Dividend Resumption, Future Profitability and Stock Returns

Abstract

We present a new approach to examining the dividend signalling hypothesis by investigating dividend resumptions by former payers. Evidence regarding the signalling hypothesis has been mixed to date. In support of previous work, we fund that dividend policy is sticky, whereby the achievement of profitability does not necessarily lead to the resumption of dividend payment. We find no evidence of future growth in profitability following the resumption of dividend payment, but some evidence of a negative effect in the following two years, which is clearly inconsistent with dividend signalling theory. Firms resuming dividend payment fail to achieve significant excess stock returns in the three years after the dividend decision.