Communicating Private Information to the Equity Market Before a Dividend Cut: An Empirical Analysis

Thomas J. Chemmanur · Xuan Tian

27 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Corporate Finance and Governance Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

Abstract This paper presents the first empirical analysis of the choice of firms regarding whether to release private information (“prepare the market”) in advance of a possible dividend cut and the consequences of such market preparation. We use a hand-collected data set of dividend cutting firms, which allows us to distinguish between prepared and nonprepared dividend cutters and to test the implications of two alternative theories: the “signaling through market preparation” theory and the “stock return volatility reduction” theory. We document several important differences between prepared and nonprepared dividend cutters. Overall, our empirical results are consistent with the signaling theory.

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References

1993Common risk factors in the returns on stocks and bonds 1997On Persistence in Mutual Fund Performance 1985Dividend Policy under Asymmetric Information 1979Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy 1998Market efficiency, long-term returns, and behavioral finance1The comments of Brad Barber, David Hirshleifer, S.P. Kothari, Owen Lamont, Mark Mitchell, Hersh Shefrin, Robert Shiller, Rex Sinquefield, Richard Thaler, Theo Vermaelen, Robert Vishny, Ivo Welch, and a referee have been helpful. Kenneth French and Jay Ritter get special thanks.1 1994Why Firms Voluntarily Disclose Bad News 1985Dividends, Dilution, and Taxes: A Signalling Equilibrium 1980Quarterly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical Analysis

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2022Executive social connections and gender pay gaps 2012“Preparing” the Equity Market for Adverse Corporate Events: A Theoretical Analysis of Firms Cutting Dividends 2019Managerial Entrenchment and Information Production 2019The price of boardroom social capital: The effects of corporate demand for external connectivity

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