When are Dividend Omissions Good News?

39 Pages Posted: 3 Jul 2007

See all articles by Laarni T. Bulan

Laarni T. Bulan

Cornerstone Research

Narayanan Subramanian

Cornerstone Research - Boston Office

Lloyd Tanlu

Washington and Lee University; University of Washington - Department of Accounting; Northeastern University

Date Written: March 2007

Abstract

A significant number of dividend omissions are actually good news, signaling a turnaround in the fortunes of the omitting firms after a period of poor performance, and frequently resulting in a resumption in dividend payments within five years of the omission. The market reaction, however, is similar for good and bad omissions, indicating that investors do not separately identify the two at the announcement of omission. We find two key determinants of whether an omission is good or bad. First, we find that good omitters have stronger fundamentals at the time of omission - they have higher profitability and lower levels of debt overhang. Our results suggest good omitters utilize the cash saved by the omission to reduce their (already low) overhang while bad omitters have persistent debt overhang and continue to perform poorly after the omission. Second, we find that an omission is more likely to be good if it occurred when market sentiment for dividend paying firms was high, i.e. the firm was penalized by the market more heavily as a consequence of the dividend omission. We posit that a good omitter is a firm that recognizes the urgency of taking the "bitter medicine" in order to heal itself of its operating and financial malaise.

Keywords: payout policy, dividend omissions, debt overhang

JEL Classification: G32, G35

Suggested Citation

Bulan, Laarni Tobia and Subramanian, Narayanan and Tanlu, Lloyd D., When are Dividend Omissions Good News? (March 2007). Available at SSRN: https://ssrn.com/abstract=997427 or http://dx.doi.org/10.2139/ssrn.997427

Laarni Tobia Bulan (Contact Author)

Cornerstone Research ( email )

Boston, MA
United States

Narayanan Subramanian

Cornerstone Research - Boston Office ( email )

699 Boylston Street
Boston, MA 02115
United States
(617) 927-3000 (Phone)
(617) 927-3100 (Fax)

HOME PAGE: http://www.cornerstone.com/

Lloyd D. Tanlu

Washington and Lee University ( email )

Lexington, VA 24450
United States

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Northeastern University ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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