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Dividend cuts and predictability

Author

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  • Ruey-Shii Chen

    (Tatung University)

  • Tai-Wei Zhang

    (Ming Chuan University)

Abstract

This study provides a plausible economic interpretation to examine why the dramatic reversal of return and dividend growth predictability by dividend yield (DY), as proposed by Chen (J Financ Econ 92: 128–151, 2009), occurs in the U.S. stock market. Because severe dividend cuts took place mostly in the prewar period and almost disappeared in the postwar period, we argue that abnormally high dividend cuts can drive a threshold effect on log DY, thereby triggering dividend growth predictability when log DY is above the threshold. However, this predictive ability completely disappears when log DY is below the threshold. Empirically, we find the existence of a log DY threshold point, above which future returns, as well as dividend growth, are significantly negatively correlated with log DY, yet below which future returns are significantly positively correlated with log DY—but lacking predictability for dividend growth.

Suggested Citation

  • Ruey-Shii Chen & Tai-Wei Zhang, 2018. "Dividend cuts and predictability," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(2), pages 249-267, April.
    • Handle: RePEc:spr:jecfin:v:42:y:2018:i:2:d:10.1007_s12197-017-9395-9
    DOI: 10.1007/s12197-017-9395-9
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    Cited by:

    1. Gebka, Bartosz, 2019. "Asymmetric price reactions to dividend announcements: Always irrational?," Economics Letters, Elsevier, vol. 185(C).

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    More about this item

    Keywords

    Predictability; Dividend cuts; Dividend yield;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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