Dividend cuts, firm profitability and financial characteristics

ap Gwilym, Owain, Seaton, James and Thomas, Stephen (2004) Dividend cuts, firm profitability and financial characteristics. Southampton, UK, University of Southampton, 44pp. (Discussion Papers in Accounting & Finance, AF04-18).


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This paper investigates the dividend decisions of firms in the UK reporting losses after sustained periods of profitability. It is found that loss-making firms are more likely to reduce dividends compared to firms that remain profitable, although a loss is far from a guarantee that the dividend payment will be reduced. A lower propensity to reduce dividends is found in the UK relative to the US, consistent with the stronger culture of dividend payments. The size of the loss is an important factor in a firm’s dividend policy. However, this is mitigated to some extent if it is the result of unusual accounting items because managers view these as a temporary fluctuation in profitability. Leverage is found to have some role in the dividend decision, with higher levels of debt consistent with a greater likelihood of a reduction in the distribution whilst also suppressing profitability in future years. Profit margins prior to the loss year are also a significant factor in dividend policy whereby low margin firms are more likely to cut dividends.

Item Type: Monograph (Discussion Paper)
Additional Information: ISSN 1356-3548
ISSNs: 1356-3548 (print)
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
Divisions : University Structure - Pre August 2011 > School of Management
ePrint ID: 35978
Accepted Date and Publication Date:
Date Deposited: 24 May 2006
Last Modified: 31 Mar 2016 12:04
URI: http://eprints.soton.ac.uk/id/eprint/35978

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