Dividend Policy and Financial Distress: An Empirical Investigation of Troubled NYSE Firms




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    • University of Michigan Business School. We received useful comments from S. Gilson, R. Hansen, J. Karpoff, G. Rao, D. Skinner, R. Stulz, J. Warner, J. F. Weston, two anonymous referees, and from workshop participants at USC and UCLA. We are grateful for the research assistance of J. Ammons, T. George, W. Grubbs, C. Lawrence, P. Ramanlal, and P. Van Amson, and for financial support from the Michigan Business School, the J. Ira Harris Center for the Study of Corporate Finance, and the Ernst & Young Foundation.


This paper studies the dividend policy adjustments of 80 NYSE firms to protracted financial distress as evidenced by multiple losses during 1980–1985. Almost all sample firms reduced dividends, and more than half apparently faced binding debt covenants in years they did so. Absent binding debt covenants, dividends are cut more often than omitted, suggesting that managerial reluctance is to the omission and not simply the reduction of dividends. Moreover, managers of firms with long dividend histories appear particularly reluctant to omit dividends. Finally, some dividend reductions seem strategically motivated, e.g., designed to enhance the firm's bargaining position with organized labor.