Financial Constraints and Dividend Policy

Abstract

Using a sample of US listed firms over the 1989-2012 period, we find that financially constrained dividend increasing firms experience superior short-run abnormal stock returns, but suffer worse operating performance compared to similar unconstrained firms. More specifically, constrained firms in more competitive industries realize poorer long-run and operating performance. Likewise, constrained firms that increase dividends during the financial crisis also deliver post-dividend-increase inferior long-run return than do unconstrained firms. We also find evidence that constrained firms show worse stock market reaction to new equity issue announcements following dividend increase but display a positive market response if they potentially have high investment growth opportunities. Our results are robust to alternative financial constraint proxies and abnormal return measures.

Keywords: Dividends, Financial constraints, Seasoned equity issues

JEL Classification: G30, G32, G34, L22, K22