Price Reaction to UK Dividend Reductions: Interim vs Final - A Note

Short-term price reactions to dividend reductions of UK firms that did not reduce their dividends in the previous three-year period are studied. Price reactions to interim and final dividend reductions are found to be significantly negative and stronger for interim dividend reductions. Although the market reacted negatively around final dividend reduction announcements it bounced back to its prior level within one month of announcements. The magnitude of price reactions to dividend reductions is found to be statistically related to the size of the dividend reduction, the post-announcement effect from day 2 to day 20, the gearing ratio and dummy variable interim versus final dividend reduction.