Hostname: page-component-cd9895bd7-dk4vv Total loading time: 0 Render date: 2024-12-25T19:34:30.006Z Has data issue: false hasContentIssue false

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

Published online by Cambridge University Press:  08 April 2015

Thomas J. Chemmanur
Affiliation:
chemmanu@bc.edu, Carroll School of Management, Boston College, 140 Commonwealth Ave, Chestnut Hill, MA 02467
Xuan Tian
Affiliation:
tianx@indiana.edu, Kelley School of Business, Indiana University, 1309 E 10th St, Bloomington, IN 47405, and Tsinghua University.

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.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aharony, J., and Swary, I.. “Quarterly Dividend and Earnings Announcements and Stockholders’ Returns: An Empirical Analysis.” Journal of Finance, 35 (1980), 112.CrossRefGoogle Scholar
Allen, F.; Bernardo, A.; and Welch, I.. “A Theory of Dividends Based on Tax Clienteles.” Journal of Finance, 55 (2000), 24992536.CrossRefGoogle Scholar
Asquith, P., and Mullins, D.. “The Impact of Initiating Dividend Payments on Shareholders’ Wealth.” Journal of Business, 56 (1983), 7796.CrossRefGoogle Scholar
Bhattacharya, S. “Imperfect Information, Dividend Policy, and ‘The Bird in the Hand’ Fallacy.” Bell Journal of Economics, 10 (1979), 259270.CrossRefGoogle Scholar
Bhattacharya, U.; Galpin, N.; Ray, R.; and Yu, X.. “The Role of the Media in the Internet IPO Bubble.” Journal of Financial and Quantitative Analysis, 44 (2009), 657689.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 5782.CrossRefGoogle Scholar
Chemmanur, T., and Tian, X.. “‘Preparing’ the Equity Market for Adverse Corporate Events: A Theoretical Analysis of Firms Cutting Dividends.” Journal of Financial and Quantitative Analysis, 47 (2012), 993–972.CrossRefGoogle Scholar
Dyck, A., and Zingales, L.. “The Media and Asset Prices.” Working Paper, University of Chicago (2003).Google Scholar
Fama, E. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics, 49 (1998), 283306.CrossRefGoogle Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 356.CrossRefGoogle Scholar
Handjinicolaou, G., and Kalay, A.. “Wealth Redistributions or Changes in Firm Value: An Analysis of Returns to the Bondholders and Stockholders around Dividend Announcements.” Journal of Financial Economics, 13 (1984), 3563.CrossRefGoogle Scholar
John, K., and Williams, J.. “Dividends, Dilution, and Taxes: A Signaling Equilibrium.” Journal of Finance, 40 (1985), 10531070.CrossRefGoogle Scholar
Kalay, A. “Signaling, Information Content, and the Reluctance to Cut Dividends.” Journal of Financial and Quantitative Analysis, 15 (1980), 855869.CrossRefGoogle Scholar
Kalay, A., and Loewenstein, U.. “The Information Content of the Timing of Dividend Announcements.” Journal of Financial Economics, 16 (1986), 373388.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “The Operating Performance of Firms Conducting Seasoned Equity Offerings.” Journal of Finance, 23 (1997), 18231845.CrossRefGoogle Scholar
Miller, M., and Rock, K.. “Dividend Policy under Asymmetric Information.” Journal of Finance, 40 (1985), 10311051.CrossRefGoogle Scholar
Skinner, D. “Why Firms Voluntarily Disclose Bad News.” Journal of Accounting Research, 32 (1994), 3860.CrossRefGoogle Scholar
Soter, D.; Brigham, E.; and Evanson, P.. “The Dividend Cut ‘Heard ’Round the World’: The Case of FPL.” Journal of Applied Corporate Finance, 9 (1996), 415.CrossRefGoogle Scholar
Watts, R. “The Information Content of Dividends.” Journal of Business, 46 (1973), 191211.CrossRefGoogle Scholar
Welch, I. “Common Flaws in Empirical Capital Structure Research.” Working Paper, University of California at Los Angeles (2008).Google Scholar
Woolridge, J. R., and Ghosh, C.. “Dividend Cuts: Do They Always Signal Bad News?Midland Corporate Finance Journal, 3 (1985), 2031.Google Scholar