What does the timing of dividend reductions signal?

Xin Che () and Kathleen P. Fuller ()
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Xin Che: California State University, Fullerton
Kathleen P. Fuller: University of Mississippi

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 3, No 8, 1035-1061

Abstract: Abstract Dividend reduction theory suggests that during an economy-wide shock, a relatively early dividend reduction indicates that a firm reduces its cash outflows to pursue positive net present value projects, whereas a relatively late dividend reduction is due only to cash constraints rather than investment strategies. This paper directly tests the dividend reduction theory. Consistent with the theory, we find that during a recession, early-dividend reducers make 5% more firm investment than late-dividend reducers within the reduction year. Further, the investment levels are not significantly different between early and late reducers outside of recessions. The results also suggest that the signaling effect does not persist, implying that in a recession, the investment opportunities pursued by the early reducers are short-lived.

Keywords: Dividend reduction; Recession; Timing; Investment (search for similar items in EconPapers)
JEL-codes: G35 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-019-00867-8

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