Abstract
We show that the firm’s decision to pay special dividends is related to its investment opportunities based on growth options that are available within the prevailing economic environment. Specifically, firms are more likely to pay special dividends when their investment opportunities are restricted by a weak economy. We also show that the share price response of special dividend payments is more favorable when the firm’s investment opportunities are restricted by a weak economy. Furthermore, the share price response to a special dividend distribution during a period in which a higher dividend tax is anticipated is more favorable when economic conditions are weak.
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