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IMPLICATIONS OF UNSUSTAINABLE DIVIDENDS
Author(s) -
Harris Oneil,
Ngo Thanh,
Susnjara Jurica
Publication year - 2020
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12204
Subject(s) - dividend , earnings , economics , shareholder , dividend policy , monetary economics , differential (mechanical device) , dividend yield , payment , financial economics , dividend payout ratio , corporate governance , finance , engineering , aerospace engineering
Abstract In this article, we examine the wealth effects of unsustainable dividend payments and explore the economic forces that may explain why they exist. We find that the larger the dividend–earnings differential, the lower the short‐ and long‐run wealth effects to shareholders. In addition, the dividend–earnings differential increases not only the probability of a subsequent dividend cut over the next four quarters but also the likelihood that the cut will be greater than 5%. Overall, our findings suggest that although investors are not fooled by unsustainable dividend payments, the negative announcement effects are in anticipation of protracted poor performance.