When Cutting Dividends Is Not Bad News: The Case of Optional Stock Dividends

Abstract

We provide evidence on optional stock dividends, a mechanism that allows shareholders to choose between stock dividends and cash dividends. We find that, in contrast to dividend cuts, shareholders do not view this option as bad news. They overwhelmingly approve it at general meetings, with the majority favoring stock dividends over cash dividends. We find that large firms with limited cash holdings and a large institutional ownership are more likely to offer optional stock dividends to their shareholders. These firms are the most committed to paying dividends, and this option provides them financial flexibility by allowing temporary cuts in cash outflows without altering their nominal dividend policy.

Keywords: dividends, stock dividends, scrip dividends, dividend cuts, dividend reinvestment plans (DRIP), backdoor equity

JEL Classification: G35, G32