically associated with a negative stock price reaction. We contend that the market’s reaction to dividend cuts depends on the reason for the cut and the economic environment. Specifically, we posit that when external financing is constrained, firms that cut dividends and have high growth opportunities are better off than dividend cutters with low growth opportunities. We test this growth opportunities hypothesis by examining stock price reactions to dividend cuts around the 2008 financial crisis. Not surprisingly, we find negative average abnormal returns around the announcement day. However, consistent with our hypothesis, we find that firms with high growth opportunities experience higher abnormal returns. We also find that firms with high growth opportunities are more likely to resume the dividend payment within 5 years of the dividend cut and firms that resume their dividends have significantly higher long-term returns than non-resumers. Taken together, our evidence provides strong support for the growth opportunities hypothesis.

Keywords: Dividend cuts; Market reaction; Financial crisis; Growth opportunities (search for similar items in EconPapers)
JEL-codes: G01 G30 G35 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11156-017-0663-8

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