Dividend policy, information uncertainty, and the distress anomaly

We find that the distress anomaly, wherein high-distress-risk stocks underperform low-distress-risk ones, is especially pronounced among stocks not paying dividends. Event analyses of dividend terminations and earnings-announcement returns further show that dividends provide important information that mitigates pricing errors and attenuates the severity of the anomaly. Among non-dividend-paying stocks, greater information uncertainty amplifies the underperformance of distressed firms, whereas this pattern is largely absent for dividend-paying stocks. These observations are consistent with the mispricing hypothesis of the distress anomaly and underscore the joint role of information uncertainty and dividend policy in shaping the mispricing of distressed stocks.