Dividend Cuts Research Articles

Do dividends and share repurchases convey information about financial strength? An exploration of the disparities between banks and industrial firms

AbstractDiffering from prior literature, this article suggests dividends are positively associated with financial strength for both financial institutions (i.e., banks) and non‐financial firms (i.e., industrials), and that this relationship is much more pronounced for banks. We also find that the signaling impacts of dividend changes on financial strength are asymmetric for these two groups as a decrease (increase) in dividends is more powerful than an increase (decrease) for banks (industrials). This suggests that dividend cuts send a more significant negative signal of bank financial strength than similar decreases by industrial firms, and that dividend increases say more about industrials' improvements in financial strength than those by banks. Similar to dividends, share repurchases are indications of financial strength for industrials but not for banks. This suggests that share repurchases serve more as a buffer (substitute) of dividends for banks (industrials).

Dividend omissions and dividend cuts behaviour: a dynamic random-effect probit panel regression analysis

PurposeThe study aims to examine the dividend omissions and dividend cuts behaviour of manufacturing and non-financial services firms to identify the determinants of dividend omissions and dividend cuts.Design/methodology/approachThe study analyses the financial data of 3,546 firms from 2011 to 2020 (35,460 firm-year observations) using a dynamic random-effect probit panel regression model.FindingsThe results suggest that profitability, growth opportunity, leverage, liquidity, risk, extraordinary income, shareholding pattern and buyback are major determinants of dividend omissions. Similarly, dividend cut in the previous year, profitability, operating cash flow, risk and extraordinary income are major factors leading to dividend cuts.Research limitations/implicationsFirms which omit the dividend are less likely to start paying dividend in subsequent years, whereas firms which cut the dividend may increase dividend in later years. Also, profitability decreases for a significant number of firms post dividend omission and cut. This indicates that dividend omission is a more prominent signal than a dividend cut for the financial health of a firm.Practical implicationsThe determinants identified in the study enable analysts and portfolio managers to decide the propensity of dividend omission and cut even before actual announcements and can alleviate the significant loss in the portfolio. Also, managers and the board of directors would be able to monitor the firm’s financial performance to avoid the situation leading to dividend omissions and cuts.Social implicationsThe study strongly recommends that firms should voluntarily pay dividends to shareholders to encourage the healthy participation of retail shareholders in the equity market and create a long-term win–win situation for all stakeholders in society. If a large number of firms continue not to pay the dividend, the study appeals to the regulators to intervene to protect shareholders' interests for the greater good of society.Originality/valueTo the best of author’s knowledge, this is the first study to empirically identify the determinants of dividend omission and cut in the unique setting like India where dividend taxation had undergone a significant change.

Dividend cuts and a firm's investment opportunity set

AbstractThis paper re‐examines corporate dividend payout policy by focusing on how investors evaluate dividend cuts. Our focus is to understand why despite the documented on average negative market response, many dividend‐cutting firms experience a positive market response. We juxtapose a well‐established literature on corporate payout policies with the literature on the role of prior information in investor evaluation of newly arrived information and document that the market responds positively to dividend cuts when firms have positive investment opportunity sets. Our results support the primary thesis that not all dividend cuts are bad news—it depends. We validate this result by documenting that firms cutting dividends in the presence of investment opportunities do make significant investments such as capital expenditures and merger and acquisition activities in future years. Furthermore, we also find that future operating profitability is higher for dividend‐cutting firms with relatively higher investment opportunities. We also document that among dividend‐cutting firms, there is a statistically significant difference in the buy‐and‐hold returns for up to 2 years, between firms with high versus low investment opportunities. This provides support for the economic significance of our results. These results provide new evidence on how investors interpret corporate payout policies to distinguish among dividend cuts.

The Effect of the COVID-19 Pandemic on Corporate Dividend Policy of Moroccan Listed Firms

The recent literature provides conflicting findings and remains inconclusive regarding the impact of the COVID-19 crisis on firms’ dividend policies. In this paper, we examine the dividend policy of Moroccan firms listed in the Casablanca Stock Exchange during the COVID-19 shock. Using panel data from 2015 to 2021 of non-financial listed firms, we observe that the proportion of dividend cuts during the last seven years (2015–2021) achieved its highest level on the onset of the crisis. Furthermore, results of the ordinary least square (OLS) regressions demonstrate that the COVID-19 shock has negatively affected the dividend payout of Moroccan listed firms. This study implies that, in times of economic crisis, Moroccan firms exhibit risk-averse behavior by prioritizing the retention of earnings over distributing dividends, scarifying, therefore, the transmission of positive signals to investors and external stakeholders. Furthermore, our results reveal that profitability, growth opportunities, leverage, and size are relevant determinants of corporate dividend policy.

