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The effect of growth opportunities on the market reaction to dividend cuts: evidence from the 2008 financial crisis

Author

Listed:
  • Xin Che

    (University of Mississippi)

  • Andre P. Liebenberg

    (University of Mississippi)

  • Ivonne A. Liebenberg

    (University of Mississippi)

  • Brandon C. L. Morris

    (Wright State University)

Abstract

Dividend cuts are typically associated with a negative stock price reaction. We contend that the market’s reaction to dividend cuts depends on the reason for the cut and the economic environment. Specifically, we posit that when external financing is constrained, firms that cut dividends and have high growth opportunities are better off than dividend cutters with low growth opportunities. We test this growth opportunities hypothesis by examining stock price reactions to dividend cuts around the 2008 financial crisis. Not surprisingly, we find negative average abnormal returns around the announcement day. However, consistent with our hypothesis, we find that firms with high growth opportunities experience higher abnormal returns. We also find that firms with high growth opportunities are more likely to resume the dividend payment within 5 years of the dividend cut and firms that resume their dividends have significantly higher long-term returns than non-resumers. Taken together, our evidence provides strong support for the growth opportunities hypothesis.

Suggested Citation

  • Xin Che & Andre P. Liebenberg & Ivonne A. Liebenberg & Brandon C. L. Morris, 2018. "The effect of growth opportunities on the market reaction to dividend cuts: evidence from the 2008 financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 1-17, July.
    • Handle: RePEc:kap:rqfnac:v:51:y:2018:i:1:d:10.1007_s11156-017-0663-8
    DOI: 10.1007/s11156-017-0663-8
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    2. Xin Che & Kathleen P. Fuller, 2020. "What does the timing of dividend reductions signal?," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1035-1061, October.
    3. Mathew Abraham & James Lau & Alastair Marsden, 2019. "Underwriting of Australian Dividend Reinvestment Plans," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 1-26, September.
    4. Jitka Hilliard & John S. Jahera & Haoran Zhang, 2019. "The US financial crisis and corporate dividend reactions: for better or for worse?," Review of Quantitative Finance and Accounting, Springer, vol. 53(4), pages 1165-1193, November.
    5. Abdul Moin & Yilmaz Guney & Izidin El Kalak, 2020. "The effects of ownership structure, sub-optimal cash holdings and investment inefficiency on dividend policy: evidence from Indonesia," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 857-900, October.

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    More about this item

    Keywords

    Dividend cuts; Market reaction; Financial crisis; Growth opportunities;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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