The Market Reaction to Discontinuing Regular Stock Dividends |
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Authors: | Aaron L Phillips H Kent Baker Richard B Edelman |
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Institution: | Treasury Management Association, Bethesda, Maryland 20814;The American University, Washington, D.C. 20016–8044 |
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Abstract: | This paper investigates the behavior of returns to share-holders of NYSE and AMEX firms that publicly announce the discontinuance of regular stock dividends. Using event-type methodology, the results show that the average abnormal return for NYSE and AMEX firms is negative but not statistically significant on the event date. Partitioning the sample by stock-related characteristics shows that for small firms with low stock prices and low institutional ownership, management's decision to drop regular stock dividends conveys a significantly negative signal, which, in turn, causes stock prices to decline. Firms that drop a stock payment and simultaneously initiate or increase cash dividends experience a significant increase in shareholder wealth. However, firms that drop the stock dividend policy and do not begin a cash dividend policy experience a sharp decline in shareholder wealth. |
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