Does the Timing of Dividend Reductions Signal Value? Empirical Evidence

43 Pages Posted: 2 Apr 2013 Last revised: 2 Oct 2015

See all articles by Tyler Hull

Tyler Hull

University of Massachusetts Boston

Date Written: April 30, 2013

Abstract

This paper examines a firm’s dividend reduction timing relative to other dividend reductions in the same industry. It tests if the timing of dividend cuts is informative in firm valuation. The findings suggest that during periods of less accessible external financing, such as recessions, firms with greater investment opportunities are among the first firms to make necessary dividend reductions to take advantage of such opportunities. When external financing is more accessible, firms with superior investment opportunities are able to access capital markets in lieu of dividend-reducing internal financing, indicating higher firm values for earlier dividend reductions during periods of costly external financing and significantly lower firm values for early reductions when financing is more easily obtained. A series of empirical tests show that, in periods of less accessible external financing or during a recession, early dividend-reducing firms significantly outperform late reducers in announcement day and contraction cycle cumulative abnormal returns. The results also show that, outside of a recession, early dividend-reducing firms have significantly lower industry contraction cycle returns than late dividend reducers. Additionally, this study compares early dividend reductions that occur during periods of costly external financing (or during a recession) against early reductions that occur when external financing is more available (or outside of a recession) and finds the former to have significantly higher announcement day and contraction cycle cumulative abnormal returns.

Keywords: Dividend policy, External financing, Dividend reductions

JEL Classification: G35

Suggested Citation

Hull, Tyler, Does the Timing of Dividend Reductions Signal Value? Empirical Evidence (April 30, 2013). Journal of Corporate Finance, Vol.22, 193-208, 2013. Available at SSRN: https://ssrn.com/abstract=2243505 or http://dx.doi.org/10.2139/ssrn.2243505

Tyler Hull (Contact Author)

University of Massachusetts Boston ( email )

100 William T Morrissey Blvd
Boston, MA 02125
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
165
rank
176,444
Abstract Views
1,387
PlumX Metrics