When Cutting Dividends Is Not Bad News: The Case Of Optional Stock Dividends

Thomas David and Edith Ginglinger
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Thomas David: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper provides new evidence on dividend policy by studying optional stock dividends, a mechanism that allows firms to cut cash payouts without a negative market reaction. We find that highly leveraged firms with limited cash holdings and large institutional ownership are more likely to offer optional stock dividends to their hareholders. These firms are the most committed to paying dividends, and optional stock dividends provide them with an opportunity for a stealth cut in dividends during economic downturns. Shareholders overwhelmingly approve optional stock dividends at general meetings with the majority favoring stock dividends over cash dividends. Further, in contrast to dividend cuts, shareholders do not view optional stock dividends as bad news. Our results support the monitoring explanation of optional stock dividends and show that shareholders value a firm's ability and willingness to pay dividends, even if the final cash payout is reduced.

Keywords: Long-term investors; Dividend cuts; Monitoring; SEOs; Scrip dividends; Stock dividends; Dividends (search for similar items in EconPapers)
Date: 2015-06
Note: View the original document on HAL open archive server: https://hal.science/hal-01637541v1
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Published in 32nd International Conference of the French Finance Association - AFFI 2015, Jun 2015, Cergy, France

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Related works:
Journal Article: When cutting dividends is not bad news: The case of optional stock dividends (2016)
Working Paper: When cutting dividends is not bad news: The case of optional stock dividends (2016)
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