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We can draw several interesting conclusions from this study. First, the vast

We can draw several interesting conclusions from this study. First, the vast number of firms announcing dividend cuts did so in response to earnings declines (384) rather than in conjunction with investment or growth opportunities (16). The market

10 Woolridge, J.R. and C. Ghosh, 1986, Dividend Cuts: Do they always signal bad news?, The Revolution in Corporate Finance, Blackwell.

seems to react negatively to all of them, however, suggesting that it does not attach much credibility to the firm's statements. The negative reaction to the dividend cut seems to persist in the case of the firms with the earnings declines, while it is reversed in the case of the firms with earnings increases or better investment opportunities.

Woolridge and Ghosh also found that firms that announced stock dividends or stock repurchases in conjunction with the dividend cuts fared much better than firms that did not. Finally, they noted the tendency across the entire sample for prices to correct themselves, at least partially, in the year following the dividend cut. This would suggest that markets tend to overreact to the initial dividend cut, and the price recovery can be attributed to the subsequent correction.

In an interesting case study, Soter, Brigham and Evanson looked at Florida Power & Light's dividend cut in 199411. FPL was the first healthy utility in the United States to cut dividends by a significant amount (32%). At the same time as it cut dividends, FPL announced that it was buying back 10 million shares over the next 3 years, and emphasized that dividends would be linked more directly to earnings. On the day of the announcement, the stock price dropped 14%, but recovered this amount in the month after the announcement, and earned a return of 23.8% in the year after, significantly more than the S&P 500 over the period (11.2%) and other utilities (14.2%).

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