Dividend Reductions and Interim Effect: UK Evidence

Abstract

Short-term price reactions to dividend reductions of UK firms that did not reduce their dividends in the previous three-year period are studied. Price reactions to interim and final dividend reductions are found to be significantly negative and stronger for interim dividend reductions. Though market reacted negatively around final dividend reduction announcements it bounced back to its prior level within one month of announcements. The magnitude of price reactions to dividend reductions is found to be statistically related to the size of the dividend reduction, the post-announcement effect from day 2 to day 20, the gearing ratio and dummy variable interim versus final dividend reduction. Interim dividend reductions were found to have incremental information about future annual earnings changes. No incremental information content was found for the final dividend reductions; however, they have information content when included as the only independent variable.