Dividend Reductions, Reinstatements, and Substitution with Repurchases

Abstract

Using a sample of dividend cuts and omissions between 1994 and 2013, we explore the cycle of dividend reductions due to a financial shock and the subsequent increase in payouts during the recovery. We indeed find that firms are more likely to cut and/or omit dividends during the recent crisis. While financial constraints are a first order consideration in these decisions, many of these firms reinitiate dividends and/or initiate share repurchase programs soon after, indicating that the effects of the crisis are less permanent than the causes of cuts and omissions in other years. Firms with a dividend-preferring blockholder reinstate faster than other firms following the crisis. Additionally, firms without a recent repurchase history that cut dividends during the crisis are more likely to subsequently repurchase than firms who cut in non-crisis years. Firms with dividend-preferring blockholders do not exhibit this propensity to shift payouts, indicating that some firms used the crisis as an opportunity to modify their payout policies. Market reactions to dividend reductions during the crisis are significantly worse than in non-crisis years, indicating that investors did not anticipate the quicker recovery in corporate payout in post-crisis years.

Keywords: payout policy, dividends, repurchases, substitution

JEL Classification: G30, G35