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Investment opportunities and dividend omissions

Listed author(s):
  • Liang, Hui
  • Moreau, Laura
  • Park, Jung Chul
Registered author(s):

    This study examines the market's reaction to dividend omission announcements and finds that if dividends are skipped to preserve cash for good investments, investors do not necessarily regard the omission as negative information. Markets penalize firms for dividend omissions only in the absence of a good stream of investments. In addition, the positive relation between investment opportunity and abnormal stock returns around the announcements is stronger when the level of information asymmetry between management and the rest of the market participants is low. Additional tests reveal that good omitters overcome underperformance faster in the post period. Overall, the results suggest that financial markets interpret differently the information conveyed in the announcement of dividend omission depending on the firm's future prospects.

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    Article provided by Elsevier in its journal Journal of Business Research.

    Volume (Year): 64 (2011)
    Issue (Month): 10 (October)
    Pages: 1108-1115

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    Handle: RePEc:eee:jbrese:v:64:y:2011:i:10:p:1108-1115
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    1. Harrison Hong & Terence Lim & Jeremy C. Stein, 2000. "Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies," Journal of Finance, American Finance Association, vol. 55(1), pages 265-295, February.
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    6. Gary L. Caton & Jeremy Goh & Ninon Kohers, 2003. "Dividend Omissions and Intraindustry Information Transfers," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(1), pages 51-64.
    7. Yi Liu & Samuel H. Szewczyk & Zaher Zantout, 2008. "Underreaction to Dividend Reductions and Omissions?," Journal of Finance, American Finance Association, vol. 63(2), pages 987-1020, April.
    8. Trout, Robert R., 1979. "Comment: Regulatory procedures, investment opportunities, and stock valuation," Journal of Business Research, Elsevier, vol. 7(3), pages 259-266, September.
    9. Michaely, Roni & Thaler, Richard H & Womack, Kent L, 1995. " Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?," Journal of Finance, American Finance Association, vol. 50(2), pages 573-608, June.
    10. Yoon, Pyung Sig & Starks, Laura T, 1995. "Signaling, Investment Opportunities, and Dividend Announcements," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 995-1018.
    11. Sant, Rajiv & Cowan, Arnold R., 1994. "Do dividends signal earnings? The case of omitted dividends," Journal of Banking & Finance, Elsevier, vol. 18(6), pages 1113-1133, December.
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