Communicating Private Information to the Equity Market before a Dividend Cut: An Empirical Analysis
45 Pages Posted: 17 Mar 2013 Last revised: 16 Dec 2017
Date Written: February 1, 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