Forced Versus Voluntary Dividend Reduction: An Agency Cost Explanation

Posted: 14 Aug 2001

See all articles by Ranjan D'Mello

Ranjan D'Mello

Wayne State University - Department of Finance

Tarun K. Mukherjee

University of New Orleans

Oranee Tawatnuntachai

Pennsylvania State University - School of Business Administration

Abstract

We examine whether the agency cost arising from shareholder-bondholder conflict is an important determinant of the timing of dividend reduction decisions. Firms forced to reduce dividends owing to bond covenant violations experience lower earnings, more frequent losses, and greater earnings declines around the dividend reduction year than do firms that voluntarily reduce dividends. Relative to voluntary-reduction firms, forced-reduction firms have higher debt-to-equity ratios and managerial holdings. These findings coupled with the increased dividend payout ratios and lower announcement period returns suggest that financially distressed firms that anticipate poor performance have greater incentives to delay reducing dividends to avoid a wealth transfer to bondholders.

Suggested Citation

D'Mello, Ranjan and Mukherjee, Tarun K. and Tawatnuntachal, Oranee, Forced Versus Voluntary Dividend Reduction: An Agency Cost Explanation. Available at SSRN: https://ssrn.com/abstract=274404

Ranjan D'Mello (Contact Author)

Wayne State University - Department of Finance ( email )

328 Prentis Bldg.
5201 Cass Avenue
Detroit, MI 48202
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313-577-7828 (Phone)

Tarun K. Mukherjee

University of New Orleans ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Oranee Tawatnuntachal

Pennsylvania State University - School of Business Administration ( email )

777 West Harrisburg Pike
Middletown, PA 17057-4898
United States
717-948-6160 (Phone)

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