Bank Dividend-cuts and the Stock Market Reaction Around the Great Recession

Abstract

We study investors’ reaction to dividend decreases and omissions in the US banking industry during the Great Recession of 2007 and 2008 and compare it to the reaction in the years before and after the crisis. Conducting standard event study approach, we find that investors didn’t react negatively to dividend-cuts in the years preceding the financial crisis and during the crisis as they did in the years following the crisis. Our results imply a shift in the perception of dividend cuts during the financial crisis. Dividend cuts were not perceived as a negative signal about the financial health of the banking firms during the Great Recession.