Abstract
AbstractIn this article, we examine the wealth effects of unsustainable dividend payments and explore the economic forces that may explain why they exist. We find that the larger the dividend–earnings differential, the lower the short‐ and long‐run wealth effects to shareholders. In addition, the dividend–earnings differential increases not only the probability of a subsequent dividend cut over the next four quarters but also the likelihood that the cut will be greater than 5%. Overall, our findings suggest that although investors are not fooled by unsustainable dividend payments, the negative announcement effects are in anticipation of protracted poor performance.
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