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Financial constraints and dividend policy

Author

Listed:
  • Shams Pathan
  • Robert Faff

    (UQ Business School, The University of Queensland, Australia)

  • Carlos Fernández Méndez

    (Departamento de Administración de Empresas, University of Oviedo, Spain)

  • Nicholas Masters

    (PricewaterhouseCoopers, Australia)

Abstract

Using a sample of US listed firms over the 1989–2012 period, we find that financially constrained dividend-increasing firms experience superior short-run abnormal stock returns, but suffer worse operating performance compared to similar unconstrained firms. More specifically, constrained firms in more competitive industries realize poorer long-run and operating performance. Likewise, constrained firms that increase dividends during the financial crisis also deliver inferior post-dividend-increase long-run return than do unconstrained firms. We also find evidence that constrained firms show worse stock market reaction to new equity issue announcements following dividend increase, but display a positive market response if they potentially have high investment growth opportunities. Our results are robust to alternative financial constraint proxies and abnormal return measures.

Suggested Citation

  • Shams Pathan & Robert Faff & Carlos Fernández Méndez & Nicholas Masters, 2016. "Financial constraints and dividend policy," Australian Journal of Management, Australian School of Business, vol. 41(3), pages 484-507, August.
    • Handle: RePEc:sae:ausman:v:41:y:2016:i:3:p:484-507
    DOI: 10.1177/0312896214557835
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    More about this item

    Keywords

    Dividends; financial constraints; seasoned equity issues;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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