Are Dividend Omissions Truly the Cruelest Cut of All?

Signaling and agency cost theories of dividend policy predict that omissions will produce a larger average decline in equity values than will reductions of less than 100 percent. However, this paper identifies a U-shaped relation between announcement day risk-adjusted excess returns and the percentage decline in dividends. The significantly smaller than expected price reaction to dividend omissions cannot be traced to growth opportunities, nor to a tendency for firms to delay omission announcements. While omitting firms provide higher per share dividends within five years of the dividend action than do firms that severely reduce payments, future dividends are unrelated to the market's response.