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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  and
Xuan Tian
Thomas J. Chemmanur
Affiliation:
[email protected], Carroll School of Management, Boston College, 140 Commonwealth Ave, Chestnut Hill, MA 02467
Xuan Tian
Affiliation:
[email protected], Kelley School of Business, Indiana University, 1309 E 10th St, Bloomington, IN 47405, and Tsinghua University.
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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
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 5-6 , December 2014 , pp. 1167 - 1199
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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