The Pennsylvania State University

The Graduate School

Smeal College of Business

HOW STICKY ARE DIVIDENDS?

ANALYSIS UNDER CASH SHORTFALLS

A Dissertation in

Business Administration

by

Thomas O. Miller

© 2011 Thomas O. Miller

Submitted in Partial Fulfillment

of the Requirements

for the Degree of

Doctor of Philosophy

December 2011

The dissertation of Thomas O. Miller was reviewed and approved* by the following:

David Haushalter

Clinical Associate Professor of Finance

Dissertation Adviser

Chair of Committee

Laura Field

Associate Professor of Finance

Peter Illiev

Assistant Professor of Finance

Ed Coulson

Professor of Economics

William Kracaw

David Sykes Professor of Finance

Department Chair

*Signatures are on file in the Graduate School

ii

Abstract:

This paper analyzes dividend stickiness by examining managers’ decisions whether to cut dividends when facing cash flow shortfalls. I present two hypotheses regarding this decision. One, which I label “tradition”, suggests that managers are looking back at dividend history, and view cutting as a last resort. The other suggests managers are forward looking and their decisions primarily on expectations about future performance. Analysis of maintaining and cutting groups with poor cash flows lend support to both hypotheses, but firms that maintained their dividend see significant increases in sales growth, and in some cases cash flow, the following year, indicating that managers are forward looking. Firm leverage is particularly important for determining whether a firm cuts its dividend under cash shortfalls.

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Contents List of Tables............................................................................................................................................v

List of Figures.........................................................................................................................................vii

1    Introduction ............................................................................................................................................. 1 

2    Literature Review .................................................................................................................................... 5 

2.1    Overview of Dividend Policy ............................................................................................................. 5 

2.2 Repurchases, the Substitution Hypothesis, and Dividend Disappearance ......................................... 7 

2.3    Related Literature............................................................................................................................. 9 

3    Hypotheses ............................................................................................................................................ 11 

3.1    The Tradition Hypothesis ............................................................................................................... 11 

3.2    The Forward Looking Hypothesis ................................................................................................... 12 

4    Data ....................................................................................................................................................... 13 

5 Who Cuts Their Dividends? A Summary Analysis .................................................................................... 14 

5.1 Market‐wide Data ............................................................................................................................. 14 

5.2 Dividend Decisions Under Financial Stress and Cash Shortfalls ....................................................... 17 

5.2.1 Defining Financial Distress ......................................................................................................... 17 

5.2.2 Why Do Firms Maintain Dividends in Extreme Stress? .............................................................. 20 

5.2.3 How do firms perform after extreme stress? ............................................................................ 24 

6 How Do Firms Fund Dividends During Cash Shortfalls? ........................................................................... 26 

7 Regressions Analysis ................................................................................................................................ 27 

7.1 Market‐wide Regressions .................................................................................................................. 27 

7.2 Regressions on Financially Distressed Firms ..................................................................................... 29 

7.3 Industry Fixed‐Effects Regressions ................................................................................................... 31 

7.4 Direct Tests of Hypotheses ............................................................................................................... 33 

8 Dividend Policies of Firms with Public Debt ............................................................................................. 34 

8.1 Summary Statistics ............................................................................................................................ 34 

8.2 Logit Regression ................................................................................................................................ 37 

9 Are Real Dividends Sticky? A Look at Inflation‐adjusted Payouts ............................................................ 37 

10 Dividend Policies at Industry Level ........................................................................................................ 39 

11    Conclusion ........................................................................................................................................... 41 

12    References ........................................................................................................................................... 44

Appendix..............................................................................................................................................47

 

 

iv

Tables

Table 1 - Summary Stats Grouped by Decision to Maintain Dividend 47

Table 2 - Summary Stats by Decision to Maintain Dividend w/Income<0 48

Table 3 - Summary Stats by Decision to Maintain Dividend w/OCF<0 49

Table 4 - Summary Stats by Decision to Maintain Dividend w/OCF<Last Year's Dividend 50

Table 5 - Summary Stats by Decision to Maintain Dividend w/OCF+Cash on Hand Last Year<Last Year's Dividend 51

Table 6 - Summary Stats by Decision to Maintain Dividend w/Income & OCF<0 52

Table 7 - Switch Table of Repeat Distressed Firms 53

Table 8 - Future Performance After Income and OCF<0 54

Table 9 - Future Performance After OCF<Last Year's Dividend 54

Table 10 - Summary of Future Performance by Decision to Maintain Dividend with OCF<Last Year's Dividend 55

Table 11 - Fixed Effect Logit Regressions on MAINTAIN variable 56

Table 12 - Fixed Effect Logit Regressions on MAINTAIN variable w/OCF and Income<0 57

Table 13 - Fixed Effect Logit Regressions on MAINTAIN variable when OCF<Last Year's Dividend 58

Table 14 - Fixed Effect Logit Regressions on MAINTAIN variable when OCF+Last Year's Cash<Last Year's Dividend 59

Table 15 - Industry Fixed Effect Logit Regressions on MAINTAIN variable 60

Table 16 - Fixed Effect Univariate Regressions on MAINTAIN on Future Sales Growth 61

Table 17 - Summary Stats for Firms with Public Debt 62

Table 18 - Summary Stats for Firms with Public Debt and OCF & Income<0 63

Table 19 - Summary Stats for Firms with Public Debt and OCF<Last Year's Dividend 64

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Table 20 - Summary Stats for Firms with Public Debt following a Downgrade 65

Table 21 - Logit Regressions on MAINTAIN variable following Credit Ratings Downgrades 66

Table 22 - Summary Stats Grouped by Decision to Maintain Real Dividend 67

Table 23 - Summary Stats Grouped by Decision to Maintain Real Dividend with OCF+Last Period's Cash on Hand<Last Period's Dividend 68

Table 24 - Summary Stats Grouped by Decision to Maintain Real Dividend with OCF<0 & Income<0 69

Table 25 - Dividend Policy by Industry 70

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Figures

Figure 1 - Percentage of Firms Maintaining or Increasing Dividends by Year 71

Figure 2 – Financing Methods of Dividend Paying Firms with Cash Shortfalls 72

Figure 3 - Percentage of Firms Maintaining Dividend by Dividend Payment History 73

Figure 4 - Percentage of Firms Maintaining or Increasing Real Dividends by Year 74

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1Introduction

Since Lintner (1956), it has been well documented that dividend payouts to shareholders are

smoothed, with last period’s payout having the largest impact on this period’s. Lintner’s

findings along with Miller and Rock’s (1985) documentation of a negative reaction to dividend

cuts have led to the interpretation of dividends as sticky. Once a firm starts paying a level of

dividends it becomes very reluctant to cut, meaning they are essentially “stuck” there.

One explanation for stickiness is that it reflects tradition. Managers may believe that if

their firm has been paying dividends for an extended period that those dividends are part of the

identity and culture of the firm. Consistent with this argument, Brav, Graham, Harvey, and

Michaely (2005) report in their survey of managers that most consider maintaining dividends of

equal importance to determining investment levels, which is in stark contrast to Miller and

Modigliani’s (1961) dividend irrelevancy hypothesis. Skinner (2008), building on Brav et. al

(2005), also suggests that firms pay dividends out of historical obligation. This represents a view

that stickiness signals the past; firms that have always paid dividends will strive to continue that

policy, and perhaps incur serious costs to do so, all to avoid going against long-standing

tradition.

An alternative explanation is that firms use dividends as a signal of their future

expectations. Benartzi, Michaely, and Thaler (1997) examine whether dividend changes signal

the future or the past. They find that although increases do not lead to future increases in cash

flow, firms that raise dividend payouts are much less likely to experience declines in cash flow in

future periods. Cash flows fluctuate even for the most stable firms, but a fluctuating dividend is

less attractive to income-seeking investors. To address this disconnect between cash flow

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stability and investor preferences, firms maintain dividends to retain consistency in shareholder

payouts, a phenomenon Lintner refers to as dividend “smoothing.” Under this model, short-term

shocks should not affect dividend payouts, unless they also indicate changes to a firm’s future

earning potential.

To further investigate explanations for dividend stickiness, I focus on the dividend

decisions of firms facing cash flow shortfalls. Following severe negative shocks to cash flow

and/or earnings, dividend-paying firms are faced with a decision between two presumably costly

alternatives. The firm can continue to pay dividends at current levels, either by drawing down

internal cash reserves or engaging in external financing, or cut dividends and risk potentially

giving a negative signal to the market and reduction in share price. Capturing this second

concern is a 2008 quote from then BP CEO Tony Hayward. Defending a decision to maintain

dividends as oil prices plummeted and BP took significant losses, he said, “I pay taxes, so I don't

go to jail. I pay dividends, so I don't get fired.”1 Similarly, Leary and Michaely (2010) note that

dividend-paying stocks are often held by income-seeking institutional investors very concerned

about payout levels.

Although there is clear pressure to maintain dividends, how firms do so when facing cash

shortfalls is less clear. Anecdotal evidence indicates that sometimes firms are raising debt levels

to fund dividend payments. The idea of borrowing to pay dividends became popular during the

early 2000s when interest rates were at historical lows. Some extreme cases, such as aircraft-

parts manufacturer TransDigm Group Inc., involved the issue of $425 million in bonds to fund a

$360 million dividend payout to shareholders.2

                                                            1 “BP Takes Heat from Two Sides on Dividend,” Wall Street Journal Online, Herron, J., June, 9, 2010 2 “Borrowing for Dividends Raises Worries,” Wall Street Journal Online, Rappaport, L., Oct. 6, 2009 

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The first goal of this paper is to provide a market-wide analysis of firms’ dividend

decisions, i.e. the decision to maintain or increase dividends from last period versus cut the

dividend. The two hypotheses I examine, outlined in detail later, relate to whether this decision

is primarily influenced by the past (the firm’s history of paying and maintaining dividends), or

the future (the firm’s future potential to support payouts). The analysis focuses on dividend-

paying firms and begins with summary statistical analysis of firm characteristics, including

indicators of financial condition, historic dividend decisions, and growth trends. For most

variables there are statistically different means and medians between the maintaining and cutting

groups. Two exceptions that do not differ significantly are cash-to-total asset ratio and capital

expenditure. As would be expected, the maintaining firms are performing much better than the

cutting firms with higher returns, cash flows, asset growth rates, sales growth rates and lower

leverage.

In the next step of the analysis I identify firms that have faced severe negative shocks in

both income and operating cash flow and are therefore most likely to be facing pressure to cut

their dividends. The results show nearly half of firms maintain dividends even when

experiencing both negative cash flows and accounting income. For firms that maintain dividends

when cash flow is less than the established dividend levels, there is a significantly higher

increase in operating cash flow compared to firms that cut their dividend. Asset growth is also

significantly higher for these firm two years following the decision.

To better understand the probability a firm will maintain its dividend in a given period, I

conduct a series of logit regressions. These regressions are run on both the whole dividend-

paying sample and on three sub-samples of financially distressed firms. The results of these

regressions show that leverage and whether a firm cut its dividend last period are key factors in

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determining whether the firm maintains its dividend. Industry-fixed models also produce similar

results, along with significant coefficients for asset growth, profitability, and firm size. Also in

regressions on a sub-sample of firms with negative cash flow and income, a firm’s streak of

years maintaining its dividend entering the period does not load as significant. This suggests that

a firm’s long-term dividend history (i.e. its tradition) may not be a key factor in the decision to

maintain or cut. This section concludes with a series of univariate cross-sectional regressions of

future sales growth with the decision to maintain or cut this period as the independent variable.

The results suggest that maintaining firms see higher sales growth in subsequent years than

cutting firms, supporting the forward-looking hypothesis.

The next section of the paper focuses on the dividend policies of firms with publicly

traded and rated (by Standard & Poor’s) debt. This section follows the framework of the

previous sections of the paper: summary statistical analysis of all firms and distressed sub-

samples, and a logit regression of firms with ratings downgrades. Unique to this sample are

repeated instances of cutting firms being older than maintaining firms, which was not the case

earlier. Results from the logit regression are consistent with the previous section where leverage

and maintaining last period seem to be the most significant variables.

Stickiness is clearly observed in nominal dividends, but the behavior of firm-level real

(i.e. inflation-adjusted) dividends is largely unexplored. The next section which examines

decisions involving real dividends finds that fewer firms (about half) are able to maintain their

real dividends from year to year. Firms that maintain real dividends tend to be consistently

younger than cutting firms across all sub-samples. Under conditions of financial distress, the

maintain rate of real dividends drops to below 20% (17.8% for firms with negative operating

cash flow and income).

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The final section of the paper examines the subset of firms that never cuts their dividend

during the sample period. This is done by comparing the number of firms by industry in three

categories: total firms, dividend payers, and firms who never cut their dividends. There does not

seem to be a clear relationship between the number of dividend payers in an industry and the

number of those payers who never cut dividends.

The overall take-away from the analysis is that firms in even extreme financial distress

continue to pay and maintain their dividends despite their dire condition. While the firm’s

history of paying dividends does seem to have some influence on a firm’s decision to maintain

dividends, it seems that the most recent year matters far more than any long-standing tradition.

Leverage seems to have a strong effect on the decision to cut dividends, with cutting firms

having much higher leverage than firms that maintained across all sub-samples.

The paper is outlined as follows. Section 2 reviews the relevant literature, Section 3

outlines the hypotheses, Section 4 describes the data, Section 5 provides summary statistical

analysis, Section 6 examines funding dividends, Section 7 provides regression analysis, Section

8 focuses on firms with public debt, Section 9 looks at inflation-adjusted dividend policy,

Section 10 addresses dividend policy at the industry level and Section 11 concludes.

2LiteratureReview

2.1OverviewofDividendPolicy

Frankfurter and Wood (1997) note that the evolution of corporate dividends has been closely

intertwined with the evolution of the corporation itself. Dating back to the 1600s, European

ships would raise funds before venturing to the New World and then disperse all capital and

profits back to investors. As the industry developed, ships stopped liquidating and became

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“going concerns,” distributing only their profits back to investors and retaining the capital.

These entities would eventually grow into the corporations we know today.

In the early days of the modern corporation, financial information was often scarce and

unreliable. Because dividend payments were clearly observable, investors would value firms

using dividend information more so than reported earnings data. Changes in dividend policy

would in turn be reflected in the stock price. However, over time as markets became more

efficient and asymmetric information reduced, investors’ need of dividends to value firms was

mitigated. The continued importance of dividends in corporate finance has puzzled many

researchers, notably Black (1976), and has lead to a number of theories aiming to explain why

they are paid.

Among the various theories, the effects of dividends on firm value are argued in every

direction: positive, neutral, and negative. Some predict that dividend policy is irrelevant

(Modigliani and Miller, 1961), others say that dividends increase firm value, and still others

attest that dividends are a detriment to value. Some of the most popular theories regarding

dividends fall into the following major camps: the bird-in-hand argument, the tax-preference

argument, dividend clienteles, information content and agency cost hypothesis.

The bird-in-hand argument was the prevailing theory on dividends in the early part of the

20th century (Al-Malkawi, Rafferty, and Pillai, 2010). The prospects of future capital gains was

viewed as risky, and investors preferred the “bird in the hand” of cash dividends rather than the

“two in the bush” of future capital gains, in reference to the common idiom. Dividends increase

firm value by reducing uncertainty regarding future cash flows, which, in turn, lowers the firms

the cost of capital. A number of papers by Gordon (Gordon and Shapiro, 1956; Gordon 1959,

1963) provide support for the bird-in-hand hypothesis.

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One of the first papers to challenge the bird-in-hand hypothesis and form the foundation

of current dividend research was Modigliani and Miller (1961). Given certain assumptions about

perfect capital markets (i.e. no taxes, transaction costs), they construct a proof that if firms invest

at their optimal level, dividend policy is irrelevant to firm value. M&M argue that investment

decisions drive firm value, not how income is distributed. Various empirical tests of the

irrelevancy hypothesis have produced mixed results. Also M&M’s assumptions do not hold in

the real world, and the authors themselves even make note that differences in taxation between

dividends and capital gains could lead to effects on firm value.  

2.2Repurchases,theSubstitutionHypothesis,andDividendDisappearance

An increasingly popular alternative form of payout to investors is share repurchases. Researchers

come down on opposing sides of whether repurchases can serve the function of dividends and

thus be used as a substitute for them. If the costs of maintaining dividends are a hindrance to

firms, the existence of a more flexible substitute could provide great benefits and cause a

substantial shift in payout policy.

