Financial constraints and dividend policy

Shams Pathan*, Robert Faff, Carlos Fernández Méndez, Nicholas Masters

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

21 Citations (Scopus)


Using a sample of US listed firms over the 1989–2012 period, we find that financially constrained dividend-increasing firms experience superior short-run abnormal stock returns, but suffer worse operating performance compared to similar unconstrained firms. More specifically, constrained firms in more competitive industries realize poorer long-run and operating performance. Likewise, constrained firms that increase dividends during the financial crisis also deliver inferior post-dividend-increase long-run return than do unconstrained firms. We also find evidence that constrained firms show worse stock market reaction to new equity issue announcements following dividend increase, but display a positive market response if they potentially have high investment growth opportunities. Our results are robust to alternative financial constraint proxies and abnormal return measures.

Original languageEnglish
Pages (from-to)484-507
Number of pages24
JournalAustralian Journal of Management
Issue number3
Publication statusPublished - 1 Aug 2016
Externally publishedYes


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