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What does the timing of dividend reductions signal?

Author

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  • Xin Che

    (California State University, Fullerton)

  • Kathleen P. Fuller

    (University of Mississippi)

Abstract

Dividend reduction theory suggests that during an economy-wide shock, a relatively early dividend reduction indicates that a firm reduces its cash outflows to pursue positive net present value projects, whereas a relatively late dividend reduction is due only to cash constraints rather than investment strategies. This paper directly tests the dividend reduction theory. Consistent with the theory, we find that during a recession, early-dividend reducers make 5% more firm investment than late-dividend reducers within the reduction year. Further, the investment levels are not significantly different between early and late reducers outside of recessions. The results also suggest that the signaling effect does not persist, implying that in a recession, the investment opportunities pursued by the early reducers are short-lived.

Suggested Citation

  • Xin Che & Kathleen P. Fuller, 2020. "What does the timing of dividend reductions signal?," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1035-1061, October.
    • Handle: RePEc:kap:rqfnac:v:55:y:2020:i:3:d:10.1007_s11156-019-00867-8
    DOI: 10.1007/s11156-019-00867-8
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    More about this item

    Keywords

    Dividend reduction; Recession; Timing; Investment;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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