Grullon and Michaely (2002) provide evidence that, since regulatory changes in 1983,

repurchases have slowly been substituting for dividend payments. They show that younger firms

are much more likely to initiate a payout policy with a repurchase, and that growth in

repurchases among all firms comes from funds that would have previously been devoted to

dividends. They also observe, seemingly in conflict with their argument, that large established

firms are cutting their dividends. The conclusion of their work is that repurchases are a viable

substitute for dividends and an increasing number of firms will continue to gravitate toward the

more flexible payout method. In contrast to the substitution hypothesis, Guay and Harford (2000)

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and Jagannathan, Stephens, and Weisbach (2000) show that firms repurchase shares with

temporary cash flows and pay dividends with permanent operating cash flows. Guay and Harford

also find a more positive market reaction to dividend increases than repurchases. This positive

reaction may be a motivating factor for a firm to maintain or even increase their dividends even

when doing so is costly.

Stemming from the substitution hypothesis is a debate as to whether or not dividends are

destined to disappear as repurchases become a larger slice of the payout pie. Fama and French

(2001) provide support for the disappearance by documenting that the percentage of U.S.

industrial firms paying dividends declined from 66.5% to 20.8% between 1978 and 1999.

DeAngelo, DeAngelo, and Skinner (2004) take the opposite viewpoint, showing that from a

dollar value standpoint, real dividend payouts from industrial firms have grown over the same

period from $31.3 billion in 1978 to $38.4 billion in 2000. They argue that the results in Fama

and French (2001) are driven by a change in the earnings concentration over the time period.

Firms that used to pay small dividends did stop paying, but concentration of dividend payouts

closely resembled the concentration of earnings (the top 25 dividend payers accounted for 54.9%

of the dividends paid and 51.4% of earnings in 2000, respectively).

A recent work on this topic is Skinner (2008). Building on the evidence provided in both

Fama and French (2001) and DeAngelo, DeAngelo, and Skinner (2004), Skinner concludes that

repurchases are becoming the dominant form of payout at the expense of dividends. A

contribution of the paper is its categorization of firms with a payout policy based on whether

they pay dividends and their frequency of repurchases. Firms that pay dividends and don’t

repurchase shares regularly are dwindling from both a firm count and percentage of total

payouts. According to Skinner, however, a small group of firms (345) who pay annual dividends

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and repurchase regularly account for well over half of aggregate payouts in recent years. This

concentration is consistent with DeAngelo, DeAngelo, and Skinner (2004).

2.3RelatedLiterature

An important concept to the framework of this paper is the costs of external financing that could

determine a firm’s willingness to raise funds in order to maintain its dividend. As described by

Myers and Majluf (1984), firms would be likely to forgo increasing dividends to build financial

“slack” to ensure optimal future investment. If firms pay dividends and maintain them through

difficult times, they must bear the costs of external financing to do so. Therefore, firms with

high costs of external financing should then be more likely to cut dividends if short-term cash

flows cannot support them. These costs of external financing can be measured by firm leverage

and, more directly, credit ratings for those firms where data is available.

Related to this issue is Easterbrook (1984), which provides two agency cost explanations

for why firms pay dividends. The first is that it is costly to monitor management and that paying

dividends reduces the amount of cash at managers’ disposal. The second rationale is with

reduced cash, managers must now go to the capital markets to finance new ventures. The

markets can then monitor managers by only financing value-creating projects. In this situation,

firms would simultaneously raise cash from external sources while also paying dividends.

Because of stickiness, firms using this practice may transition from raising cash while paying

dividends to raising cash specially to pay dividends. This concept of dividend financing is

explored further in a later section of the paper.

A more recent paper studying dividend stickiness is Aivazian, Booth, and Cleary (2006),

which focuses on the type of debt a firm has and how these different debt types affect the firm’s

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dividend decision. Aivazian et al. find that firms with bank debt exhibit a strong correlation

between dividends and current earnings, which essentially equates to non-sticky dividends.

Conversely, they also find that firms with publicly traded debt, and thus a credit rating, are more

likely to engage in dividend smoothing, as predicted by the Lintner model. The paper also finds

empirically that the same fundamental factors that influence paying a dividend also influence

access to public debt, particularly size and asset tangibility. Aivazian et al. indicate a clear link

between a firm’s outside financing options and its dividend behavior.

Grullon, Michaely, and Swaminathan (2002) build on Benartzi, Michaely, and Thaler

(1997) by arguing that dividend increases are a sign of firm maturity. They find that earnings do

not increase following dividend increases, but, rather, increase leading up to the dividend

change. They do find, however, that earnings are much less likely to decrease following a

dividend increase, suggesting the real information in dividend changes is that previous increases

in earnings are permanent. Grullon, Michaely, and Swaminathan use these results to suggest that

dividend increases convey information about a firm’s discount rate. They find empirical support

that as firms age, become less risky and offer less return, they will increase dividend payments.

This provides support for the “forward-looking” hypothesis to be discussed in the next sections.

This suggests that when firms notice a change in their future prospects, such as decreased risk,

there will be an impact on the firm’s dividend policy.

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3Hypotheses

3.1TheTraditionHypothesis

The first hypothesis I consider for how firms make their dividend decision is the “tradition”

hypothesis. The “tradition”hypothesis is based on the work of Brav et al. (2005) and Skinner

(2008). Brav et al. find in a survey of top management (CEOs and CFOs) that many managers

view dividends as a “burden” and felt significant pressure to maintain them. When questioned

further, many said if they were to run a company from inception, they would never introduce a

dividend, instead distributing cash through repurchases. Skinner (2008) builds on this result by

observing that a vast majority of the dividends in the market are paid by a small number of firms

(approx. 300) with long dividend histories. He asserts that these firms are continuing to pay

dividends simply because they always have; essentially dividends are a tradition for these firms.

This hypothesis is also consistent with a line of behavior research that suggests dividends

have become a social norm (Frankfurter and Lane, 1992). The rationale is that dividends once

served a purpose in mitigating information asymmetry problems, but over the course of time,

however, dividend paying evolved into a custom that is difficult to question and hard to resist.

Baskin (1988) reviews the historical development of corporations in the United States and the

UK and observes that investor pressure turned dividend paying into a normative behavior that is

difficult to evade.

The “tradition” hypothesis says that firms are looking backward when deciding whether

to maintain or cut dividends this period. This hypothesis predicts that the longer a firm’s history

of maintaining dividends, the greater the likelihood it will continue to maintain them. This

hypothesis is consistent with Lintner’s model, as last period’s dividend is the primary factor

influencing this period’s. The “tradition” hypothesis also implies that dividend cuts would be a

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method of last resort. Firms have little incentive to cut dividends until they absolutely must.

This leads to a prediction that dividend policy choices (to cut or not) should have little effect on

future performance.

The difficulty in testing this hypothesis is that a “tradition” is a nebulous concept. Surely

thirty years of paying a dividend would constitute a tradition, but what about ten or five? Is a

firm with twenty years of maintaining dividends any less set in its policy than a firm with thirty-

five years of maintaining? Providing clarity in this area will be an important step in testing this

hypothesis.

3.2TheForward‐LookingHypothesis

If the “tradition” hypothesis is backward looking, then its alternative is forward looking. The

“forward-looking” hypothesis predicts that future firm prospects are the primary influence on a

firm’s dividend policy. Grullon, Michaely, and Swaminathan (2002) provide some of the

strongest support for this argument. They show a firm’s understanding of its future discount rate

is the driving factor behind dividend increases. The difficulty in testing this hypothesis is

determining the best way to measure future firm prospects. Easterbrook (1984) suggests that the

costs of and access to external financing would be a good way to capture such prospects.

This hypothesis is also consistent with Lintner (1956). Dividend smoothing is a firm’s

attempt to separate earnings volatility from payout volatility. Under this model, a choice to cut

dividends would indicate a change in the future outlook of the company. The “forward-looking”

hypothesis suggests that maintaining dividends signals that while current circumstances for the

firm may be poor, managers’ outlook on the future of the company has not changed. A

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prediction of the “forward-looking” hypothesis is that, following poor performance, firms that

maintain dividends should improve, returning to established levels.

4Data

To examine these arguments, I gathered annual data on all firms in the Compustat database over

the period of 1977 to 2007, excluding financials and utilities (SIC codes 4000-4999 and 6000-

6999). Also, to be included in the sample, firms must have information on the following

variables: DIV (sum total of all firm dividends declared in the given year) and EARN (the total

income before extraordinary items). The data ranging from 1977 through 1986 are then used to

create historic dividend policy and other backward-looking variables for the early years of my

sample. The final sample includes all dividend-paying firms during the years 1987 to 2007,

resulting in a total of 25,773 firm-year observations. The year 1987 was chosen to begin the

sample as it is the first year in which statement of cash flow variables are widely reported in

Compustat.

The most important variable for my analysis is whether a firm cuts, maintains, or

increases its dividend from one year to the next. I define this variable, MAINTAIN, to be 1 if

dividend payouts are equal to or greater than those in the previous year. I define MAINTAIN to

be 0 whenever dividends are less than the previous years. Firms with MAINTAIN=0 are

considered to have cut their dividends. Looking at the entire sample, dividend-paying firms

maintained or increased their payouts in 85.3% of firm-years. Figure 1 examines this variable’s

trend on a yearly basis. For the first twelve years of the sample, this “maintain rate” was

consistently between 80-90% before falling into the 70% range for the first time following the

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burst of the dotcom bubble. In the most recent years of the sample, the rate rebounded to crack

90% for the first time. The rarity of cuts is consistent with dividend stickiness. Whether this is

primarily due to tradition or signaling of future prospects is not clear.

5WhoCutsTheirDividends?ASummaryAnalysis

5.1Market‐wideData

Table 1 provides summary statistics for firm-years grouped by the MAINTAIN variable, along with a

t-test of the difference in means between the two categories and the Wilcoxon rank sum test. The

goal of Table 1 is to gain a broad understanding of the type of firm that cuts their dividend. By

looking at data across three sections (financials, historical dividend policy, and growth rating), this

table provides insights to characteristics shared by dividend cutters and maintainers. Because the

decision to cut or, more appropriately, not cut dividend payouts creates dividend stickiness,

understanding that decision is vital to understanding stickiness. Due to extreme outliers, many of the

variables were winsorized at the 1% level. The difference in means test shows noticeable differences

between the two groups, with all but five t-stats significant at 1%. The results are even stronger for

the rank sum test with only a ratio of cash total assets not significantly different at 10%. Table 1 is

broken into four sections: financial data, dividend history data, growth data and credit rating data.

The financial data section aims to give a snapshot of the fiscal state of firms when they

decide to maintain or cut their dividends. Although firms who maintain their dividends are older and

larger than the firms who cut, the cutting firms are by no means young and small, with a mean age of

21.62 and mean assets totaling $2.3 billion. The maintaining firms, as one would expect, are more

profitable by both accounting (return on assets) and cash flow (operating cash flow/total assets)

metrics. However, not all the cutting firms appear financially stressed, with more than half of the

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firms posting positive return on assets and operating cash flows. Cutting firms appear to have higher

leverage (as defined by debt-to-asset ratio) than firms maintaining or increasing their dividend

payouts. Looking at the change in leverage and lagged changed in leverage variable, this seems to be

the result of increases in leverage over the previous two years3.

The information in this first panel of Table 1 can be interpreted in a number of ways. There

does seem to be a clearly distinguished difference in the performance between firms maintaining

dividends and firms cutting their dividends. This is consistent with the notion that stickiness is driven

by a firm’s desire to maintain dividends whenever possible, cutting them only in times of serious

financial stress. However, when looking only at the data of the cutting firms, there is no evidence of

widespread cases of such stress. Most of these firms have adequate cash on hand to pay their

dividends and the median firm remains profitable.

Panel B of Table 1 focuses on firms’ previous decisions regarding its dividend policy. For

maintaining firms in the current period, dividends scaled by assets have a significantly higher mean

and median. In the previous period, however, the cutting firms had higher values in both measures.

This suggests that cutting firms had a more burdensome dividend in the previous period, which has

been greatly reduced in the current period. The next variable is the dummy for whether or not a firm

maintained its dividends in the previous period. This variable captures the fraction of total firms

maintaining their dividend, and is displayed as a percentage. The results show a much greater

percentage of firms maintaining their dividend in the current period also maintained their dividend

last period. Focusing on the cutting side, nearly one third of firms cutting their dividend this period

also cut in the period prior. The final two variables in the panel indicate how long the firm had

maintained (consecutive years without cutting) and paid (consecutive years with any payout)

dividends prior to the current period. The difference is much greater for the “maintaining streak”

                                                            3 Change in leverage is defined by the absolute change in the leverage ratio, e.g. a firm whose debt‐to‐asset ratio increased from 50% to 53% 

would be listed at 3%, not 3%/50% = 6% . 

15

 

variable, although this effect is being driven by one third of the cutting group having a “maintaining

streak” of zero. With the “paying streak” variable the difference is much smaller, with less than half a

year separating the groups’ means.

Perhaps the most interesting take-away from this second panel of Table 1 is in the dividend

decision from the prior period. Over one third of all dividend cuts from 1987-2007 were by firms

who had cut their dividend in the previous year as well. This seems to be consistent with the

“tradition” hypothesis, in that firms that have not recently cut dividends are much more reluctant to

do so than those firms who cut in the last year. The results from the “paying streak” variable,

however, seem to lean slightly against the “tradition” hypothesis, as the maintaining firms do not

have an appreciably longer history of paying out their dividend than cutting firms.

In Panel C of Table 1 an important difference surfaces between maintaining and cutting

firms. Maintaining firms have a much higher asset and sales growth rates than cutting firms. In fact,

the median cutting firm sees its assets shrink by -1.4% and its sales by -0.1%. This difference persists

when looking back to the prior period with mean asset growth for a maintaining firm three times that

of a cutting firm, which again has a negative median as well. Only when looking back two periods

does the difference in asset growth between the groups become insignificant. Sales growth is

significantly higher in maintaining firms both one and two years prior, although firms appear much

more similar in yearT-2. Another growth variable with a clear gap between the groups is the operating

cash flow growth. Maintaining firms’ cash flow grew by 8.8% on average while the mean cutting

firm fell -13.3%, and the median cutting firm fell even further at -16.9%. Cutting firms performed

very poorly compared to the previous period, which is more indicative of the financial stress

expected to cause dividend reductions. No statistical difference is found between the groups’ capital

expenditure growth.

The results of Panel C are important to the overall question of this paper. Understanding

trends in performance is a key factor in assessing the chances of future success. Managers are highly

16

 

likely to incorporate this data into any expectations they have about the firm’s future. If these trends

suggest a decline for cutting firms, but not for maintaining firms, that would support the “forward-

looking” hypothesis. Panel C does give some indication that this is the case, but there are a few other

possible take-aways. As noted earlier, the poor, and often negative, growth rates for cutting firms are

consistent with the notion that only extreme financial stress motivates firms to cut their dividends. As

the next section of this paper will examine, financial distress, however, can come in a variety of

degrees. The fact that firms that cut their dividends are performing poorly is not surprising. Given the

documented adverse market reaction to dividend cuts it would be counterintuitive for firms doing

well to reduce payouts and risk stock price reduction. This supports the “last resort” prediction of the

“tradition” hypothesis. Only firms doing extremely poorly even consider cutting their dividends. The

analysis raises a number of interesting questions. When a firm faces potential stress, what factors

determine if it is the time to cut their dividend? Do they consider only their tradition of paying

dividends, or do they consider not only their ability to payout in this period but future periods as

well? The next section of this paper will examine firm behavior under very difficult financial

conditions.

From the analysis of Table 1, there are indications that both the “tradition” and “forward-

looking” hypotheses are viable. The next step of the analysis will focus on those firms facing difficult

financial conditions as these firm are the most likely to be considering dividend cuts, regardless of

whether they execute those cuts.

5.2DividendDecisionsUnderFinancialStressandCashShortfalls

5.2.1DefiningFinancialDistress

The incentive for firms to maintain dividends is strong. Miller and Rock (1985) document negative

stock price reaction to dividend cuts and nearly 90% of managers surveyed in Brav et al. (2005)

17

 

believe there will be negative consequences if they cut dividends. Firms performing well are

therefore very unlikely to even consider cutting dividends. Table 1 captures the entire market,

making analysis of a “decision” to cut dividends difficult; hence a large number of successful firms

aren’t really facing a decision at all. Alternately, firms facing financial distress are forced into

making these decisions. By studying these firms in particular, the factors that influence dividend cuts

should become clearer. Isolating and studying these firms will therefore become the primary focus

of my analysis.

