Communicating Private Information to the Equity Market before a Dividend Cut: An Empirical Analysis
Thomas J. Chemmanur
Boston College - Carroll School of Management
Indiana University - Kelley School of Business - Department of Finance
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
This paper presents the first empirical analysis of the choice of firms regarding whether or not to release private information (“prepare the market”) in advance of a possible dividend cut, and the consequences of such market preparation. We use a hand-collected data set of dividend cutting firms that allows us to distinguish between prepared and non-prepared dividend cutters and test the implications of two alternative theories: the “signaling through market preparation” theory and the “stock return volatility reduction” theory. We document several important differences between prepared and non-prepared dividend cutters. Overall, our empirical results are consistent with the signaling theory.
Number of Pages in PDF File: 45
Keywords: market preparation, dividend cut, announcement returns, stock return volatility
JEL Classification: G35, D82
Date posted: March 17, 2013
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