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Underreaction to Dividend Reductions and Omissions?


  • YI LIU,



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      Yi Liu is assistant professor of Finance at Capital University and at University of North Texas. Samuel H. Szewczyk is associate professor of Finance at Drexel University, and Zaher Zantout is associate professor of Finance at the American University of Sharjah and at Rider University. The authors greatly appreciate the helpful comments of the anonymous referee, Malcolm Baker, Robert Boldin, Richard Bower, De-Wai Chou, Arnie Cowan, Jacqueline Garner, Michael Gombola, Robert Lawson, Edward Nelling, Maria Sanchez, Robert Stambaugh (Editor), and Linghui Tang. The generous financial support of Drexel University, Rider University, and Capital University is also acknowledged. The usual disclaimer applies.


Using a sample of 2,337 cash dividend reduction or omission announcements over the 1927 to 1999 period, this study reports significant negative post-announcement long-term abnormal returns, which last 1 year only. However, this long-term abnormal performance is driven by the post-earnings-announcement drift. After controlling for the earnings performance and the skewness of buy-and-hold abnormal returns, there is no compelling evidence of a post-dividend-reduction or post-dividend-omission price drift.