Financial distress can come in many forms. The variables chosen to measure such stress are

income before extraordinary items, a measure of accounting performance, operating cash flow, a

metric to capture actual cash generated, and the firm’s actual cash level. For the purpose of

dividends, cash shortfalls would be expected to be of more importance since dividends are cash

payouts to shareholders. However, because accounting return is a common measure of firm

performance and financial health, it was included as well. Changes in both accounting profit and cash

flows were also considered as proxies but were not chosen due to difficulties in defining what level

of reduction would constitute stress and the possibility of small increases occurring in poor

performing firms (i.e. a reduction in losses from $1.1M to $1M).

To measure various types of financial stress, a number of constraints using these three

proxies are created and then grouped sample statistics (in the style of Table 1) are generated for these

conditions. A main motivation for this sub-sample selection is to understand the sustainability of

dividend policies. Firms doing well can maintain dividend policies for decades even if they are relics

that don’t provide firm value. Only in financial stress are firms forced to reconsider their dividend

policy. Firms performing poorly will have difficulty paying their dividend, and must evaluate

whether paying dividends at the current level is sustainable into the future.

These tables represent sub-samples of Table 1 and aim to understand the characteristics of

maintaining and cutting firms just as Table 1 did, only now under a condition of financial stress. The

18

 

first and most straightforward is whether a firm had a year with negative accounting profit. These

results are reported in Table 2. Under this condition approximately 54% of firms maintain their

dividends and, as expected, firms that maintain are generating more cash than cutting firms. The

results of difference in mean and rank sum tests for Table 2 are very similar to those in Table 1,

suggesting that using negative income as the only criteria does not produce a unique sub-sample of

firms.

Next, Table 3 uses negative cash flow for its stress condition and finds, somewhat

surprisingly, that nearly 70% of firms in this sample maintained their dividend. In this case, the

opposite of the previous table occurs; the maintaining firms in this sample have much higher return

on assets than the cutters, even though the cash flow generated by each group is similar. The results

for the difference in means tests change considerably from Tables 1 and 2. Most notably, there is no

longer a significant difference between the size and age of the maintaining and cutting groups. The

rank sum test does continue to find significantly higher assets in maintaining firms, but age is no

longer significant in that test either.

Because generating positive, but relatively small, cash flows may also lead to financial stress,

Table 4 provides statistics under the constraint that operating cash flows are less than the previous

period’s cash dividends. The logic behind this condition is that if cash flow is less than a firm’s

established dividend level, the firm must choose to either cut dividends or payout more cash to

shareholders than it generated. In this sample, slightly more than 60% of firms maintained their

dividends. The results of Table 4 are consistent with those in Tables 2 and 3.

Table 5 accounts for not only the firm’s performance, but also the level of cash on hand.

Firms in this sample had a sum total of operating cash flow and cash on hand last period less than the

previous year’s cash dividends. In this sample 55.3% of firms maintain their dividend. In Tables 2-

5, the variable that has the most statistical difference between the two groups is the leverage variable,

where maintaining firms have lower leverage than cutting firms in all three cases. This difference is

19

 

significant at the 1% in both the t-test and rank sum test. In Tables 4 and 5 maintaining firms

actually have less cash on hand than cutting firms. This suggests that cutting firms are recognizing

the need to keep cash on hand and thus cut dividends. This would contradict the “last resort”

prediction of the “tradition” hypothesis, as these firms have cash reserves but are not using them to

maintain dividends.

Because each of the tables uses only one variable to measure stress, it is difficult to ensure

that all the firms in the sample are experiencing stress, or if they simply operate in that environment

(i.e., profitable with low cash flows). Table 6 uses both accounting profit and cash flow to create a

condition likely to capture only those firms in the most dire straits. To be included in Table 6, sample

firms must have both a negative income before extraordinary items and a negative cash flow from

operations. This creates a sample of 777 firm-years, with 355 (45.7%) maintaining their dividend.

5.2.2WhyDoFirmsMaintainDividendsinExtremeStress?

Table 6 provides a look at firms that are clearly in a grave financial situation, with both negative

accounting profits and cash flows in the current period. One would expect a very large portion of

these firms to cut dividends, but nearly half (45.7%) choose to maintain their payouts.

The interesting question in this case shifts from why do firms cut dividends (which is obvious in this

case) to why do firms maintain dividends when faced with such grim financial performance. It is this

decision to maintain, when the situation would seem to clearly dictate otherwise, that is at the heart

of dividend stickiness. Understanding the motivations of these firms should in turn yield a much

greater understanding of stickiness and what it indicates. If these maintaining firms are clinging to a

long history of dividends, that would give clear support to the “tradition” hypothesis. This would

predict longer maintaining and paying streaks (entering the period) for maintaining firms.

Alternatively, if there are variables indicating potential improvement, that would support the “future

20

 

performance” hypothesis. In line with this prediction would be significantly higher performance and

growth for maintaining firms.

Now that all firms in the sub-sample are facing similar financial conditions, many of the

variables are no longer statistically different between the two groups. The difference in means test for

age, size, cash flow/assets, and return on assets are no longer significant at even the 10% level. Of

these variables, only the difference in return on assets remains significant (at 1%) in the rank sum

test. Although maintaining firms hold a higher percentage of their assets in cash, cutting firms do not

appear to be cash poor, with a mean cash-to-assets ratio of 13.2% and median of 4.7%. The main

difference in the financials again appears to be in leverage. The firms who maintained their dividend

have both a mean and median leverage over 10% less than cutting firms, a difference significant at

the 1% in both the t-test and rank sum test.

The difference in leverage seen in Panel A of Table 6 potentially indicates a forward-looking

dividend policy. Obviously firms in this sample, if they choose to do so, must pay dividends out of

some other source besides current cash income. Firms with more debt capacity are willing to payout

cash from reserves knowing that if cash shortfalls occur in the future, they can still take on more

debt. Firms with little to no excess debt capacity have very little choice but to hold on to as much

cash as possible to sustain their business, thus forcing managers to make the difficult decision to cut

dividends. If leverage is a factor in determining whether firms maintain dividends, then managers are

concerned with their firm’s future access to capital which is consistent with a forward-looking

approach.

Panel B of Table 6 shows the difference in dividend history variables between the two sets of

firms. Going against the “tradition” hypothesis, cutting firms actually came into the period with a

longer streak of paying dividends than maintaining firms, and the median “maintaining streak” for

both groups is 1. The main difference between the two groups, as was the case in the overall sample,

is maintaining firms had maintained in the prior year much more often than cutting firms. Total

21

 

dividends scaled by assets are higher for maintaining firms in the current period but were

significantly higher for cutting firms in the previous period. This suggests that firms with a higher

dividend relative to their size are more likely to cut their dividends. There is also no statistical

difference found in either test between the total instances of previous dividend payouts for the two

groups.

Interpreting the dividend history data in Table 6 is not easily done. Neither set of the firms

has a particularly long streak of maintaining its dividend, and there is not much distinguishing the

other variables, save the difference in whether the firms maintained the prior year. One possible case

for the “tradition” hypothesis’ last resort prediction could be made based on the higher scaled

dividends for cutting firms in the previous year. Firms with lower dividends relative to their size are

likely to have an easier time maintaining them and would not need to turn to a last resort.

Panel C of Table 6 examines the growth data across the two groups of distressed firms. This

table includes data on how a firm’s leverage has changed over the prior two periods. The change in

leverage variable is a raw change in percentage leverage, i.e. a firm with a change in leverage equal

to 10% would have went from 50% leverage in the prior period to 60% leverage in the current

period. This number is statistically higher in the current period for cutting firms, although the median

change of 5.7% is very close to the maintaining firms’ median of 5.3%. In the prior period, however,

the change is much greater for cutting firms, with maintaining firms actually reducing leverage on

average. Also in this panel is three periods of asset and sales growth for the firms. As was the case in

Table 1, asset growth is noticeably higher in the maintaining firms than the cutting firms in both the

current and previous period. There is no statistical difference between the groups when looking back

two years. Sales growth has significantly higher medians for maintain firms in both the current and

previous year, but the means are not statistically different. Operating cash flow growth is highly

negative for both groups with very large standard deviations resulting in no significant difference in

22

 

means. The rank sum test does find lower operating cash flow growth for maintaining firms to be

significant at the 10% level.

Panel C highlights some possible indicators for determinants of the dividend decision. The

cutting group shows a trend of consecutive periods of both low asset growth as well as rising

leverage. Conversely, firms maintaining their dividend while having low asset growth and increased

leverage in the current period have stronger asset growth and stable leverage in the prior period. If a

firm has one bad year they more than likely will continue to payout dividends at their current levels.

When it’s two bad years, however, the environment seems to change. What remains unclear is

whether these firms are cutting their dividend because they are lacking in cash and have no other

choice, or if they are updating their expectations about their future prospects and thus reduce or stop

dividend payouts accordingly. The role dividend history and tradition plays are also unclear from

these difference in means tests. Trying to isolate these effects will be the main goal of the duration of

this study.

One potential drawback of using panel data is many of the firms in the cutting group of Table

6 could simply be older versions of the maintaining firms in the other group. This is also consistent

with the findings in Table 6 that firms maintain dividends through the first signs of trouble, but cut

when that trouble persists over time. Table 7 is a small switch table designed to capture the overlap

between the two groups. The table shows 147 firms are present in the sample over two consecutive

years. Twenty-two firms were able to maintain their dividend through two years of negative cash

flow and income while 54 firms who maintained once had to cut in the second period. Of 71 firms

who cut their dividend in the first period, only four maintained their new level in the second, with 67

firms cutting again. Although there is clearly some overlap present, only 54 of the 422 firm-years in

the cutting group are T+1 firm year from the maintain group. This suggests the result is not simply

the effect of the panel data set. It is also a possible indication that dividend cuts are often rolling.

23

 

5.2.3Howdofirmsperformafterextremestress?

Table 8 is similar to Table 6, providing summary statistics for a sub-sample of firms with negative

operating cash flow and income before extraordinary items, grouped by firms who maintained and

cut their dividends. Table 8, however, looks forward at the performance of the firm after its decision

to maintain or cut its dividend. A link between maintaining dividends and improved performance in

subsequent periods would give strong support to the “forward-looking” hypothesis. If maintaining

dividends are an indicator of improved future performance, this suggests that managers are

considering their expectations about the firm’s future when making dividend decisions. Alternatively,

if maintaining dividends is associated with poor future performance, then managers are less likely to

be considering the future when deciding not to cut.

In Table 8, performance remains poor for both groups with both mean and median return on

assets negative. The maintaining group, however, does better with a higher ROA in year T+1,

significant at 1% in both the difference in means and rank sum tests, and a median of only -1.9%

compared to -6.7% for the cutting group. Most other forward-looking variables do not produce a

significant difference in means between the two groups. The rank sum test finds ROA in year T+2 to

be higher for maintaining firms significant at 10%. Operating cash flow (scaled by assets) improves

for both groups with positive medians in both year T+1 and T+2. Mean asset growth in T+1 is 5%

higher in maintaining firms but high variance leads to an insignificant difference in means, though

the rank sum test is significant at 1%. Asset growth in T+2 is significantly higher (at 5% according

to both) in the maintaining group, but the median of -4.3% is close to the value of -5.6% for the

cutting group. Both groups experience an increase in return and cash flow at the median from year T

to T+1, but there is not a significant difference between the two groups.

Interpreting Table 8 is somewhat difficult with only two variables having statistically

different means. It is also impossible to know exactly what performance in year T+1 would have

looked like had the firms made a different decision on dividends in year T. The lower median return

24

 

on assets in year T+1 suggests that maintaining firms are better off in the short run. There is also

some survivorship bias present in these tests. More firms are leaving the cutting group than the

maintaining group, possibility indicating that cutting firms are more likely to cease operations.

Table 9 continues to examine future performance, only now for the sub-sample of firms that

had operating cash flow in year T less the aggregate dividends paid out in year T-1. In this sample

there appears to be much more statistical difference between the maintaining and cutting groups.

Maintaining firms have significantly higher returns in years T+1 and T+2, as well as significantly

higher asset growth rates in those same years. Although the means are not significantly different, the

rank sum test shows cutting firms have a significantly greater change in ROA in year T+1. Of even

more interest, however, is the greater increase in operating cash flow for maintaining firms than for

cutting firms. Maintaining firms’ cash flows increase by an average of 7.2% of assets compared to

only 3.3% for cutting firms. This difference is significant at 1% according to both tests, and would

seem to give clear support to the “forward-looking” hypothesis. Managers expecting greater

increases in future cash flow appear to be more likely to maintain dividends.

Table 10 looks at the performance of maintaining and cutting groups in year T+1, but

introduces a new sorting variable to better capture dividend history. Using the same sample from

Table 9 (OCF<last dividend), the first panel contains firms with less than ten consecutive years of

maintaining dividends, while the second panel has firms that have maintained dividends for ten

straight years or more. This is done to try to better capture the effect of dividend traditions, by

grouping firms with long histories of maintaining dividends together.

Looking at the statistical tests in Table 10, it appears maintaining firms have much better

returns following their decision to maintain. Although this is tempered by no statistical difference

between the earnings growth of cutting and maintaining firms, it still indicates that firms on average

recognize their bad situations and are unlikely to change greatly when cutting their dividend. This

result holds for both panels. A significant difference occurs in the operating cash flow variable in the

25

 

first panel and is similar to the results from Table 9. The difference in mean is not significant for this

variable in the second panel but the rank sum test is significant at 5%.

A take-away from Table 10, beyond the difference in means tests, is the increased percentage

of firms maintaining dividends when entering the period with a ten-year streak of maintaining. 58.7%

of firms maintained when having a shorter streak of maintaining, compared to 79.3% with the streak

of ten years or greater. On the surface this would suggest that a long maintain streak is causing more

firms to maintain their dividends, thus supporting the “tradition” hypothesis. However, the

performance of the long history maintaining firms suggests that may not be the case.

If a greater percentage of long maintain streak firms were maintaining dividends out of tradition, they

should perform poorer than their shorter streak counterparts. This is not the case here, as performance

seems to be slightly better in the longer streak firms if there is any difference at all. Another

interesting difference between the long and short streak firms is the much lower standard deviations

in the long streak samples, particularly for the maintaining firms. This seems consistent with the

argument of Grullon and Michaely (2002) that increased dividends are a sign of firm stability. If

firms are able to maintain dividends for ten years, it would be reasonable to conclude that they are

stable firms and that this long-term stability is why they maintain dividends during financial stress.

6HowDoFirmsFundDividendsDuringCashShortfalls?

Having observed that, even in the most difficult of financial circumstances, 47% of firms maintain

their dividends, how this activity is funded becomes an important question. Figure 2 contains four

charts which present a breakdown of how firms fund their dividend during operating cash flow

shortfalls. The charts contain information on maintaining firms and cutting firms under two sets of

conditions. The first is that both operating cash flow and net income be negative, and the second is

that operating cash flow be less than the dividend paid in the previous period. There are four specific

26

 

financing options displayed along with an “other” category (where the source of cash was difficult to

trace) for maintaining firms. The categories are reducing cash reserves, asset sales, issuing stock, and

issuing debt. Cutting firms have a fifth specific category of omitting dividends completely.

As expected, the most common source of funds across all categories is the use of cash

reserves. This is consistent with the pecking order theory established by Myers and Majluf (1984). In

Figure 2 Panels A-C, cash reserves fund approximately one third of dividend payouts. In Figure 2

Panel D, that percentage jumps to over 50%. Also consistent across the charts is the small percentage

(between 3-6%) of firms using asset sales to fund dividends. Nearly half the maintaining firms in

Figure 1A (w/OCF and Income<0) sought external financing to fund their dividend payments, with

24% issuing stock, and a quarter of the firms issuing debt. Half the maintaining firms in Figure 1C

(w/OCF<last dividend) also raised outside funds, although in this case about a third of the firms

issued debt, while 18% issued stock. This increased amount of stock issuance for the firms in Figure

1A compares to 1C as the firms in Figure 1A are in slightly worse financial condition and more

likely to issue shares. Figure 1B shows that roughly a third of cutters omit dividends altogether,

while those that do raise cash have a close to even distribution between debt (14%) and stock (13%)

issuance. The main take-away from Figure 1 is that firms are clearly willing to raise outside capital

to maintain their dividends, which in the long run may be costly to the firm.

