Many companies reduced their annual dividend payments substantially due to the global recession during 2008~2009. What’s...

Many companies reduced their annual dividend payments substantially due to the global recession during 2008~2009. What’s your opinion about their dividend policy changes

Expert Solution

Recessions in general bring a negative shock to both corporate profits and investment opportunities, making firms’ dividend changes unclear. I find that firms increase dividends about three times as often as they decrease dividends in recessions, similar to the four times in expansions. Firms increase dividends with similar reasons over business cycles, while in recessions firms only cut dividends when they have big earnings losses and high cash flow volatility, and investment does not seem to matter. The motivations behind change in dividends also differs. Free cash flow hypothesis can only explain dividend changes in expansions, in contrast, firms try to signal their relative performance in recessions, consistent with cash flow signaling hypothesis. In addition to the distinct information content, dividend changes also receive stronger market reaction in recessions for two reasons. First, the magnitude of dividend changes is larger. Second, firms adjust dividends towards the target more slowly, thus conveying more information through dividend announcements.

jeff jeffy answered 1 year ago

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