Did Option Prices Signal the 2008 and 2009 Dividend Cuts and Omissions?

Abstract:     
The large number of dividend cuts and omissions in 2008 and 2009 provides the opportunity to study the predictability of dividend cuts in a controlled environment. We employ the information contained in forward-looking option prices in an attempt to predict dividend cuts. We provide evidence that implied dividends, calculated from put and call prices on a firm’s stock, are significantly related to a firm’s propensity to cut or omit its dividend. Option traders made clear their anticipation of these events through price adjustments reflected in implied dividends that allow us to successfully identify firms more likely to reduce or omit dividend payments.

Number of Pages in PDF File: 32

Keywords: Dividend Cuts, Dividend Omissions, Implied Dividends

JEL Classification: G12, G13, G14

working papers series