7RegressionsAnalysis

7.1Market‐wideRegressions

Tables 10-12 display the results of a series of fixed-effect logit regressions on the MAINTAIN

variable. Independent variables were selected that best capture the firms’ current financial position

and historical dividend policies. Positive coefficients indicate that a higher value of that variable will

increase the likelihood that firms will maintain their dividend. A negative coefficient means

27

 

maintaining is less likely, and thus cutting more likely. In Table 11 the regression was run on the

entire sample, Table 12 was run on the financially stressed sub-sample where both operating cash

flow and net income are negative, and Table 13 on the sub-sample where operating cash flow in year

T was less than aggregate dividends in year T-1. The goal of these regressions is to determine how

strongly various factors relate to a firm’s decision to cut or maintain its dividend. The variables that

showed the most statistical difference between maintain and cutting groups in the analysis of

summary statistics were those chosen to be included in these regressions. The first regressions focus

on firms’ financial and growth characteristics, followed by regressions focusing on dividend history,

and conclude with the complete regression model.

The results displayed in Table 11 are predominantly consistent with those found in the

summary statistic analysis. In all regressions in which they are included leverage, asset growth

(current and lagged), and return on assets are all significant at the 1% level, with a negative

coefficient for leverage, and positive for asset growth and ROA. A dummy variable for recession

years is also significant at 1% whenever present in the model, with firms more likely to cut during

these economic downturns.

The remaining financial variables exhibited inconsistent results across the various

regressions. Firm size (natural log of total assets) was positive significant at 5% in model 1,

insignificant in models 2-4, and significant at 1% in final three models. These results indicate a

potential relationship between firm size and the importance of dividend history, and suggest the

possible inclusion of an interaction variable.

Perhaps the most intriguing findings in Table 11 are the results for the dividend history

variables. Total previous years with dividend payments and consecutive years maintaining are both

negative and significant at 1% across all models, as is the dummy for maintaining in ten consecutive

years included in model 8. Only the dummy for maintaining dividends in the previous period has a

positive relationship to maintaining in the current period, which is significant at 1% in models 5-9.

28

 

These findings would seem to be in direct conflict with the “tradition” hypothesis. Firms that have

been maintaining and paying dividends for a long time are actually more likely to cut them.

7.2RegressionsonFinanciallyDistressedFirms

Table 12 presents the results of the same series of fixed-effect logit regression models as Table 11,

only now using the sub-sample of financially stressed firms with negative income and operating cash

flow in the current period. The variable significance in this series of regressions appears drastically

different from Table 11. Leverage, which is negative and significant at 1% in all regressions in

which it is present, is the only variable significant at 1% in any of the nine models. In the final three

models including both financial and dividend history variables, asset growth is the only other

variable significant at all, which is positive and significant at the 10% level. Not much can be

interpreted from Table 12’s results, aside from the fact that leverage seems to be an overwhelming

important variable for determining the dividend policies of firms in this financially stressed situation.

Results of a series of fixed-effect logit regressions using a sample of firms with cash flows

less than last year’s dividend are provided in Table 13. Using this criterion for financial distress, the

results are much more similar to those found for all firms in Table 11. Leverage, asset growth

(current and lagged), and return on assets are significant at 5% or lower in all models containing

those variables. Again leverage has a negative relationship to maintaining dividends, where ROA

and asset growth have a positive relationship. The recession dummy is also negative and significant

at 1% whenever included in the model. A puzzling finding in Table 13 is that operating cash flow to

assets is negative and significant at 1% in models 3, 8, and 9 after displaying minimal significance in

Tables 11 and 12. The negative relationship to maintaining dividends seems especially

counterintuitive. Upon review, however, this is likely to be an effect of the criteria chosen for the

29

 

sample. Firms with higher operating cash flows must also have paid higher dividends in the previous

period, which is likely to be causing the negative relationship with maintaining those dividends.

The results in Table 13 for the dividend history variables seem to be less significant than in

Table 11. In models 7-9, which include both dividend history and financial variables, only the

number of previous dividend payments in the sample is significant, with a negative coefficient. This

seems to provide more support against the “tradition” hypothesis.

Table 14 uses the sub-sample of firms in which last period’s cash on hand summed with this

period’s operating cash flow is less than last period’s dividend. This is the only regression thus far

where leverage was not highly significant in all models. The recession dummy variable seems to be

highly significant in these models, with a negative coefficient meaning firms are more likely to cut

dividends when the overall market is doing poorly. Similar to Tables 11 and 13, asset growth in the

previous period is positive and significant all models. The number of previous dividends payments is

again negative and significant, suggestions that older firms with longer dividend histories are actually

more likely to cut their dividends when facing this particular strain on cash.

Examining the results of Tables 11-14 as a whole, the only clear finding seems to be the large

role leverage plays in the determining dividend policy. The lack of significance, and in some cases,

negative significance for dividend history variables seems to be in conflict with the “tradition”

hypothesis. An interesting finding actually occurred when running the fixed-effect regressions

reported in these tables. A large number of firms (approx. half) were not included in most

regressions because they never cut dividends throughout the sample period. These firms either had

the good fortune of avoiding severely bad performance or endured through any such periods without

cutting their dividends. Section 10 of this paper will take a closer look at these firms.

30

 

7.3IndustryFixed‐EffectsRegressions

Table 15 provides the results of two additional fixed-effects logit regressions on financially stressed

firms. However, this time instead of using fixed-effects at the firm level, the industry level was used.

This allows for firms that never cut their dividends to be including in the sample and allows for

benchmarking against similar firms instead an individual firm’s historical averages. Industry is

defined by the 48 Fama-French industrial classifications. Both models are based on model 7 from

Tables 11-14 including data on both firm financials and dividend history. Model 1 is run on the

subset of firms used in the Table 15 regressions, where current operating cash flow is less than last

year’s dividends. Model 2 is run on the subset of firms from the Table 12 regressions, where both

operating cash flow and net income are negative. Model 1 contains 2481 observations and Model 2

contains 615.

Model 1 results in high levels of significance for all variables included, with only two

variables not significant at the 1% level (and those are significant at 5%). Consistent with the

previous firm fixed-effects models, leverage, cash to assets, and the recession dummy all have

negative coefficients. Also consistent with the results from Table 13 model 7 are positive and

significant coefficients for asset growth (current and lagged) and return of assets. Variables that

were not significant in Table 13 model 7 but became significant in this model are firm size, dummy

for maintaining last period, and consecutive periods maintaining. The newfound significance of the

size variable is to be expected as ln(assets) is now being compared to an industry average as opposed

to a firm average. One variable, number of previous years paying a dividend, changes from

significantly negative in Table 13 model 7 to significantly positive in Table 13 model 1, both at the

1% level.

This change of sign for the number of previous years paying a dividend now goes against the

“forward-looking” hypothesis and supports the “tradition” hypothesis. It is still important to note,

though, that within the lifecycle of given firm it is more likely to cut dividends after more years of

31

 

paying them. The positive coefficient in Table 15 model 1 suggests that industry may be an

important element in the “tradition” hypothesis. Firms that have a longer history of paying dividends

than their industry counterparts are less likely to cut their payments. If these firms began paying

dividends earlier then they may be considered industry leaders, and thus believe they have more

reputation at stake with a dividend cut. More generally this finding opens the door to a more

dynamic understanding the of the “tradition” hypothesis. Perceived reputation, either within industry

or on a market-wide scale, may go a long way in determining how firms consider dividend history

when making policy decisions.

Table 15 model 2 does not have the widespread significance found in model 1. Lagged asset

growth, cash to assets, consecutive years maintaining dividends, and the recession dummy are all

insignificant. Leverage was negative and significant at the 1% level, again consistent with all models

run thus far. Current asset growth was positive and significant at the 5% level, an improvement from

the 10% firm fixed-effect model on the same sample in Table 12 model 7. Variables that were not

significant in Table 12 model 7 but are in this model include firm size, return on assets, total previous

years with dividend payments, and the dummy for maintaining dividends last period.

Examining Table 15 as a whole, it is again clear that increased leverage has a negative effect

on maintaining dividends. The negative significance in model 1 and lack of significance in the

model for cash to assets is puzzling. This suggests that when considered relative to industry average,

cash on hand is not a major factor in determining dividend policy, and is perhaps even a deterrent to

maintaining dividends. The positive significance in both regressions of number of previous years

paying dividends suggests that the importance of dividend history of firm policy may be dynamic,

with industry leaders placing more emphasis on history when making dividend policy decisions.

32

 

7.4DirectTestsofHypotheses

This section aims to create direct tests for the “forward-looking” and “tradition” hypotheses. The

first test, reported in Table 16, aims at directly testing the “forward-looking hypothesis. It is a series

of four fixed-effects cross-sectional regressions of the sales growth of firms following a dividend

decision. The only independent variable used in the regression is whether or not a firm maintained

its dividend in the current period. The dependent variable is sales growth in yearT+1. The regressions

are run on four sub-samples of dividend-paying firms, all payers, and three distressed sub-samples:

negative operating cash flow and income, operating cash flow less than last year’s dividend, and

operating cash flow plus last year’s cash on hand less than last year’s dividend.

Returning to Modigliani and Miller (1961), a firm’s dividend policy should not have an

impact on value, unless it is affecting optimal investment. However, Brav et. al (2005) suggest that

firms are not investing optimally when they are mired in paying sticky dividends. If the “forward-

looking” hypothesis holds, firms that maintain dividends should see improved sales performance in

T+1. If sales improve following a decision to maintain dividends, one can infer that managers

recognized the firm’s future potential. If sales are worse following the decision to maintain

dividends, this suggests that managers are not taking into account future prospects and perhaps

investing sub-optimally, reducing future sales potential. Table 16 finds a positive and significant

coefficient on maintaining in three out of four sub-samples. In particular the final sub-sample on

firms with cash flow combined with cash reserves insufficient to meet last period’s dividend has a

coefficient of 10.3% significant at 1%, with an overall R-squared of 1.68%. This says that for these

cash-constrained firms that must seek outside financing to maintain their dividend, those that

maintain see on average 10.3% higher sales growth the following year. This result is also consistent

with Easterbrook (1984). Firms that need to seek out the capital markets in order to invest are

choosing projects that promote better growth. Overall the results of Table 16 provide clear support

for the “forward-looking” hypothesis.

33

 

Finding a direct test for the “tradition” hypothesis is more difficult. The last resort prediction

of the “tradition” hypothesis is difficult isolate. Of the 3798 dividend cuts observed in Table 1,

71.6% of those firms had enough cash on hand to have maintained their dividend. This shows a vast

majority of cuts are not by firms facing a last resort. Figure 3 was constructed to examine the effect

total previous dividends paid has on a firm’s maintain rate. Figure 3 graphs the maintain rate of all

paying firms who maintained the previous year grouped by the length of their dividend history, and

for a sub-sample of firms that had operating cash flow less than last period’s dividend. If the

tradition hypothesis holds, there should be a clear positive relationship between a firm’s dividend

history and its maintain rate. For all firms there is a slight upward slope from the firms with the

fewest years of dividend history up through the most. Almost all observations fall between 90 and

96%. For the overall market, dividends appear to be extremely sticky regardless of dividend history.

The second series on Figure 3 examines maintain rate by dividend history for a subset of

firms with low operating cash flow. Here the variance of maintain rate by dividend history is much

higher. There is a noticeable cluster of firms with low maintain rates when the number of previous

years paying dividends is six or fewer. The lowest maintain rate (51.4%) is actually for firms with

23 years of historical payouts. While Figure 3 does show a connection between past dividend policy

and maintain rates, it does not appear to be the driving force behind dividend stickiness.

8DividendPoliciesofFirmswithPublicDebt

8.1SummaryStatistics

Section 8 of this paper focuses on firms with publically traded debt rated by Standard and Poor’s.

Aivazian, Booth, and Cleary (2006) find that firms with publicly traded debt are more likely to

engage in dividend smoothing, and therefore have sticky dividends. The dividends of the firms

34

 

in this sample should therefore be even stickier than the overall market and provide a cleaner test

for both the “tradition” and “forward-looking” hypotheses.

Section 8 repeats the analysis done on all dividend-paying firms in this particular sub-

sample. It begins with summary statistical analysis of difference in mean and median tests

between maintaining and cutting firms, first in the overall market, and then under a series of

financial distress conditions. It concludes with a logit regression on the MAINTAIN variable for

firms that have been downgraded by S&P.

Table 17 displays the summary stats for all firms with credit ratings from S&P. Firms

maintain dividends about 87.7% in this sample, which is slightly higher than the overall market

average found in Table 1. Panel A shows the financial data of maintaining and cutting firms.

Almost all variables in the panel are statistically different at 1% for both mean and median, with

the lone exception being cash scaled by total assets. In general, maintaining firms are older,

bigger, and are performing better than cutting firms with much lower leverage. Panel B shows

maintaining firms have significantly longer streaks of maintaining dividends entering the period

and a much greater portion maintained dividends the previous period. Panel C shows significant

differences in asset and sales growth for both this period and last period, with no statistical

difference looking back two years.

Panel D brings in new data for this sample based on the firm’s credit rating. The first

variable is the S&P credit rating broken into 4 categories with 1 being the best rated firms and 4

the worst. The second credit rating variable is dummy for whether the firm’s debt is investment

grade. Maintaining firms have a significantly higher rating than cutting firms, and nearly 80% of

maintaining firms are investment grade compared to 46% for cutting firms.

The take-away from Table 17 is similar to that of Table 1. Firms that maintain dividends

are generally doing better than those that cut. Leverage remains a noticeable difference between

35

 

the two firms. The credit ratings data, combined with difference in leverage, suggests that

maintaining firms have easier access to capital than cutting firms. Tables 18, 19, and 20 provide

summary statistics for sub-samples of firms facing some form of financial distress.

Table 18 includes a sample of firms with negative operating cash flow and negative

income, the strictest distress constraint. Under this condition only 41.3% of firms maintained

their dividends, the smallest percentage of any sub-sample. Maintaining and cutting firms in this

sample appear to be of similar age and size, with maintaining firm losses significantly lower than

their cutting counterparts. Dividends scaled by assets in the previous year do not a have

statistically different median for cutting and maintaining firms. This suggests that cuts are not

driven by firms with a higher dividend burden relative to their size. Again leverage is

significantly higher for cutting firms. Asset and sales growth are significantly higher for

maintaining firms in both the current and previous period. Panel D shows the maintaining firms

have better credit ratings, but now only 30% of maintaining firms are investment grade.

Table 19 includes a sub-sample of firms in which operating cash flow was less than last

year’s dividend. This is designed to capture firms that would be unable to pay dividends from

current cash flows generated and must choose to either draw down cash reserves or seek outside

financing. For this group of firms, 61.8% maintained their dividends. The findings under this

constraint are fairly similar to Table 17. Notable exceptions are that dividends scaled by assets

in the previous year appear significantly higher for cutting firms, suggesting dividends were a

greater burden heading into the period for those firms. The percentage of maintaining firms that

are investment grade is 49% in this sample.

Table 20 uses a constraint for financial distress unique to firms with public debt, ratings

downgrades. Somewhat surprisingly, almost 75% of the firms in the sample maintained their

dividends following a downgrade. 89% of maintaining firms also maintained the prior year which

36

 

shows that these firms are not cutting dividends in advance of being downgraded. A unique finding

for this sub-sample is that maintaining firms are significantly younger and smaller than cutting firms,

while cutting firms have longer consecutive streaks of paying dividends entering the period. This

would seem to be in direct contrast to the “tradition” hypothesis.

8.2LogitRegression

Table 21 shows the results of a series of logit regressions on the MAINTAIN variable for firms

following a downgrade. To reach a sufficient sample size for downgraded firms, a fixed-effect

model was not used because of sample truncation discussed earlier. Leverage was again negative

and significant at 1% in every model where it was included. Also significant at 1% in every model

where they were included were return on assets, the recession dummy (negative coefficient), and

whether or not the firm maintained last period. Maintaining last period is the only dividend history

variable that is significant in any model. This suggests that firms are mainly concerned with the

sustainability of the dividend policy, and their historical decisions outside of last period hold little

weight.

