Stock‐market reaction to growth‐induced dividend cuts: Are investors myopic?

This paper focuses on shareholder reaction to growth‐motivated dividend cuts and omissions. The results reveal that although growth announcements mitigate the capital loss induced by dividend decreases, the stockmarket response to growth‐oriented dividend cuts is still strongly negative. However, the capital loss suffered by investors is significantly reduced when dividend cuts are accompanied with stock dividends. Two potential explanations of the results are explored: (1) shareholders find the immediate benefits of stock dividends more attractive than the potentially higher future rewards of investment opportunities; and (2) shareholders overreact to dividend announcements. Analysis of the performance of the firms for two years following the dividend cut indicates weak support for the overreaction hypothesis.