Who Cuts Dividends First? Theory and Evidence from Dividend Reductions

This paper examines dividend reduction timing at the industry level, asking what firm types choose to reduce their dividends earlier in a dividend reducing cycle than others. Theory is proposed that suggests that higher quality firms will reduce dividends sooner to start rebuilding the firm‟s profitability, while lower quality firms delay reducing their dividends until they must. This paper contributes to the literature by providing a new theoretical model that suggests dividend reduction timing can be an indicator of firm or management quality. The theory is taken to quarterly dividend paying firm level data where the proposed theoretical predictions are empirically tested. The results show support that early dividend reducers are higher quality firms in that they have higher future returns, a greater increase in total asset growth and higher levels of future profitability. * Tyler Hull is at the International Business School, Brandeis University, 415 South Street, MS 032, Waltham, MA 02454. Email: [email protected].