Price Reaction, Final Dividend Reductions and Signaling: UK Evidence

This paper provides an analysis of the relationship between final dividend reductions and price reactions around final dividend reduction announcements. The authors argue that final dividend reductions provide strong signals when they are not fully anticipated, while the price reaction is weaker when the market anticipates a reduction in the final dividend. Price reactions are dependent upon the size of final dividend reduction, the gearing ratio and prior dividend reduction. In addition, the authors find that the gearing ratio, company size, lagged earnings and current earnings change have explanatory power for the decision to determine whether to reduce annual dividend at both interim and final stages or only at the final stage.