Distressed Firms and Dividend Reductions

We are interested in the effects of dividend reduction decisions on the firms that make them. We compare financial ratios of distressed dividend-reducing firms to distressed firms that did not reduce dividends, of nondistressed dividend-reducing firms to nondistressed firms that did not reduce dividends, and ratios of distressed dividend- reducing firms to nondistressed dividend-reducing firms. Results indicate benefits of dividend reductions to both distressed and nondistressed firms. We find a cost to nondistressed firms, i.e., a drop in the market value of the firm in the year following the dividend reduction.