How the Timing of Dividend Reductions Can Signal Value
39 Pages Posted: 2 Apr 2013 Last revised: 2 Oct 2015
Date Written: December 1, 2014
This paper examines a firm’s dividend reduction timing relative to other dividend reductions in the same industry. A model is proposed where the timing of dividend cuts signal true firm value. It is suggested that during periods of less accessible external financing, such as recessions, firms with greater investment opportunities will be among the first firms to make necessary dividend reductions, to take advantage of such opportunities. When external financing is more available, firms with superior investment opportunities will be 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.
Keywords: Dividend reductions, Dividend policy, External financing
JEL Classification: G35
Suggested Citation: Suggested Citation