Over/Under Reactions to Dividend Reductions in Long Term Returns

Price reactions in both the short and long term to interim and final dividend reductions (i.e. both omissions and cuts) are established. The degree of overreaction or underreaction in the long term returns is investigated by using speeds of adjustment coefficients estimated from a partial adjustment with noise model. Statistically significant negative returns over the post announcement period are found in the case of interim dividend omissions only; a statistically significant positive post announcement return is found for interim cuts and final cuts/omissions. Abnormal returns are related to the speeds of adjustments for firms that reduce their interim (but not final) dividends.