To Cut or Not to Cut a Dividend

53 Pages Posted: 20 Nov 2010

Date Written: November 19, 2010


Motivated by the argument that managers will cut their dividend only when there are visible signs of poor performance, I revisit the issue of why firms cut their regular cash dividend. I use a propensity score matching methodology to differentiate firms according to their likelihood of cutting a dividend where the likelihood is a function of observable firm characteristics. I have three main findings: First, I find that the market reaction to dividend cut announcements is proportional to the element of surprise. Specifically, for a given magnitude of the dividend cut, I find that the three-day cumulative abnormal return around the dividend cut announcement is more negative for firms with less visible signs of poor performance compared to those that have experienced a more prolonged period of poor performance. Second, while on average firms cut their dividend as a last resort response to poor performance as suggested by prior studies, a significant number of firms cut their dividend pro-actively even without such visible signs of poor performance. The preservation of a low leverage ratio appears to be of first-order importance to these "pro-active" firms. Third, I find that by and large, firms use their poor performance to justify a dividend cut. Moreover, the absence of concurrent poor performance seems to preclude the option of cutting the dividend. Instead, firms may resort to cut back on capital expenditures.

Suggested Citation

Bulan, Laarni Tobia, To Cut or Not to Cut a Dividend (November 19, 2010). Available at SSRN: or

Laarni Tobia Bulan (Contact Author)

Cornerstone Research ( email )

Boston, MA
United States

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