Dividend cuts and predictability

Ruey-Shii Chen and Tai-Wei Zhang ()
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Ruey-Shii Chen: Tatung University
Tai-Wei Zhang: Ming Chuan University

Journal of Economics and Finance, 2018, vol. 42, issue 2, No 2, 249-267

Abstract: Abstract This study provides a plausible economic interpretation to examine why the dramatic reversal of return and dividend growth predictability by dividend yield (DY), as proposed by Chen (J Financ Econ 92: 128–151, 2009), occurs in the U.S. stock market. Because severe dividend cuts took place mostly in the prewar period and almost disappeared in the postwar period, we argue that abnormally high dividend cuts can drive a threshold effect on log DY, thereby triggering dividend growth predictability when log DY is above the threshold. However, this predictive ability completely disappears when log DY is below the threshold. Empirically, we find the existence of a log DY threshold point, above which future returns, as well as dividend growth, are significantly negatively correlated with log DY, yet below which future returns are significantly positively correlated with log DY—but lacking predictability for dividend growth.

Keywords: Predictability; Dividend cuts; Dividend yield (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s12197-017-9395-9

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