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When Cutting Dividends Is Not Bad News: The Case Of Optional Stock Dividends

Author

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  • Thomas David

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Edith Ginglinger

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper provides new evidence on dividend policy by studying optional stock dividends, a mechanism that allows firms to cut cash payouts without a negative market reaction. We find that highly leveraged firms with limited cash holdings and large institutional ownership are more likely to offer optional stock dividends to their hareholders. These firms are the most committed to paying dividends, and optional stock dividends provide them with an opportunity for a stealth cut in dividends during economic downturns. Shareholders overwhelmingly approve optional stock dividends at general meetings with the majority favoring stock dividends over cash dividends. Further, in contrast to dividend cuts, shareholders do not view optional stock dividends as bad news. Our results support the monitoring explanation of optional stock dividends and show that shareholders value a firm's ability and willingness to pay dividends, even if the final cash payout is reduced.

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  • Thomas David & Edith Ginglinger, 2015. "When Cutting Dividends Is Not Bad News: The Case Of Optional Stock Dividends," Post-Print hal-01637541, HAL.
    • Handle: RePEc:hal:journl:hal-01637541
    Note: View the original document on HAL open archive server: https://hal.science/hal-01637541
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    References listed on IDEAS

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    7. Shahab, Yasir & Wang, Chong-xiao & Yeung, P. Eric & Zhou, Jia-nan, 2024. "The National Team: Stock market interventions and corporate catering behavior," International Review of Financial Analysis, Elsevier, vol. 93(C).

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