A Closer Look at Dividend Omissions: Payout Policy, Investment and Financial Flexibility
55 Pages Posted: 31 Jan 2009
Date Written: November 6, 2008
Abstract
We adopt a comprehensive approach to studying dividend omissions to better understand the motivation behind this important policy decision. We find that poor operating performance, poor financial flexibility, high investment and increased risk are factors that affect the likelihood of a dividend omission. Not all dividend omissions, however, are the same. For 25% of dividend omitting firms, the omission signals a quick turnaround in their operating performance and results in a resumption of dividends within three years from the omission. Our analysis suggests these firms use the dividend omission strategically to improve their financial flexibility, allowing them to pursue valuable investment opportunities. The remaining firms continue to be financially constrained and under-perform their peers after the omission. One possible explanation for this divergence in performance is the quality of their management.
Keywords: Payout Policy, Dividend Omission, Dividend Resumption, Debt Overhang, Financial Flexibility, Management Quality
JEL Classification: G32, G35
Suggested Citation: Suggested Citation
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