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Are Dividend Omissions Truly the Cruelest Cut of All?

Published online by Cambridge University Press:  06 April 2009

William G. Christie
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Abstract

Signaling and agency cost theories of dividend policy predict that omissions will produce a larger average decline in equity values than will reductions of less than 100 percent. However, this paper identifies a U-shaped relation between announcement day risk-adjusted excess returns and the percentage decline in dividends. The significantly smaller than expected price reaction to dividend omissions cannot be traced to growth opportunities, nor to a tendency for firms to delay omission announcements. While omitting firms provide higher per share dividends within five years of the dividend action than do firms that severely reduce payments, future dividends are unrelated to the market's response.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 3 , September 1994 , pp. 459 - 480
Copyright
Copyright © School of Business Administration, University of Washington 1994

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