45 Pages Posted: 17 Mar 2013
Date Written: February 2013
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.
Keywords: market preparation, dividend cut, announcement returns, stock return volatility
JEL Classification: G35, D82
Suggested Citation: Suggested Citation
Chemmanur, Thomas J. and Tian, Xuan, Communicating Private Information to the Equity Market before a Dividend Cut: An Empirical Analysis (February 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2234467 or http://dx.doi.org/10.2139/ssrn.2234467