Forced versus voluntary dividend reduction: An agency cost explanation

Ranjan D’Mello, Tarun Mukherjee, Oranee Tawatnuntachai

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)1-22
Number of pages22
JournalFinancial Review
Issue number1
StatePublished - Feb 2001

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


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