Understanding the price reaction to large dividend increases

Recent studies report muted price reactions to large dividend increases, attributing the phenomenon to the fact that these events are part of volatile dividend streams and are followed by dividend cuts. I find that the price also reacts slower to large dividend increases, suggesting the price effects of these events are more uncertain than small dividend increases. Further analysis shows that large dividend increases display some persistence and this offsets the effects of subsequent dividend cuts on future dividends. These results are more consistent with the muted price reaction arising from market concerns about dividend volatility than subsequent dividend cuts.

Restructuring in family firms: Balancing family objectives and economic prosperity

This study analyzes the extent to which family firms adopt distinct restructuring strategies (employee downsizing, management dismissals, asset retrenchment, dividend cuts) in response to declining performance. We hypothesize that family firms select different restructuring strategies than non-family firms because of the mixed gamble between economic benefits and socioemotional wealth (SEW), and that this difference diminishes as the severity of decline increases. The hypotheses were tested with a sample of 357 decline incidences in 283 German firms between 2005 and 2018 and are largely confirmed; at low decline severity, family firms downsize and retrench less, but this tendency is reversed as the severity increases. They tend to cut dividends more strongly and are less willing to dismiss managers, irrespective of their decline severity.

OWNERSHIP STRUCTURE AND CORPORATE RESTRUCTURING: DOES IT HAVE AN IMPACT?

Ownership structure has a role in decision making by the company. This study wants to examine the effect of ownership structure on the choice of corporate restructuring: asset divestment and dividend cut. This study focuses on the restructuring strategy on manufacturing firms that experience declining performance, using the proxy of decreasing Earnings Before Interest and Tax for two or more consecutive years, in the period of 2010 until 2020. Data analysis techniques using OLS Regression through Stata Program. The result shows: 1. Managerial ownership has positive impact on asset divestment, but family ownership, liquidity and inflation (as control variable) have negative impact on asset restructuring, namely, assets divestment, and 2. Family ownership have positive significant impact on financial restructuring through dividend cut, but institutional ownership have negative impact on dividend cut restructuring.. Applications/Originality/Value: This study provides strengthening empirical evidence about the impact of ownership structure on corporate restructuring (divestment and dividend cut) choices in distress firms. This study is appropriate to carried out in Indonesia, which has a high leveraged firm on average 43% and emerging market. 
 
 Keyword: Managerial ownership, institutional ownership, family ownership, assets divestment, restructuring

Corporate dividend policy in the time of COVID-19: Evidence from the G-12 countries

This paper examines how the COVID-19 pandemic affects corporate dividend policy. Utilizing a sample of 8889 firms listed in the G-12 countries, the findings show that although the proportion of dividend cuts and omissions is significantly higher during the pandemic, yet the majority of firms could either maintain or increase dividends. By doing so, firms might aim to purse more stable dividend policies and signal their financial prospects during the crisis, as posited by dividend signaling theory. Logit regression findings reveal that firm profitability, earnings prospects, size and leverage appear to be important determinants of dividend policy decisions during the pandemic.

Fictitious dividend cuts in the CRSP data

We compare CRSP dividend data to data from firms' financial statements in the SEC's EDGAR database. Data screens typically used in the extant literature produce a sample in which about half of the apparent reductions in dividends per share are not actually dividend cuts. Many of the fictitious cuts are due to CRSP misclassifying special dividends as regular dividends. We demonstrate that the fictitious cuts can affect point estimates and inferences in studies of the information content of dividends. We provide a simple filter that eliminates most of the fictitious cuts in our sample – remove dividend cuts from the sample that are preceded by a dividend increase in the prior quarter. This filter produces empirical results that are similar to our sample of true cuts.

