A Closer Look at Dividend Omissions: Payout Policy, Investment and Financial Flexibility

55 Pages Posted: 31 Jan 2009

See all articles by Laarni T. Bulan

Laarni T. Bulan

Cornerstone Research

Narayanan Subramanian

Cornerstone Research - Boston Office

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

Bulan, Laarni Tobia and Subramanian, Narayanan, A Closer Look at Dividend Omissions: Payout Policy, Investment and Financial Flexibility (November 6, 2008). Available at SSRN: https://ssrn.com/abstract=1335854 or http://dx.doi.org/10.2139/ssrn.1335854

Laarni Tobia Bulan (Contact Author)

Cornerstone Research ( email )

Boston, MA
United States

Narayanan Subramanian

Cornerstone Research - Boston Office ( email )

699 Boylston Street
Boston, MA 02115
United States
(617) 927-3000 (Phone)
(617) 927-3100 (Fax)

HOME PAGE: http://www.cornerstone.com/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
482
Abstract Views
2,290
rank
64,890
PlumX Metrics