9AreRealDividendsSticky?ALookatInflation‐adjustedPayouts

All the analysis thus far has focused on the stickiness of nominal dividends. This section looks to

briefly analyze payout policy from an inflation-adjusted perspective. If dividend stickiness and

reluctance to cut are based on visible signals to investors, perhaps firms can slowly adjust dividends

over time by simply not increasing dividends along with inflation. Three tables of summary statistics

are created for firms grouped by whether or not they maintained real dividends. Real dividends are

37

 

calculated by scaling a firm’s total dividend payout by the consumer price index in a given year.

Figure 4 charts the market-wide rate of maintaining real dividends annually from 1987-2007.

Table 22 provides summary statistics for the overall market grouped by maintaining real

dividends. Real dividends are not nearly as sticky as nominal dividends with only 53.3%

maintaining their real dividend payout. Due to the large size of both the maintaining and cutting

groups, all variables have statistically different means and medians. Firms maintaining real

dividends are slightly younger than firms cutting them. Almost all other variables are in line with

expectations. Maintaining firms are bigger, more profitable, and have been generating better asset

and sales growth rates for a number of years.

Table 23 looks at real dividends under the condition that last period’s cash on hand plus

operating cash flow is less than last period’s dividend. Again stickiness drops considerably with

35.3% of firms maintaining under this condition. Still, considering the cash shortfall these firms are

under, the fact that 35% actually keep pace with inflation is rather impressive. Maintaining firms are

again younger than their cutting counterparts. Maintaining firms have lower leverage and less cash

on hand. Maintaining firms show much better asset and sales growth in the current and previous

periods.

Table 24 examines real dividends cuts with the constraint of both negative operating cash

flow and income. In this sub-sample only 17.8% maintained dividends. There are not many

significant differences between the maintaining and cutting groups. Maintaining firms are again

younger. Maintaining firms are also losing less money than cutting firms. Asset and sales growth

are both significantly higher with positive means and medians for maintaining firms, compared to

negative values for cutting firms.

Figure 4 follows a similar pattern to the nominal rate maintaining dividends depicted in

Figure 1. The rate dips considerably during the recessionary periods of the early 1990s and dotcom

38

 

collapse of 2001. The rate also crosses 60% for the first time in 2004 and remains above that

threshold for the final four years of the sample.

The unique finding from these tables on real dividends is the age of firms maintaining versus

those cutting. In all three samples, maintaining firms have both a younger mean and median than

cutting firms. It is possible to interpret this in support of the tradition hypothesis. Younger firms

have a more aggressive view of dividend policy and are keeping pace with inflation even during

financial trouble. Older firms, however, are only maintaining their dividends out of tradition but

when they face hardship allow real dividends to decrease, while avoiding market reactions by

maintaining nominal payouts.

10DividendPoliciesatIndustryLevel

Earlier it was mentioned that a large number of firms (approx. half) never cut dividends throughout

the sample period of 1987-2007. Table 25 tries to better understand these firms by examining

dividend policy on the industry level. All firms in the sample are divided into the 48 Fama-French

industry classifications. Column 1 shows the total number of unique firms appearing in the sample at

some point from 1987-2007. This total includes both dividend payers and non-payers, but does not

include firms in the utilities or financial industries that were removed to be consistent with prior

research. Since firms were removed using SIC codes and not Fama-French classifications, a handful

of what Fama-French consider financial firms remain in the sample. Column 2 gives the total

number of unique dividend payers during the sample period. Column 3 displays the number of firms

who once they began paying dividends never cut them from 1987-2007. Note that it is possible for a

firm to be counted in Column 3 if they cut dividends prior to 1987. Column 4 shows the percentage

of total firms who are dividend payers. Column 5 reports the percentage of dividend payers who did

not cut during the sample period. The industries are sorted by total number of firms.

39

 

There are a number of interesting elements in Table 25. Consistent with dividend stickiness,

every industry with at least 20 firms in the sample has at least 1 firm that never cuts its dividend.

Again, considering industries with at least 20 firms, every industry has at least 10% of its payers

maintaining dividends throughout the sample period. Over all industries, 35.6% of dividend-paying

firms never cut their dividend over a 21-year period. There are also some results that would seem to

go against common conceptions of a dividend-paying firm. The oil industry, mentioned in anecdotal

evidence at the beginning of this paper, is often associated with a long history of dividend payments.

However, according to Table 25, only 16.6% of firms in the Petroleum industry pay dividends. More

consistent with general perception is 34.9% of Petroleum dividend payers never cut their dividends,

but this is approximately the same the rate as the overall market.

Other industries of note include the Electronic Equipment industry. This is the largest

industry classification in the sample and at 6.2% has the smallest percentage of dividend payers. But

looking at Column 5, this industry has one of the higher rates of maintaining dividends, with 42.9%

not cutting in the sample period. Turning to a midsized industry, 103 out of 250 firms in the Steel

Works industry pay dividends, a rate of 41.2%, one of only 5 industries with more than 20 firms to

have a percentage over 40%. However, only 18.4% (roughly half the overall average) of these

dividend-paying Steel Works firms maintained their dividends from 1987 to 2007.

The point of those previous examples is to illustrate that the propensity of a firm in a

particular industry to pay dividends is not proportional to its propensity to maintain those dividends

over a long period of time. To further support this point, a univariate regression of industries with

over 20 firms with Column 5 as the independent variable and Column 4 as the dependent variable

yields a negative R2. This shows that none of the variation in the percentage of dividend payers

maintaining throughout the sample can be explained by the changes in percentage of firms paying

dividends.

40

 

These results are important because they suggest that the factors that determine whether a

particular firm in an industry pays a dividend are not the same factors that determine whether that

firm maintains its dividend consistently over time. While there is large amount of prior research on

the factors that determines who pays dividends, there has been very little research done on the factors

that influence whether a firm maintains its dividend. The goal of this paper has been to better

understand what drives a firm to maintain its dividend, which, based on Table 25, is distinct from

what made the firm pay the dividend in the first place.

11Conclusion

This paper attempts to better understand firms’ decisions to maintain or cut their dividend

payouts. Building on the previous literature, two hypotheses are formed. The first predicts that

maintaining dividends is largely the result of firm dividend history and that measures of that

history will be the deciding factor in whether firms continue to maintain. The second hypothesis

predicts that managers use their expectations of future performance when deciding to maintain or

cut. Analysis of differences in means across all firm-years where companies maintain versus cut

their dividend give indications that both hypotheses could be valid. Cutting firms have poor, and

often negative, growth rates on key financial measures, suggesting that only extreme financial

stress motivates firms to cut their dividends. With the documented adverse market reaction to

dividend cuts found in Miller and Rock (1986), it makes little sense for firms doing well to

reduce payouts, so the poor performance of cutting firms logically follows.

After using a number of different measures to account for financial stress, firms with both

negative income and operating cash flow and firms with cash flows less than previous dividends

are made the focus of further analysis. Somewhat surprising is that 45.7% of firms with negative

41

 

income and cash flow continue to not only pay dividends, but maintain their previous dividend

levels. Analysis of summary statistics shows the key variables that appear different between

maintaining and cutting firms are asset growth (higher for maintain firms) and leverage (higher

for cutting firms.)

The next section reports the results of the series of fixed-effect logit regressions on a

firm’s decision to maintain or cut its dividend. The only consistent finding across these series of

models is that leverage has a significantly negative effect on a firm’s ability to maintain its

dividend. In firm level fixed-effect models, some of the dividend history variables are actually

significantly negative, which would go against the “tradition” hypothesis. However, these

variables are significantly positive in industry fixed-effects models, suggesting that there may be

a dynamic influence of tradition on dividend policy. Concluding the regression analysis section

is a direct attempt to isolate the “forward-looking” hypothesis. A series of univariate fixed-

effects regressions are run on future sales growth with a firm’s decision to maintain dividends

this year as the dependent variable. In three out of four models, maintaining dividends has a

positive relationship with future sales growth.

The next section of the paper examines the dividend decisions of firms with publicly

traded debt. Unique to this section is the ability to use credit rating downgrades as a proxy for

poor financial condition. In that sub-sample, firms who maintained dividends had a significantly

younger mean and median age compared to cutting firms. Logit regressions for firms following

downgrades are consistent with previous models with whether or not a firm maintained in the

previous period as the only significant dividend history variable in any model.

The next section examines dividend decisions involving dividends adjusted for inflation

using the consumer price index. It finds that 53.8% of firms are able to maintain their real

42

 

dividend from year to year. Firms that maintain real dividends tend to be consistently younger

than cutting firms across all sub-samples. Under conditions of financial stress, maintain rate of

real dividends drops to below 20% (17.8% for firms with negative operating cash flow and

income).

The final section of the paper examines the subset of firms that never cuts their dividend

during the sample period. This is done by comparing the number of firms by industry in three

categories: total firms, dividend payers, and firms who never cut their dividends. The important

result of this analysis is that there is no relation to percentage of firms in an industry that pays

dividends and the percentage of firms in that industry that is able to maintain dividends

throughout the sample. This suggests that what influences a firm to pay dividends is not

necessarily what influences a firm to maintain those dividends. Since the former is widely

studied in previous literature, this finding gives credence to the contributions of this paper on

what influences the decision to maintain dividends.

Overall the results reported in this paper lend support to both the “tradition” and

“forward-looking” hypothesis. Since the “tradition” hypothesis is possibly rooted in a behavior

social norm, it is extremely difficult to produce a direct and clean test on the hypothesis. A

direct test of the “forward-looking” hypothesis shows that in three out of four samples, sales

growth is greater for firms who maintained their dividend. Although I cannot dispute that

dividend history plays an important part in managers’ dividend decisions, results seem to

indicate that the most recent history is far more important than any long-standing traditions.

43

 

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46

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 21975 3798 25.48 21.62 *** 22.00 17.00 ***

Total Assets^ 21975 3798 3,057 2,306 *** 697 346 ***

Return on Assets^ 21913 3798 6.5% -1.9% *** 6.0% 1.4% ***

Operating Cash Flow^ 20694 3564 346.51 207.06 *** 65.51 16.86 ***

Operating Cash Flow/Total Assets^ 20694 3564 10.5% 6.4% *** 10.3% 6.6% ***

Cash to Total Assets 21910 3798 10.9% 10.9% 5.7% 5.5%

Leverage 21913 3798 50.4% 58.9% *** 51.7% 58.6% ***

Change in Leverage 21913 3798 0.5% 3.1% *** -0.2% 0.8% ***

Change in LeverageT-1 21694 3756 -0.4% 4.5% *** -0.5% 1.8% ***

Capital Expediture^ 12770 2334 54.75 57.32 2.63 3.06 *

Panel B - Dividend History Data

Dividends/Total Assets^ 21751 3798 2.5% 1.6% *** 1.7% 0.6% ***

Dividends/Total AssetsT-1^ 21975 3735 2.1% 3.3% *** 1.5% 1.8% ***

Maintaining Dividend Dummy for Last

Period19508 3430 93.1% 65.9% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior

to Year21975 3798 4.85 2.39 *** 4.00 1.00 ***

Cons. Years Paying Dividend Prior to

Year21975 3798 7.11 6.71 *** 10.00 8.00 ***

Panel C - Growth Data

Asset Growth^ 21975 3798 12.8% 2.4% *** 7.5% -1.4% ***

Asset GrowthT-1 21694 3756 14.3% 4.6% *** 8.1% -0.1% ***

Asset GrowthT-2 21189 3692 13.7% 12.9% 7.7% 5.2% ***

Sales Growth^ 21911 3759 11.4% 2.7% *** 8.3% -0.1% ***

Sales GrowthT-1 21607 3734 12.6% 3.6% *** 8.8% 1.2% ***

Sales GrowthT-2 21105 3666 12.2% 9.6% *** 8.4% 5.4% ***

Operating Cash Flow Growth^ 19485 3336 8.8% -13.3% *** 4.8% -16.9% ***

Capital Expediture Growth^ 12071 2196 102.0% 102.9% 5.0% 9.7% **

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

The following table provides summary statistics for firms from the years 1987-2007 that paid dividends in yearT-1 Firms are

grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-1 to yearT.

Significance differences are calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

Table 1 - Summary Stats Grouped by Decision to Maintain Dividend

47

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 1755 1499 23.82 22.36 ** 19.00 18.00 **

Total Assets^ 1755 1499 2,505 1,779 *** 539 301 ***

Return on Assets^ 1755 1499 -7.5% -11.6% *** -3.0% -5.4% ***

Operating Cash Flow^ 1663 1408 185.02 106.09 *** 21.77 5.35 ***

Operating Cash Flow/Total Assets^ 1663 1408 3.9% 1.5% *** 5.0% 3.1% ***

Cash to Total Assets 1755 1499 10.6% 9.3% ** 4.5% 4.0% **

Leverage 1755 1499 59.0% 68.1% *** 60.8% 67.5% ***

Capital Expediture^ 1036 899 59.00 56.27 2.36 3.23

Panel B - Dividend History Data

Dividends/Total Assets^ 1734 1499 2.3% 0.9% *** 1.3% 0.2% ***

Dividends/Total AssetsT-1^ 1755 1481 1.5% 2.4% *** 1.0% 1.2% ***

Maintaining Dividend Dummy for Last Period 1468 1357 90.7% 62.6% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior to Year 1755 1499 3.94 2.39 *** 3.00 1.00 ***

Cons. Years Paying Dividend Prior to Year 1755 1499 6.49 6.80 ** 9.00 8.00 *

Panel C - Growth Data

Asset Growth^ 1755 1499 5.3% -5.7% *** -2.6% -8.2% ***

Sales Growth^ 1744 1483 3.6% -4.2% *** 0.2% -5.5% ***

Operating Cash Flow Growth^ 1586 1314 -34.3% -27.2% -31.3% -49.3% ***

Capital Expediture Growth^ 972 851 93.1% 118.0% 8.0% 10.5%

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

The following table provides summary statistics for firms that paid dividends in yearT-1 and had negative income before extraordinary items in

yearT. Firms are grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-1 to yearT. Variables

marked with a ^ have been winsorized at the 1% level. Leverage is defined as debt to asset ratio. Significance differences are calculated via a t-

test for the mean and Wilcoxon Ranksum test for the median.

Table 2 - Summary Stats by Decision to Maintain Dividend w/Income<0

48

Z

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 1286 577 21.41 21.93 18.00 18.00

Total Assets^ 1286 577 1,332 1,166 249 179 ***

Return on Assets^ 1286 577 0.3% -13.1% *** 2.5% -5.2% ***

Operating Cash Flow^ 1286 577 -17.94 -17.86 -6.78 -6.53

Operating Cash Flow/Total Assets^ 1286 577 -6.8% -9.1% ** -3.2% -4.3% ***

Cash to Total Assets 1286 577 11.1% 12.8% * 4.2% 4.8% *

Leverage 1286 577 0.56 0.68 *** 0.58 0.66 ***

Capital Expediture^ 777 333 82.79 60.63 2.57 3.60

Panel B - Dividend History Data

Dividends/Total Assets^ 1279 577 2.1% 0.8% *** 1.1% 0.1% ***

Dividends/Total AssetsT-1^ 1286 569 1.2% 2.9% *** 0.9% 1.2% ***

Maintaining Dividend Dummy for Last Period 1055 528 90.8% 65.3% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior to Year 1286 577 3.71 2.23 *** 2.00 1.00 ***

Cons. Years Paying Dividend Prior to Year 1286 577 5.74 6.02 6.00 6.00 *

Panel C - Growth Data

Asset Growth^ 1286 577 18.9% -3.2% *** 11.2% -6.9% ***

Sales Growth^ 1275 560 12.3% -0.1% *** 9.2% -3.2% ***

Operating Cash Flow Growth^ 1177 528 -118.5% -76.5% -119.8% -110.5% **

Capital Expediture Growth^ 736 314 86.0% 107.0% 0.0% 6.3%

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 3 - Summary Stats by Decision to Maintain Dividend w/OCF<0

The following table provides summary statistics for firms that paid dividends in yearT-1 and had negative cash flow from operating activities in

yearT. Firms are grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-1 to yearT. Variables

marked with a ^ have been winsorized at the 1% level. Leverage is defined as debt to asset ratio. Significance differences are calculated via a t-

test for the mean and Wilcoxon Ranksum test for the median.

