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Dividend cuts, firm profitability and financial characteristics

Dividend cuts, firm profitability and financial characteristics
Dividend cuts, firm profitability and financial characteristics
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.
1356-3548
AF04-18
University of Southampton
ap Gwilym, Owain
dbd356d9-b22d-420b-a980-7341f6d52f34
Seaton, James
b6f37ca8-95a5-4d2b-8f85-33061f2afc7b
Thomas, Stephen
3ebf2346-25f1-4f19-b854-7a7da0cee9ca
ap Gwilym, Owain
dbd356d9-b22d-420b-a980-7341f6d52f34
Seaton, James
b6f37ca8-95a5-4d2b-8f85-33061f2afc7b
Thomas, Stephen
3ebf2346-25f1-4f19-b854-7a7da0cee9ca

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

Record type: Monograph (Discussion Paper)

Abstract

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.

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Published date: 2004
Additional Information: ISSN 1356-3548

Identifiers

Local EPrints ID: 35978
URI: http://eprints.soton.ac.uk/id/eprint/35978
ISSN: 1356-3548
PURE UUID: 76a68d45-4863-4be0-ae53-55347e9a8ffd

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Date deposited: 24 May 2006
Last modified: 15 Mar 2024 07:55

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Contributors

Author: Owain ap Gwilym
Author: James Seaton
Author: Stephen Thomas

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