New Bank and Transportation Stock Indexes from 1793 to 1871, with Comparisons Across Region and Sector, and Against Prior Indexes

Good data on US stock market returns before the advent of the Cowles’ (1939) dataset in 1871 have been scarce. Small samples and an inability to observe dividends render current estimates suspect. I report total return for a much larger sample of stocks before 1871 than heretofore seen. I observe prices and dividends for all the large banks trading in the markets of Boston, Philadelphia, Baltimore and Virginia, where past research had been confined mostly to banks headquartered in New York. I also observe prices and dividends for all the large turnpikes, canals, and railroads that traded in this period. In both cases I find significant survivorship bias in prior compilations. Banks that went bust or went to the wall in the Panics of 1819 and 1837 have been ignored. Early transportation firms that soared on speculation and then collapsed without ever paying a dividend have also been omitted from the record. Likewise, the dividend cuts and omissions characteristic of hard times have been overlooked. Net of correcting these survivorship biases, in the period before the Civil War I find significantly lower stock market returns than reported in Siegel (2014). I likewise find bonds out-performing stocks during this period. The paper concludes with a discussion of why stocks should have performed poorly, and bonds well, under the distinctive macroeconomic conditions that prevailed before the Civil War. [This paper has been updated by later work. See revision notes that follow this abstract.]

Corporate Payout Policy and Credit Risk: Evidence from Credit Default Swap Markets

We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions and among firms experiencing financial distress. CDS spreads also react more strongly to permanent and less anticipated dividend cuts. The size of the CDS reaction is more pronounced for financial firms, which are inherently more opaque. In contrast, CDS spreads react weakly to dividend raises and share repurchases. The results show that the information effect of dividend changes dominates the wealth-transfer effect. This paper was accepted by Kay Giesecke, finance.

REIT Spreads Around Dividend Cuts and Suspensions During the Financial Crisis

We examine bid-ask spreads, depths, and adverse selection components of bid-ask spreads for REITs announcing dividend cuts or suspensions before, during, and after the 2008 financial crisis. We compare measures of spread, market depth, and adverse selection components of bid-ask spreads across time periods and between event and non-event REITs. We find that on announcement days of dividend cuts and suspensions, bid-ask spreads of event REITs are narrower and market depths are larger than that of non-event REITs during and after the financial crisis periods. These findings suggest improved liquidity of REIT shares on announcement days of dividend events. We do not find any significant change in adverse selection components of bid-ask spreads. Our results regarding improved liquidity during the financial crisis period are consistent with Calomiris and Wilson. Calomiris and Wilson report that during the capital crunch in the 1930s, banks facing wider bid-ask spreads used dividend cuts as a way to preserve capital to avoid selling equity in a low-liquidity or high-transaction cost environment (wider bid-ask spread).

Distracted institutional shareholders and corporate cash holdings

We investigate whether institutional investors’ distraction affects corporate cash holdings. We also investigate two channels that may explain the relationship (if any) between institutional shareholder distraction and corporate cash holdings. First, the acquisition channel predicts that a reduction of monitoring intensity allows the firm to engage in costly and value-destroying acquisitions and this, in turn, lowers cash holdings. Second, the payout channel suggests that firms with distracted shareholders are associated with dividend cuts, and therefore, shareholder-distraction-related payout cuts may leave the firm with more cash holdings. Using 26,727 firm-year observations (3813 unique firms) over the period 1980 to 2010, we find evidence that institutional shareholder distraction is negatively associated with corporate cash holdings. We also find that this effect is driven mainly by the acquisitions channel. The evidence is robust to an alternative estimation method and alternative measures of key variables.

The Effect of War Risk on Managerial and Investor Behavior: Evidence from the Brussels Stock Exchange in the Pre-1914 Era

With two news-based measures on war, I document that managers mitigated war risk through dividend cuts, arguably to establish a war chest. Moreover, I find that companies postponed their initial public offerings and that foreign companies were more likely to delist after the onset of wars. Investors reacted negatively to the increase in war news coverage. There is evidence of mean-reversion after a threat of war and a negative drift following the start of war. Finally, I highlight the importance of proximity to military conflicts. In general, the evidence indicates that both managers and investors became more risk averse as a consequence of war news.

Does managerial reluctance of dividend cuts signal future earnings?

In this study, we develop alternative dividend stickiness measures as a proxy for managerial reluctance to cut dividends and investigate the information content of dividend stickiness. We find that firms with stickier dividend payout have greater earnings persistence, earnings growth, and pricing multiples on earnings. Further analysis shows that the signaling effect of dividend stickiness on future earnings is more pronounced for firms with less catering incentives to avoid dividend cuts. Our results suggest that dividend stickiness has incremental explanation over dividend payout for signaling future earnings.

