Communicating Private Information to the Equity Market before a Dividend Cut: An Empirical Analysis

45 Pages Posted: 17 Mar 2013  

Thomas J. Chemmanur

Boston College - Carroll School of Management

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: February 2013

Abstract

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

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

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

440 Fulton Hall
Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Paper statistics

Downloads
234
Rank
103,968
Abstract Views
935