49

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 1789 1146 22.31 20.85 ** 19.00 16.00 ***

Total Assets^ 1789 1,146 1,401 1,297 262 204 ***

Return on Assets^ 1789 1146 1.4% -5.8% *** 2.9% -0.9% ***

Operating Cash Flow^ 1789 1146 -3.05 37.76 *** -2.37 -0.03 ***

Operating Cash Flow/Total Assets^ 1789 1146 -4.0% -1.2% *** -1.6% 0.0% ***

Cash to Total Assets 1789 1146 11.3% 13.2% *** 4.4% 5.5% ***

Leverage 1789 1146 53.5% 61.3% *** 55.4% 59.0% ***

Capital Expediture^ 1072 694 83.31 53.37 *** 2.80 3.37

Panel B - Dividend History Data

Dividends/Total Assets^ 1782 1146 2.8% 2.0% *** 1.4% 0.5% ***

Dividends/Total AssetsT-1^ 1789 1089 2.0% 5.3% *** 1.2% 2.9% ***

Maintaining Dividend Dummy for Last Period 1524 1050 90.9% 72.0% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior to Year 1789 1146 3.99 2.36 *** 3.00 1.00 ***

Cons. Years Paying Dividend Prior to Year 1789 1146 6.18 5.88 ** 7.00 5.00 *

Panel C - Growth Data

Asset Growth^ 1789 1146 15.7% -0.8% *** 8.4% -3.7% ***

Sales Growth^ 1775 1118 10.6% 0.7% *** 7.6% -2.1% ***

Operating Cash Flow Growth^ 1627 1047 -102.9% -55.0% *** -102.7% -80.2% ***

Capital Expediture Growth^ 1017 650 93.4% 94.3% 3.9% 11.2%

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 4 - Summary Stats by Decision to Maintain Dividend w/OCF<Last Year's Dividend

The following table provides summary statistics for firms that paid dividends in yearT-1 and had cash flow from operating activities in yearT less than

aggregate dividends paid in yearT-1. Firms are grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-

1 to yearT. Variables marked with a ^ have been winsorized at the 1% level. Leverage is defined as debt to asset ratio. Significance differences are

calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

50

Maintain

or

IncreaseCut

Maintain

or

IncreaseCut

Maintain

or

IncreaseCut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 649 524 20.80 19.71 18.00 15.00 *

Total Assets^ 649 524 1,302 1,259 306 249 *

Return on Assets^ 649 524 2.5% -8.0% *** 3.1% -1.2% ***

Operating Cash Flow^ 649 524 -17.11 56.67 *** -9.56 -1.13 ***

Operating Cash Flow/Total Assets^ 649 524 -6.6% -3.1% ** -4.4% -1.4% ***

Cash to Total Assets 649 524 4.2% 8.9% *** 1.5% 2.5% ***

Leverage 649 524 61.8% 70.2% *** 62.0% 66.2% ***

Change in Leverage 649 524 3.2% 8.1% *** 3.3% 3.2%

Change in LeverageT-1 635 518 -0.5% 10.3% *** 0.6% 5.2% ***

Panel B - Dividend History Data

Dividends/Total Assets^ 648 524 2.2% 1.9% * 1.0% 0.4% ***

Dividends/Total AssetsT-1^ 649 467 1.8% 6.1% *** 1.0% 3.5% ***Maintaining Dividend Dummy for Last

Period 553 472 91.5% 73.5%***

100.0% 100.0% ***Cons. Years Maintaining Dividend Prior

to Year 649 524 4.04 2.31***

3.00 1.00 ***Cons. Years Paying Dividend Prior to

Year 649 524 6.14 5.89 7.00 6.00

Panel C - Growth Data

Asset Growth^ 649 524 24.6% 1.5% *** 16.8% -3.1% ***

Asset GrowthT-1 635 518 20.9% 2.9% *** 11.7% -3.1% ***

Asset GrowthT-2 614 507 16.1% 20.5% 9.1% 4.4% ***

Sales Growth^ 645 503 16.9% 0.8% *** 11.3% -2.6% ***

Sales GrowthT-1 632 510 17.9% 3.5% *** 12.2% -0.1% ***

Sales GrowthT-2 608 500 13.3% 11.7% 10.0% 4.6% ***

Operating Cash Flow Growth^ 582 456 -120.6% -39.9% ** -114.5% -62.8% ***

Capital Expediture Growth^ 374 309 72.8% 80.7% 5.0% 2.7%

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 5 - Summary Stats by Decision to Maintain Dividend w/OCF+Cash on

Hand Last Year<Last Year's Dividend

The following table provides summary statistics for firms that paid dividends in yearT-1 and had a sum total cash flow from

operating activities in yearT and cash on hand in yearT-1 less than aggregate dividends paid in yearT-1. Firms are grouped by

whether or not they maintained or increased dividends versus cut their dividends from yearT-1 to yearT. Variables marked

with a ^ have been winsorized at the 1% level. Leverage is defined as debt to asset ratio. Significance differences are

calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

51

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

n n Mean Mean Median MedianPanel A - Financial DataFirm Age 355 422 21.46 21.06 17.00 17.00Total Assets^ 355 422 1098 1190 173 165Operating Cash Flow^ 355 422 -16.32 -18.49 -6.78 -6.93Operating Cash Flow/Total Assets^ 355 422 -10.6% -10.4% -4.2% -4.8%Return on Assets 355 422 -11.9% -27.2% -5.0% -9.6% ***Cash to Total Assets 355 422 17.1% 13.2% ** 7.1% 4.7% ***Leverage 355 422 58.2% 71.8% *** 58.3% 69.4% ***Net LT Debt Issuance 338 394 22.32 19.57 0.00 0.00Net LT Debt IssuanceT-1 338 387 16.65 33.20 * 0.00 0.00 *Change in Cash/Last Year's Assets 331 407 -5.0% -3.9% -2.0% -1.3%Capital Expediture^ 218 248 100.54 61.72 2.53 3.55

Panel B - Dividend History Data

Dividends/Total Assets^ 352 422 3.1% 0.7% *** 1.2% 0.0% ***

Dividends/Total AssetsT-1^ 355 420 1.1% 2.8% *** 0.7% 1.2% ***

Maintaining Dividend Dummy for Last

Period264 386 87.1% 64.8% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior

to Year355 422 2.99 2.22 *** 1.00 1.00 ***

Cons. Years Paying Dividend Prior to 355 422 5.07 6.05 *** 5.00 6.00 ***Number of Previous Years Paying 331 408 9.97 10.13 10.00 9.00

Panel C - Growth DataChange in Leverage 355 422 6.9% 12.6% *** 5.3% 5.7% **Change in LeverageT-1 347 420 -2.6% 6.7% *** 0.1% 4.7% ***Asset Growth^ 355 422 5.0% -8.4% *** -1.1% -10.1% ***Asset GrowthT-1 347 420 18.8% 2.8% *** 4.2% -2.7% ***Asset GrowthT-2 338 410 14.6% 22.1% 3.7% 4.1%Sales Growth^ 349 412 -0.8% -3.4% -1.1% -5.7% ***

Sales GrowthT-1 341 414 7.2% 0.8% 2.2% -3.0% ***

Sales GrowthT-2 331 404 15.9% 8.5% 5.7% 3.4%Operating Cash Flow Growth^ 339 388 -104.0% -55.3% -121.5% -110.5% *

Capital Expediture Growth^ 203 236 112.2% 128.6% 3.0% 7.7%

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

The following table provides summary statistics for firms that paid dividends in yearT-1 and had both negative income before

extraordinary items and negative cash flow from operating activities in yearT. Firms are grouped by whether or not they

maintained or increased dividends versus cut their dividends from yearT-1 to yearT. Variables marked with a ^ have been

winsorized at the 1% level. Leverage is defined as debt to asset ratio. Significance differences are calculated via a t-test for

the mean and Wilcoxon Ranksum test for the median.

Table 6 - Summary Stats by Decision to Maintain Dividend w/Income & OCF<0

52

Maintain1 Cut1 Total

Maintain2 22 4 26

Cut2 54 67 121

Total 76 71 147

Table 7 - Switch Table of Repeat Distressed Firms

The following table categorized firms that have firm year observations present in both the maintaining

and cutting groups of sample in Table 5 in consecutive years. For example column 1 row 2 is the

number of firms present in Table 5 that maintained dividends in yearT and then cut them in yearT+1

53

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

n n Mean Mean Median Median

Return on AssetsT+1 314 360 -8.4% -18.1% *** -1.9% -6.7% ***

Return on AssetsT+2 280 311 -7.9% -11.3% -1.2% -2.6% *

Operating Cash Flow/Total AssetsT+1 310 357 -1.4% -2.6% 1.3% 1.0%

Operating Cash Flow/Total AssetsT+2 278 309 0.3% -1.6% 2.8% 2.1%

Change in Return on AssetsT+1 314 360 2.0% -1.5% 2.5% 3.1%

Change in OCF/Total AssetsT+1 310 357 7.4% 6.2% 6.4% 6.1%

Asset GrowthT+1 316 361 -0.9% -5.9% -6.1% -9.6% ***

Asset GrowthT+2 281 312 5.9% -3.9% ** -4.3% -5.6% **

*,**,*** denote significance difference at 10%,5%, and 1%

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

n n Mean Mean Median Median

Return on AssetsT+1 1647 1011 0.5% -6.0% *** 2.8% 0.1% ***

Return on AssetsT+2 1503 887 0.0% -3.6% *** 2.7% 1.1% ***

Operating Cash Flow/Total AssetsT+1 1637 1003 4.1% 2.9% 4.1% 3.8%

Operating Cash Flow/Total AssetsT+2 1496 875 4.7% 3.7% 4.8% 4.8%

Change in Return on AssetsT+1 1647 1011 -1.3% -1.6% -0.2% 0.3% ***

Change in OCF/Total AssetsT+1 1637 1003 7.2% 3.3% *** 5.7% 2.7% ***

Asset GrowthT+1 1652 1014 7.1% -0.3% *** 2.7% -3.3% ***

Asset GrowthT+2 1503 894 4.7% 0.7% ** 1.5% -2.1% ***

*,**,*** denote significance difference at 10%,5%, and 1%

Table 9 - Future Performance After OCF<Last Year's Dividend

The following table provides summary statistics on firm performance in the two years following a decision to maintain or cut

dividends. Included in the sample are firms that paid dividends in yearT-1 and had cash flow from operating activities in yearT

less than aggregate dividends in yearT-1 . Firms are grouped by whether or not they maintained or increased dividends versus

cut their dividends from yearT-1 to yearT. All variables have been winsorized at the 1% level. Significance differences are

calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

The following table provides summary statistics on firm performance in the two years following a decision to maintain or cut

dividends. Included in the sample are firms that paid dividends in yearT-1 and had both negative income before extraordinary

items and negative cash flow from operating activities in yearT. Firms are grouped by whether or not they maintained or

increased dividends versus cut their dividends from yearT-1 to yearT. All variables have been winsorized at the 1% level.

Significance differences are calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

Table 8 - Future Performance After Income and OCF<0

54

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

Maintain

or

Increase

Cut

n n Mean Mean Median Median

Panel A - Less Than Ten Years of Maintaining Dividends.

Return on AssetsT+1 1310 923 0.13% -6.22% *** 2.65% 0.14% ***

Change in Return on AssetsT+1 1300 916 3.96% 2.76% 3.99% 3.76% ***

Operating Cash Flow/Total AssetsT+1 1310 923 -1.45% -1.73% -0.26% 0.20%

Change in OCF/Total AssetsT+1 1300 916 7.29% 3.18% *** 5.72% 2.71% ***

Panel B - At Least Ten Years of Maintaining Dividends.

Return on AssetsT+1 337 88 2.03% -4.11% *** 3.21% 0.04% ***

Change in Return on AssetsT+1 337 87 4.71% 4.95% 4.55% 4.26%

Operating Cash Flow/Total AssetsT+1 337 88 -0.60% 0.31% 0.19% 0.82%

Change in OCF/Total AssetsT+1 337 87 6.89% 4.85% 5.82% 3.23% **

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 10 - Summary of Future Performance by Decision to Maintain

Dividend with OCF<Last Year's Dividend

The following table provides summary statistics on firm performance in the year following a decision to maintain or cut

dividends. Firms in panels a and b had cash flow from operating activities in yearT less than aggregate dividends paid in yearT-

1. Firms are grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-1 to yearT.

All variables have been winsorized at the 1% level. Significance differences are calculated via a t-test for the mean and

Wilcoxon Ranksum test for the median. Firms in panels b have at least ten consecutive years of maintaining dividends prior to

yearT.

55

Coefficient (Z-stat)

1 2 3 4 5 6 7 8 9

Leverage -3.4105 -3.5796 -3.7680 -3.5953 - - -3.6436 -3.9064 -3.9951

(-16.22)*** (-16.25)*** (-16.08)*** (-16.32)*** - - (-13.83)*** (-13.86)*** (-14.06)***

Asset Growth 0.7642 1.0162 0.9649 1.0035 - - 0.9683 0.9689 0.9450

(8.47)*** (10.45)*** (9.55)*** (10.31)*** - - (8.41)*** (8.03)*** (7.84)***

Asset GrowthT-1 - 1.5398 1.4868 1.5585 - - 1.3497 1.3195 1.3060

- (14.54)*** (13.54)*** (14.67)*** - - (11.15)*** (10.41)*** (10.28)***

Ln(Total Assets) 0.1115 -0.0482 -0.0357 -0.0705 - - 0.3212 0.2808 0.3582

(2.26)** (-0.9) (-0.63) (-1.32) - - (4.18)*** (3.45)*** (4.31)***

Cash to Total Assets 0.6315 0.9109 0.7474 0.8716 - - 0.4469 0.3422 0.2468

(2.15)** (3.01)*** (2.34)** (2.88)*** - - (1.26) (0.91) (0.66)

Return on Assets 6.0145 5.3025 5.5976 5.2024 - - 5.9564 6.4977 6.4204

(16.6)*** (14.34)*** (13.84)*** (14.09)*** - - (13.14)*** (12.98)*** (12.77)***

Recession Dummy - - - -0.2692 - - -0.2955 -0.2740 -0.2770

- - - (-4.67)*** - - (-4.48)*** (-4.03)*** (-4.06)***

- - -0.1178 - - - - -0.1330 -0.0922

- - (-0.34) - - - - (-0.31) (-0.22)

- - - - -0.0630 -0.0653 -0.0435 -0.0403 -0.0449

- - - - (-11.25)*** (-11.58)*** (-5.61)*** (-4.83)*** (-5.37)***

- - - - 0.8490 1.1241 0.9047 0.6225 0.9103

- - - - (16.31)*** (16.95)*** (12.34)*** (10.06)*** (11.99)***

- - - - - -0.0744 -0.0867 - -0.0913

- - - - - (-6.96)*** (-7.49)*** - (-7.55)***

- - - - - - - -0.3986 -

- - - - - - - (-3.81)*** -

n 16083 15838 14624 15838 13579 13579 13367 12287 12287

*,**,*** denote significance at 10%,5%, and 1%

Maintained for at least 10

years prior Dummy

Table 11 - Fixed Effect Logit Regressions on MAINTAIN variable

Operating Cash Flow/Total

Assets

Total Previous Years with

Dividend Payments

Maintaining Dividend

Dummy for Last Period

Cons. Years Maintaining

Dividend Prior to Year

The following provides the results of a series of fixed effect logit regressions on a dummy variable for whether or not firms maintained dividends. Firms maintaining or

increasing dividends are coded as MAINTAIN=1 while cutting firms are coded as MAINTAIN=0. Positive coefficients mean indicate a positive relationship between

the variable and a firm deciding to maintain dividends. Included in the sample are all firm years 1987-2007 that paid a dividend in yearT-1.