Elective stock and scrip dividends

We investigate firms' decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and scrip dividends are used more when access to external financing is costly. Our results are robust to using the 2008 financial crisis as an exogenous shock to credit supply. Cash preservation is the most important corporate incentive to use scrip dividends as they tend to be distributed in combination with dividend cuts and with major corporate investments such as debt-financed mergers and acquisitions. Analysis of US dividend reinvestment plans by which investors purchase new shares confirms firms' cash-preservation motives.

The price of boardroom social capital: The effects of corporate demand for external connectivity

Abstract In this study we examine the effect of boardroom social capital, defined as the aggregate benefits from the social networks of outside directors, on director compensation. Using a large panel of nine thousand firm-year observations for the period 2007–2013, we find that boardroom social capital is positively priced. Further analysis shows that firms pay a premium for networked directors. Firms that have suffered adverse events such as a bad merger, performance declines, or dividend cuts, pay a higher connection premium. We determine that well-connected directors perform important board roles and hold multiple directorships. Overall, our results are consistent with an efficient contracting explanation for boardroom pay.

Is Bad News Ever Good for Stocks? The Importance of Time-varying War Risk and Stock Returns

With two news-based measures on war, I document that managers mitigated war risk through dividend cuts, arguably to establish a war chest. Moreover, I find that companies postponed their initial public offerings and that foreign companies were more likely to delist after the onset of wars. Investors reacted negatively to the increase in war news coverage. There is evidence of mean-reversion after a threat of war and a negative drift following an act of war. Finally, I highlight the importance of proximity to military conflicts. In general, the evidence indicates that both managers and investors became more risk averse as a consequence of war news.

SENSITIVITY OF DIVIDENDS TO EARNINGS CHANGES

This paper deals with probabilities of dividend changes for a given change in earnings. This so-called sensitivity of dividends to earnings changes was analyzed on a sample of Advanced economies and Emerging and developing economies, according to International Monetary Fund classification. The main goal of the research is to empirically verify the assumption that companies are generally reluctant to cut or reduce dividends regardless of the stage of economic development of the country. In addition, the probabilities of dividend changes for a given change in earnings in characteristic groups of countries - Baltic countries and former Yugoslavia countries - have been analyzed. Research results show that earnings are significant dividend factor in all sample countries, that companies are generally reluctant to cut or decrease dividends and that dividends are less sensitive to earnings changes in Advanced economies, compared to Emerging and developing economies. Research has also shown that dividends are less responsive to earnings changes in former Yugoslavia countries compared to Baltic countries. These findings are in line with Lintner (1956) who has shown that reduction in earnings is not necessarily followed by reduction in dividends. Such behavior of dividends can be explained even by prospect theory created by Kahneman and Tversky (1979). They have shown that investors are more sensitive to negative events than to positive events and that investors do not make decisions in relation to the overall wealth but in relation to a particular reference point, which is usually the status quo. If this is the case, the previous dividends represent a specific reference point in relation to which investors make decisions. Having in mind asymmetric reaction of the investing public to dividend increases and dividend decreases (or dividend cuts), companies are reluctant to cut or decrease dividends because they are trying to avoid negative market reaction.

Decoding the Paradox of Dividend Policy: An Empirical Study on Indian Banking Sector

The dividend policy has often been treated as the most complicated and intriguing aspects in corporate finance. Profitability was always cited as the main source of confidence for dividend payments. Numerous articles written on the dividend policy explored several of its other determinants. The most popular Lintner’s Dividend Model has been assessed and applied by researchers in different sectors including the banking sector in India. The results from the banking sector also confirmed to a greater extent the accuracy of Lintner’s Dividend Model. Although Lintner’s Dividend Model had its firm footing in the Indian banking industry, the model has not much explored about liquidity constraints, ownership and managerial efficiency. The above-mentioned predictors are important in the present scenario where many public sector banks paid dividends while having high nonperforming assets. Recently the government has announced a dividend cut for 16 public sector banks due to high level of stressed assets. Hence, profitability and stressed assets are the paradoxical aspects in the dividend policy for the banking industry. Findings from this study have evidence of substantial influence of liquidity constraints, ownership and managerial efficiency and their influence on the dividend policy.