Firm Value and Payout Suspensions During Financial Market Distress

64 Pages Posted: 10 Apr 2021 Last revised: 5 Aug 2022

See all articles by Davide Pettenuzzo

Davide Pettenuzzo

Brandeis University - International Business School

Riccardo Sabbatucci

Stockholm School of Economics; Swedish House of Finance

Allan Timmermann

University of California, San Diego (UCSD) - Rady School of Management

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Date Written: July 9, 2021

Abstract

We use high-frequency data on firms’ dividend and buyback suspensions to estimate the effect on firm value from preserving cash during periods of financial market distress such as the Global Financial Crisis and the Covid-19 pandemic. Our results suggest that saving one percent in cash by suspending dividends is associated with a 2.5 percent increase in firm value. New dynamic tests based on the sequencing of firms’ financing decisions suggest that firm behavior was more in line with the Myers and Majluf (1984) pecking order theory during the pandemic than during the Global Financial Crisis.

Keywords: Dividend and buyback suspensions; value of cash; pecking order theory; high frequency data; financial market distress, Covid-19

JEL Classification: G14, G32, G35

Suggested Citation

Pettenuzzo, Davide and Sabbatucci, Riccardo and Timmermann, Allan, Firm Value and Payout Suspensions During Financial Market Distress (July 9, 2021). Swedish House of Finance Research Paper No. 21-10, Available at SSRN: https://ssrn.com/abstract=3823258 or http://dx.doi.org/10.2139/ssrn.3823258

Davide Pettenuzzo

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

Riccardo Sabbatucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Allan Timmermann

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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