56

Coefficient (Z-stat)

1 2 3 4 5 6 7 8 9

Leverage -4.9508 -5.1979 -5.7396 -5.1830 - - -20.5057 -22.4573 -21.4544

(-3.73)*** (-3.76)*** (-3.93)*** (-3.77)*** - - (-3.34)*** (-3.32)*** (-3.33)***

Asset Growth -0.0433 0.0905 -0.0468 0.0865 - - 3.4137 3.4552 3.2862

(-0.16) (0.32) (-0.16) (0.31) - - (1.71)* (1.7)* (1.66)*

Asset GrowthT-1 - 0.4412 0.4387 0.4186 - - 2.8751 2.8913 2.7116

- (1.91)* (2.02)** (1.89)* - - (1.52) (1.48) (1.45)

Ln(Total Assets) 0.5836 0.4980 1.1883 0.4939 - - 0.9639 1.2688 1.3211

(1.59) (1.23) (2.27)** (1.23) - - (0.45) (0.63) (0.65)

Cash to Total Assets -1.4396 -0.7817 0.9620 -0.7420 - - -4.9076 -3.9546 -3.6344

(-1.16) (-0.58) (0.63) (-0.55) - - (-1.06) (-0.81) (-0.74)

Return on Assets -1.8185 -2.2746 -1.1769 -2.3500 - - 2.3772 3.8745 4.7857

(-1.71)* (-1.92)* (-0.94) (-1.97)** - - (0.38) (0.51) (0.67)

Recession Dummy - - - -0.5289 - - 0.2455 0.4241 0.2492

- - - (-1.22) - - (0.3) (0.5) (0.31)

- - -2.5642 - - - - -4.9272 -5.3549

- - (-2.39)** - - - - (-0.63) (-0.69)

- - - - -0.1709 -0.1653 -0.3452 -0.3678 -0.3450

- - - - (-1.8)* (-1.74)* (-1.35) (-1.45) (-1.36)

- - - - 1.0540 0.9031 1.2380 0.9089 1.1435

- - - - (2.2)** (1.54) (1.27) (1.13) (1.18)

- - - - - 0.0382 -0.1053 - -0.0874

- - - - - (0.44) (-0.64) - (-0.54)

- - - - - - - -0.8673 -

- - - - - - - (-0.54) -

n 236 232 232 232 166 166 164 164 164

*,**,*** denote significance at 10%,5%, and 1%

Maintained for at least 10

years prior Dummy

Table 12 - Fixed Effect Logit Regressions on MAINTAIN variable w/OCF and Income<0

Operating Cash Flow/Total

Assets

Total Previous Years with

Dividend Payments

Maintaining Dividend

Dummy for Last Period

Cons. Years Maintaining

Dividend Prior to Year

The following provides the results of a series of fixed effect logit regressions on a dummy variable for whether or not firms maintained dividends. Firms

maintaining or increasing dividends are coded as MAINTAIN=1 while cutting firms are coded as MAINTAIN=0. Positive coefficients mean indicate a positive

relationship between the variable and a firm deciding to maintain dividends. Included in the sample are firm years 1987-2007 that paid a dividend in yearT-1 and

had both negative income before extraordinary items and negative cash flow from operating activities in yearT.

57

Coefficient (Z-stat)

1 2 3 4 5 6 7 8 9

Leverage -2.6328 -2.5398 -2.7535 -2.5626 - - -3.2043 -3.1462 -3.1429

(-5.45)*** (-5.1)*** (-5.22)*** (-5.08)*** - - (-4.51)*** (-4.35)*** (-4.36)***

Asset Growth 0.4464 0.7104 0.6799 0.7024 - - 1.4061 1.1986 1.1947

(2.34)** (3.2)*** (2.94)*** (3.15)*** - - (5.12)*** (4.43)*** (4.41)***

Asset GrowthT-1 - 1.2580 1.2026 1.2776 - - 1.2452 0.9333 0.9300

- (5.36)*** (5.04)*** (5.36)*** - - (4.71)*** (3.68)*** (3.67)***

Ln(Total Assets) 0.0461 -0.2593 -0.0587 -0.2750 - - -0.0173 0.4579 0.4685

(0.33) (-1.77)* (-0.38) (-1.89)* - - (-0.08) (2.12)** (2.15)**

Cash to Total Assets 0.5924 0.8574 0.7541 0.8074 - - -0.3696 -0.3040 -0.3302

(1) (1.38) (1.2) (1.29) - - (-0.44) (-0.35) (-0.38)

Return on Assets 1.4732 1.1576 2.4951 1.0696 - - 2.7702 6.1508 6.1546

(2.8)*** (2.16)** (3.85)*** (1.99)** - - (2.71)*** (5.08)*** (5.09)***

Recession Dummy - - - -0.4641 - - -0.5732 -0.5365 -0.5406

- - - (-2.82)*** - - (-2.87)*** (-2.6)*** (-2.61)***

- - -3.9439 - - - - -5.6839 -5.6621

- - (-4.81)*** - - - - (-5.33)*** (-5.39)***

- - - - -0.1029 -0.1028 -0.0900 -0.1204 -0.1199

- - - - (-5.21)*** (-5.2)*** (-3.84)*** (-4.76)*** (-4.77)***

- - - - 0.4584 0.5122 0.2628 0.1549 0.2079

- - - - (2.84)*** (2.56)** (1.17) (0.8) (0.89)

- - - - - -0.0145 -0.0263 - -0.0171

- - - - - (-0.46) (-0.73) - (-0.45)

- - - - - - - -0.0795 -

- - - - - - - (-0.22) -

n 1391 1372 1372 1372 1110 1110 1099 1099 1099

*,**,*** denote significance at 10%,5%, and 1%

Maintained for at least 10

years prior Dummy

Table 13 - Fixed Effect Logit Regressions on MAINTAIN variable when OCF<Last Year's DividendThe following provides the results of a series of fixed effect logit regressions on a dummy variable for whether or not firms maintained dividends. Firms maintaining or

increasing dividends are coded as MAINTAIN=1 while cutting firms are coded as MAINTAIN=0. Positive coefficients mean indicate a positive relationship between the

variable and a firm deciding to maintain dividends. Included in the sample are firm years 1987-2007 that paid a dividend in yearT-1 and had cash flow from operating

activities in yearT less than aggregate dividends paid in yearT-1.

Operating Cash Flow/Total

Assets

Total Previous Years with

Dividend Payments

Maintaining Dividend

Dummy for Last Period

Cons. Years Maintaining

Dividend Prior to Year

58

Coefficient

(Z-stat)

1 2 3 4 5 6 7 8 9

Leverage -0.6944 -0.8190 -0.8213 -1.1208 - - -2.9549 -2.5247 -2.7182

(-0.82) (-0.97) (-0.89) (-1.29) - - (-2.14)** (-1.84)* (-1.97)**

Asset Growth 0.8746 1.3482 1.4411 1.4342 - - 1.2464 1.0359 0.9919

(1.89)* (2.55)** (2.6)*** (2.6)*** - - (1.94)* (1.63) (1.59)

Asset GrowthT-1 - 1.7135 1.5469 1.9023 - - 1.6862 1.4524 1.3991

- (3.27)*** (2.95)*** (3.44)*** - - (2.78)*** (2.44)** (2.37)**

Ln(Total Assets) -0.2493 -0.7639 -0.6042 -0.8909 - - -0.5186 -0.4402 -0.3661

(-0.98) (-2.39)** (-1.86)* (-2.56)** - - (-1.23) (-1.05) (-0.86)

Cash to Total Assets -0.9275 -1.4422 -1.7487 -1.9779 - - -1.1663 -1.7549 -1.4933

(-0.64) (-0.95) (-1.07) (-1.27) - - (-0.62) (-0.85) (-0.73)

Return on Assets 5.1429 4.1480 5.2513 3.6632 - - 0.8308 3.2140 3.0102

(2.87)*** (2.31)** (2.4)** (2.04)** - - (0.39) (1.24) (1.17)

Recession Dummy - - - -0.8780 - - -1.3386 -1.4392 -1.4419

- - - (-2.46)** - - (-2.95)*** (-3.07)*** (-3.08)***

- - -5.8203 - - - - -6.6448 -6.2450

- - (-2.7)*** - - - - (-2.49)** (-2.43)**

- - - - -0.1196 -0.1184 -0.1051 -0.1186 -0.1194

- - - - (-2.72)*** (-2.68)*** (-2.04)** (-2.24)** (-2.26)**

- - - - 0.4158 0.4838 0.3908 0.2847 0.2877

- - - - (1.3) (1.18) (0.81) (0.7) (0.58)

- - - - - -0.0166 -0.0090 - 0.0128

- - - - - (-0.26) (-0.12) - (0.16)

- - - - - - - 0.4907 -

- - - - - - - (0.71) -

n 327 320 320 320 262 262 260 260 260

*,**,*** denote significance at 10%,5%, and 1%

Maintained for at least 10 years prior Dummy

Table 14 - Fixed Effect Logit Regressions on MAINTAIN variable when OCF+Last Year's Cash<Last Year's

Dividend

The following provides the results of a series of fixed effect logit regressions on a dummy variable for whether or not firms maintained dividends. Firms maintaining or increasing

dividends are coded as MAINTAIN=1 while cutting firms are coded as MAINTAIN=0. Positive coefficients mean indicate a positive relationship between the variable and a firm

deciding to maintain dividends. Included in the sample are firm years 1987-2007 that paid a dividend in yearT-1 and had a sum of cash flow from operating activities and cash on

hand in yearT-1 in yearT less than aggregate dividends paid in yearT-1.

Operating Cash Flow/Total Assets

Total Previous Years with Dividend Payments

Maintaining Dividend Dummy for Last Period

Cons. Years Maintaining Dividend Prior to Year

59

Coefficient (Z-stat) p-value Coefficient (Z-stat) p-value

Leverage -1.4179 -6 0 *** -1.9292 -3.75 0 ***

Asset Growth 0.9452 5.67 0 *** 0.5938 2.35 0.019 **

Asset GrowthT-1 0.8517 5.45 0 *** 0.2771 1.36 0.173

Ln(Total Assets) 0.0616 2.01 0.044 ** 0.1441 2.3 0.022 **

Cash to Total Assets -1.2942 -3.59 0 *** 0.0441 0.06 0.953

Return on Assets 4.3631 7.93 0 *** 5.9714 4.9 0 ***

Recession Dummy -0.2939 -2.29 0.022 ** -0.4023 -1.45 0.148

Total Previous Years with Dividend Payments 0.0247 3.34 0.001 *** 0.0285 1.91 0.056 *

Maintaining Dividend Dummy for Last Period 0.7912 5.18 0 *** 1.1571 3.8 0 ***

Cons. Years Maintaining Dividend Prior to Year 0.0995 5.72 0 *** 0.0327 0.92 0.358

Number of Observations 2481 615

*,**,*** denote significance at 10%,5%, and 1%

Table 15 - Industry Fixed Effect Logit Regressions on MAINTAIN variableThe following provides the results of industry fixed effect logit regressions on a dummy variable for whether or not firms maintained dividends. Firms maintaining

or increasing dividends are coded as MAINTAIN=1 while cutting firms are coded as MAINTAIN=0. Positive coefficients mean indicate a positive relationship

between the variable and a firm deciding to maintain dividends. Included in both models are a sample are of firm years 1987-2007 that paid a dividend in yearT-1.

Model 1 includes firms that had cash flow from operating activities in yearT less than aggregate dividends paid in yearT-1. Model 2 contains firms that had negative

operating cash flow and net income in yearT.

Model 1 - OCF<Last Period's Dividend Model 2 - OCF and ROA<0

60

Sample n overall R2

Coefficient t-value

All Payers 23484 0.0026 3.1% 4.94 ***

OCF & Income<0 656 0.0062 3.1% 0.26

OCF<Last Year's Dividend 2630 0.0062 7.0% 2.29 **OCF+Last Year's Cash on Hand<Last Year's

Dividend 1046 0.0168 10.3% 2.95 ***

*,**,*** denote significance at 10%,5%, and 1%

The following are the results of 4 univariate cross-sectional fixed effects models. Sales growth in yearT+1 is the

dependent variable with the MAINTAIN variable in yearT the independent variable.

Table 16 - Fixed Effect Univariate Regressions on MAINTAIN on Future

Sales Growth

61

Maintain

or

IncreaseCut Maintain

or IncreaseCut

Maintain

or

IncreaseCut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 8715 1223 33.74 28.48 *** 32.00 24.00 ***

Total Assets^ 8715 1223 6,198 4,848 *** 3,228 2,168 ***

Return on Assets^ 8699 1223 5.4% -1.5% *** 5.3% 0.7% ***

Operating Cash Flow^ 8355 1148 701.70 437.39 *** 322.60 124.78 ***

Operating Cash Flow/Total Assets^ 8355 1148 10.2% 6.4% *** 10.0% 6.3% ***

Cash to Total Assets 8699 1223 7.1% 7.4% 3.9% 4.3% *

Leverage 8699 1223 60.4% 74.3% *** 59.8% 71.0% ***

Change in Leverage 8699 1223 0.6% 4.4% *** -0.3% 1.4% ***

Change in LeverageT-1 8675 1219 0.1% 6.8% *** -0.5% 2.3% ***

Panel B - Dividend History Data

Dividends/Total Assets^ 8646 1223 2.2% 1.2% *** 1.7% 0.6% ***

Dividends/Total AssetsT-1^ 8715 1198 2.0% 2.3% *** 1.5% 1.3% ***Maintaining Dividend Dummy for Last

Period 7966 1073 94.8% 64.1%***

100.0% 100.0% ***Cons. Years Maintaining Dividend Prior to

Year 8715 1223 5.53 2.76***

5.00 1.00 ***

Cons. Years Paying Dividend Prior to Year 8715 1223 8.17 7.82***

10.00 10.00 ***

Panel C - Growth Data

Asset Growth^ 8715 1223 12.7% 2.6% *** 7.0% -2.0% ***

Asset GrowthT-1 8675 1219 14.1% 5.4% *** 7.5% 0.1% ***

Asset GrowthT-2 8570 1206 13.4% 14.7% 7.2% 5.3% ***

Sales Growth^ 8699 1212 11.1% -0.6% *** 8.0% -1.0% ***

Sales GrowthT-1 8654 1214 12.0% 1.3% *** 8.4% 0.5% ***

Sales GrowthT-2 8549 1201 11.5% 10.1% 8.0% 5.8% ***

Operating Cash Flow Growth^ 7962 1081 9.4% -7.8% 6.1% -12.9% ***

Capital Expediture Growth^ 4441 656 91.5% 113.0% 5.0% 9.4%

Panel D - Credit Rating Data

S&P rating (4 cat.) 8715 1223 2.09 2.56 *** 2.00 3.00 ***

Investment Grade Dummy 8715 1223 0.79 0.45 *** 1.00 0.00 ***

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 17 - Summary Stats for Firms with Public DebtThe following table provides summary statistics for firms from the years 1987-2007 that paid dividends in yearT-1 And have a credit

rating with S&P. Firms are grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-1 to

yearT. Significance differences are calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

62

Maintain

or

IncreaseCut Maintain

or IncreaseCut

Maintain

or

IncreaseCut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 88 125 30.95 26.86 25.00 22.00

Total Assets^ 88 125 3,253 3,417 1,358 1,167

Return on Assets^ 88 125 -7.2% -15.6% *** -2.7% -7.9% ***

Operating Cash Flow^ 88 125 -34.48 -36.77 -29.86 -34.76

Operating Cash Flow/Total Assets^ 88 125 -3.7% -5.3% ** -2.5% -3.1% *

Cash to Total Assets 88 125 8.5% 8.1% 4.6% 4.4%

Leverage 88 125 73.9% 90.9% *** 70.8% 87.3% ***

Change in Leverage 88 125 7.1% 13.9% ** 4.4% 7.8% **

Change in LeverageT-1 88 125 0.7% 9.7% *** 0.5% 4.9% ***

Panel B - Dividend History Data

Dividends/Total Assets^ 88 125 1.5% 0.4% *** 0.9% 0.2% ***

Dividends/Total AssetsT-1^ 88 125 1.0% 1.4% * 0.8% 0.8%Maintaining Dividend Dummy for Last

Period81 110 90.1% 60.0% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior

to Year88 125 4.59 2.80 *** 4.00 1.00 ***

Cons. Years Paying Dividend Prior to

Year88 125 7.08 7.58 10.00 10.00

Panel C - Growth Data

Asset Growth^ 88 125 6.1% -12.2% *** 0.8% -10.0% ***

Asset GrowthT-1 88 125 16.0% 6.1% 5.7% -0.7% ***

Asset GrowthT-2 87 123 14.6% 17.0% 6.8% 4.1%

Sales Growth^ 88 123 0.5% -12.4% *** 0.2% -6.5% ***

Sales GrowthT-1 88 124 13.1% -1.8% *** 6.9% -2.1% ***

Sales GrowthT-2 87 121 11.0% 8.9% 7.3% 6.2%

Operating Cash Flow Growth^ 82 114 -176.4% -55.0% * -130.3% -117.7% *

Capital Expediture Growth^ 48 64 19.7% 179.4% * -5.8% 15.3%

Panel D - Credit Rating Data

S&P rating (4 cat.) 88 125 2.72 3.03 *** 3.00 3.00 ***

Investment Grade Dummy 88 125 0.30 0.12 *** 0.00 0.00 ***

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 18 - Summary Stats for Firms with Public Debt and OCF & Income<0

