The Journal of Finance

Dividend Policy and Financial Distress: An Empirical Investigation of Troubled NYSE Firms

Published: 12/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb03721.x

HARRY DeANGELO, LINDA DeANGELO

This paper studies the dividend policy adjustments of 80 NYSE firms to protracted financial distress as evidenced by multiple losses during 1980–1985. Almost all sample firms reduced dividends, and more than half apparently faced binding debt covenants in years they did so. Absent binding debt covenants, dividends are cut more often than omitted, suggesting that managerial reluctance is to the omission and not simply the reduction of dividends. Moreover, managers of firms with long dividend histories appear particularly reluctant to omit dividends. Finally, some dividend reductions seem strategically motivated, e.g., designed to enhance the firm's bargaining position with organized labor.

Dividends and Losses

Published: 12/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04685.x

HARRY DeANGELO, LINDA DeANGELO, DOUGLAS J. SKINNER

An annual loss is essentially a necessary condition for dividend reductions in firms with established earnings and dividend records: 50.9% of 167 NYSE firms with losses during 1980–1985 reduced dividends, versus 1.0% of 440 firms without losses. As hypothesized by Miller and Modigliani, dividend reductions depend on whether earnings include unusual items that are likely to temporarily depress income. Dividend reductions are more likely given greater current losses, less negative unusual items, and more persistent earnings difficulties. Dividend policy has information content in that knowledge that a firm has reduced dividends improves the ability of current earnings to predict future earnings.