| Summary: | This study was conducted in an attempt to understand the rationale behind dividend decrease announcements by Johannesburg Stock Exchange listed firms over the period 1990 to 2012. In 2010 Jensen, Lundstrum and Miller conducted a study in the United States in which they attempted to understand why firms which reduced their dividend, experienced an earnings increase in the years after the decrease. The authors hypothesised that it was as a result of the free cash-flow hypothesis. In reality, firms were allowing growth opportunities to expire as part of broader cost-cutting initiatives, which in turn lead to an uplift in earnings figures. This study aimed to understand whether the same relationship existed between dividends and a firm’s performance, subsequent to a dividend decrease in South Africa over the sample period.
The study used an event study methodology to consider a 95 (665 firm-years) observation dividend-decrease sample and a 95 (665 firm-years) observation peer sample, comprised of firms which did not experience a dividend decrease in the event year. Each observation was accompanied by financial and market data for three-years before and three-years after the event year.
The evidence in this study suggested that dividend-decrease firms in South Africa experienced lower earnings levels, reduced profit and higher costs in the years after the dividend decrease, even though firms attempted to rationalise costs such as their workforce. Given the internal inefficiencies, investments made by the firm’s management failed to produce the anticipated growth, even with increased capital expenditure. The results aligned to Jensen et al. (2010)’s research in the sense that they did not find support for the free cash-flow hypothesis. However, the announcement of a dividend decrease additionally appears to be largely driven by a liquidity shortage in the event year.
|
|---|