The following table provides summary statistics for firms from the years 1987-2007 that paid dividends in yearT-1 And have a credit

rating with S&P. Firms are grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-1

to yearT. Significance differences are calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

63

Maintain

or

IncreaseCut Maintain

or IncreaseCut

Maintain

or

IncreaseCut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 480 297 29.73 28.85 26.00 24.00

Total Assets^ 480 297 3,997 3,332 * 1,637 1,478 *

Return on Assets^ 480 297 1.8% -6.2% *** 2.6% -2.1% ***

Operating Cash Flow^ 480 297 2.06 65.92 *** -15.22 -6.35 ***

Operating Cash Flow/Total Assets^ 480 297 -2.3% -0.4% *** -1.3% -0.5% ***

Cash to Total Assets 480 297 6.1% 7.4% * 3.6% 3.9%

Leverage 480 297 68.4% 85.2% *** 67.5% 78.0% ***

Change in Leverage 480 297 2.5% 6.9% *** 1.1% 3.5% ***

Change in LeverageT-1 477 296 0.7% 13.5% *** 0.2% 5.2% ***

Panel B - Dividend History Data

Dividends/Total Assets^ 478 297 1.9% 1.3% *** 1.0% 0.4% ***

Dividends/Total AssetsT-1^ 480 276 1.6% 3.8% *** 0.9% 1.5% ***Maintaining Dividend Dummy for Last

Period 431 261 93.3% 70.5%***

100.0% 100.0% ***Cons. Years Maintaining Dividend Prior

to Year 480 297 4.86 3.04***

4.00 1.00 ***Cons. Years Paying Dividend Prior to

Year 480 297 7.45 7.58 10.00 10.00

Panel C - Growth Data

Asset Growth^ 480 297 17.7% -2.2% *** 9.8% -4.2% ***

Asset GrowthT-1 477 296 21.1% 4.6% *** 8.7% -0.7% ***

Asset GrowthT-2 472 294 16.0% 23.7% 7.9% 5.6% *

Sales Growth^ 478 291 13.3% -6.4% *** 8.0% -3.7% ***

Sales GrowthT-1 474 294 13.4% -0.2% *** 9.4% -1.1% ***

Sales GrowthT-2 470 292 13.0% 12.2% 9.0% 5.2% ***

Operating Cash Flow Growth^ 448 264 -100.5% -70.7% -101.1% -86.5% ***

Capital Expediture Growth^ 255 157 85.4% 101.9% 2.2% 9.7%

Panel D - Credit Rating Data

S&P rating (4 cat.) 480 297 2.50 2.84 *** 3.00 3.00 ***

Investment Grade Dummy 480 297 0.49 0.25 *** 0.00 0.00 ***

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 19 - Summary Stats for Firms with Public Debt and OCF<Last Year's

Dividend

The following table provides summary statistics for firms from the years 1987-2007 that paid dividends in yearT-1 And have a credit

rating with S&P. Firms are grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-1

to yearT. Significance differences are calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

64

Maintain

or

IncreaseCut Maintain

or IncreaseCut

Maintain

or

IncreaseCut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 593 203 21.60 26.49 *** 16.00 23.00 ***

Total Assets^ 593 203 3,511 4,536 ** 1,597 1,777 *

Return on Assets^ 593 203 3.7% -3.5% *** 4.0% -1.0% ***

Operating Cash Flow^ 548 190 338.43 322.80 134.28 83.72 ***

Operating Cash Flow/Total Assets^ 548 190 9.1% 5.0% *** 8.6% 5.2% ***

Cash to Total Assets 593 203 7.9% 7.6% 4.6% 4.7%

Leverage 593 203 64.0% 78.3% *** 61.7% 76.6% ***

Change in Leverage 593 203 7.3% 10.3% * 2.8% 4.1% **

Change in LeverageT-1 570 202 0.9% 5.1% *** 0.0% 2.8% ***

Panel B - Dividend History Data

Dividends/Total Assets^ 582 203 2.3% 1.1% *** 1.3% 0.5% ***

Dividends/Total AssetsT-1^ 593 199 1.8% 2.2% * 1.2% 1.2% ***Maintaining Dividend Dummy for Last

Period 509 169 89.4% 73.4%***

100.0% 100.0% ***Cons. Years Maintaining Dividend Prior

to Year 593 203 4.17 3.20***

3.00 1.00 ***Cons. Years Paying Dividend Prior to

Year 593 203 6.39 7.50***

9.00 10.00 ***

Panel C - Growth Data

Asset Growth^ 593 203 32.3% 9.3% *** 11.7% -1.4% ***

Asset GrowthT-1 570 202 25.8% 9.3% *** 9.5% 2.3% ***

Asset GrowthT-2 528 196 17.0% 14.4% 9.0% 5.1% **

Sales Growth^ 590 200 19.7% 0.0% *** 11.8% -2.5% ***

Sales GrowthT-1 567 201 15.4% 1.6% *** 9.4% 0.9% ***

Sales GrowthT-2 526 195 15.5% 11.5% 9.3% 6.2% **

Operating Cash Flow Growth^ 508 180 10.6% -18.2% 3.5% -22.0% ***

Capital Expediture Growth^ 354 113 105.1% 144.3% 1.7% 9.4%

Panel D - Credit Rating Data

S&P rating (4 cat.) 593 203 2.47 2.86 *** 3.00 3.00 ***

Investment Grade Dummy 593 203 0.50 0.16 *** 0.00 0.00 ***

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 20 - Summary Stats for Firms with Public Debt following a Downgrade

The following table provides summary statistics for firms from the years 1987-2007 that paid dividends in yearT-1 And have a credit

rating with S&P. Firms are grouped by whether or not they maintained or increased dividends versus cut their dividends from yearT-1

to yearT. Significance differences are calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

65

Coefficient

(Z-stat)

1 2 3 4 5 6 7 8 9

Leverage -1.8594 -1.8564 -1.8102 -1.9120 - - -1.7766 -1.7801 -1.7882

(-4.66)*** (-4.47)*** (-4.37)*** (-4.49)*** - - (-3.99)*** (-3.9)*** (-3.96)***

Asset Growth 0.6923 0.6369 0.6823 0.5942 - - 0.4493 0.4738 0.4742

(3.22)*** (2.98)*** (2.94)*** (2.77)*** - - (2.1)** (2.01)** (2.02)**

Asset GrowthT-1 - 0.9169 1.0326 0.8771 - - 1.0892 1.2527 1.2574

- (1.86)* (2.05)** (1.79)* - - (2.81)*** (3.3)*** (3.29)***

Ln(Total Assets) -0.0748 -0.0722 -0.0951 -0.0595 - - -0.0063 -0.0031 -0.0064

(-1.07) (-1.02) (-1.28) (-0.83) - - (-0.08) (-0.04) (-0.07)

Cash to Total Assets -0.4759 -0.3972 -0.2615 -0.6693 - - 0.1696 -0.2956 -0.3392

(-0.5) (-0.41) (-0.24) (-0.68) - - (0.14) (-0.23) (-0.26)

Return on Assets 6.6617 6.5813 4.8150 6.6105 - - 7.0190 5.6178 5.6154

(3.61)*** (3.83)*** (3.27)*** (3.85)*** - - (3.95)*** (3.52)*** (3.55)***

Recession Dummy - - - -0.8145 - - -0.8957 -1.0248 -1.0198

- - - (-3.71)*** - - (-3.48)*** (-3.82)*** (-3.79)***

- - 4.3736 - - - - 3.8769 3.9049

- - (3.05)*** - - - - (2.45)** (2.48)**

- - - - -0.0127 -0.0181 0.0033 0.0020 0.0024

- - - - (-1.18) (-1.54) (0.22) (0.14) (0.16)

- - - - 1.1344 0.9554 1.1815 1.2498 1.1811

- - - - (5.13)*** (3.57)*** (3.68)*** (4.16)*** (3.45)***

- - - - - 0.0347 0.0231 - 0.0256

- - - - - (1.08) (0.67) - (0.71)

- - - - - - - 0.2564 -

- - - - - - - (0.92) -

Contant 0.3285 0.3911 2.5783 2.3986 2.6760 1.0138 0.7723 0.7974 2.7641

(1.41) (1.65)* (4.04)*** (3.53)*** (4.1)*** (1.33) (0.94) (0.97) (4.43)***

Pseudo-R-squared 0.1297 0.1455 0.1546 0.1573 0.0325 0.0341 0.1946 0.2065 0.206

n 796 772 715 772 678 678 658 605 605

*,**,*** denote significance difference at 10%,5%, and 1%

Maintained for at least 10 years prior Dummy

Table 21 - Logit Regressions on MAINTAIN variable following Credit Ratings Downgrades

The following provides the results of a series of fixed effect logit regressions on a dummy variable for whether or not firms maintained dividends. Firms maintaining or increasing

dividends are coded as MAINTAIN=1 while cutting firms are coded as MAINTAIN=0. Positive coefficients mean indicate a positive relationship between the variable and a firm

deciding to maintain dividends. Included in the sample are firm years 1987-2007 that paid a dividend in yearT-1 and had their credit rating downgraded by S&P

Operating Cash Flow/Total Assets

Total Previous Years with Dividend Payments

Maintaining Dividend Dummy for Last Period

Cons. Years Maintaining Dividend Prior to Year

66

Maintain

or IncreaseCut Maintain

or IncreaseCut Maintain

or IncreaseCut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 13052 11219 25.19 26.09 *** 22.00 23.00 ***

Total Assets^ 13052 11219 3,582.51 2,433.16 *** 888.43 494.21 ***

Return on Assets^ 13052 11167 7.4% 2.6% *** 7.0% 3.6% ***

Operating Cash Flow^ 12302 10558 421.63 239.77 *** 90.32 35.91 ***

Operating Cash Flow/Total Assets^ 12302 10558 11.2% 8.6% *** 10.8% 8.5% ***

Cash to Total Assets 13050 11167 10.9% 9.9% *** 5.9% 5.0% ***

Leverage 13052 11167 50.1% 54.0% *** 51.4% 54.7% ***

Change in Leverage 13052 11167 0.4% 1.6% *** -0.4% 0.3% ***

Change in LeverageT-1 12892 11158 -0.6% 2.1% *** -0.7% 0.6% ***

Panel B - Dividend History Data

Dividends/Total Assets^13052 11049 2.7% 2.0% *** 1.9% 1.3% ***

Dividends/Total AssetsT-1^ 13052 11219 2.3% 2.6% *** 1.6% 1.7% ***Maintaining Dividend Dummy for Last

Period12307 10426 93.9% 84.7% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior

to Year13052 11219 5.08 4.39 *** 4.00 3.00 ***

Cons. Years Paying Dividend Prior to

Year13052 11219 7.29 7.68 *** 10.00 10.00 ***

Panel C - Growth Data

Asset Growth^ 13052 11219 16.2% 5.1% *** 9.9% 2.4% ***

Asset GrowthT-1 12892 11158 17.8% 6.5% *** 10.4% 3.1% ***

Asset GrowthT-2 12571 11027 15.2% 11.3% *** 9.2% 5.5% ***

Sales Growth^ 13032 11166 14.5% 4.7% *** 10.4% 3.5% ***

Sales GrowthT-1 12856 11101 15.2% 5.8% *** 10.8% 4.0% ***

Sales GrowthT-2 12535 10966 13.8% 9.0% *** 9.8% 5.9% ***

Operating Cash Flow Growth^ 11562 9971 13.4% -3.8% *** 7.7% -4.9% ***

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 22 - Summary Stats Grouped by Decision to Maintain Real Dividend

The following table provides summary statistics for firms from the years 1987-2007 that paid dividends in yearT-1 Firms are grouped by whether or

not they maintained or increased dividends versus cut their real dividends from yearT-1 to yearT. Real dividends are calculated by scaling dividends by

the Consumer Price Index in yearT. Significance differences are calculated via a t-test for the mean and Wilcoxon Ranksum test for the median.

67

Maintain

or IncreaseCut Maintain

or IncreaseCut Maintain

or IncreaseCut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 374 686 18.53 22.27 *** 16.00 19.00 ***

Total Assets^ 374 686 1,235.06 1,077.38 317.90 255.49 *

Return on Assets^ 374 686 3.4% -6.0% *** 3.7% -0.1% ***

Operating Cash Flow^ 374 686 -17.17 -2.16 *** -10.62 -3.97 ***

Operating Cash Flow/Total Assets^ 374 686 -6.0% -4.2% -4.4% -2.9% ***

Cash to Total Assets 374 686 4.1% 6.7% *** 1.5% 1.9% **

Leverage 374 686 61.7% 67.9% *** 61.8% 64.2% **

Change in Leverage 374 686 3.4% 7.7% *** 2.9% 3.9% **

Change in LeverageT-1 369 684 -1.2% 8.2% *** 0.6% 3.9% ***

Panel B - Dividend History Data

Dividends/Total Assets^ 374 686 2.2% 1.9% * 1.0% 0.7% ***

Dividends/Total AssetsT-1^ 374 686 1.9% 4.8% *** 1.0% 2.0% ***Maintaining Dividend Dummy for Last

Period345 643 91.9% 78.5% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior

to Year374 686 4.14 3.19 *** 3.00 2.00 ***

Cons. Years Paying Dividend Prior to

Year374 686 6.08 6.53 * 6.00 8.00 *

Panel C - Growth Data

Asset Growth^ 374 686 29.7% 4.0% *** 21.1% 1.2% ***

Asset GrowthT-1 369 684 29.3% 3.5% *** 16.5% -0.7% ***

Asset GrowthT-2 351 673 18.6% 19.1% 11.5% 5.4% ***

Sales Growth^ 372 676 20.9% 3.3% *** 15.3% -0.4% ***

Sales GrowthT-1 368 678 23.6% 4.9% *** 16.4% 1.7% ***

Sales GrowthT-2 348 664 16.2% 11.4% * 13.0% 5.2% ***

Operating Cash Flow Growth^ 332 629 -81.1% -90.8% -106.0% -85.4%

Capital Expediture Growth^ 209 404 66.6% 84.4% 10.6% 3.4%

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 23 - Summary Stats Grouped by Decision to Maintain Real Dividend with

OCF+Last Period's Cash on Hand<Last Period's DividendThe following table provides summary statistics for firms from the years 1987-2007 that paid dividends in yearT-1 Firms are grouped by

whether or not they maintained or increased dividends versus cut their real dividends from yearT-1 to yearT. Real dividends are calculated by

scaling dividends by the Consumer Price Index in yearT. Significance differences are calculated via a t-test for the mean and Wilcoxon

Ranksum test for the median.

68

Maintain

or IncreaseCut Maintain

or IncreaseCut Maintain

or IncreaseCut

n n Mean Mean Median Median

Panel A - Financial Data

Firm Age 124 574 19.16 22.85 ** 15.50 19.00 **

Total Assets^ 124 574 1,415.57 1,201.88 285.06 194.43

Return on Assets^ 124 574 -9.6% -15.8% *** -4.7% -7.1% ***

Operating Cash Flow^ 124 574 -19.59 -18.06 -7.90 -7.28

Operating Cash Flow/Total Assets^ 124 574 -8.8% -8.9% -3.9% -4.3%

Cash to Total Assets 124 574 10.7% 12.6% 4.5% 4.8%

Leverage 124 574 63.8% 67.9% 61.7% 66.4% *

Change in Leverage 124 574 8.1% 11.0% 5.5% 5.6%

Change in LeverageT-1 123 572 -5.1% 5.4% ** 0.4% 3.1% ***

Panel B - Dividend History Data

Dividends/Total Assets^ 124 572 2.6% 0.8% *** 1.2% 0.3% ***

Dividends/Total AssetsT-1^ 124 574 1.5% 2.4% *** 0.9% 1.2% ***Maintaining Dividend Dummy for Last

Period113 530 85.8% 72.3% *** 100.0% 100.0% ***

Cons. Years Maintaining Dividend Prior

to Year124 574 2.81 2.88 1.00 1.00

Cons. Years Paying Dividend Prior to

Year124 574 5.02 6.48 *** 4.50 8.00 ***

Panel C - Growth Data

Asset Growth^ 124 574 18.7% -5.8% *** 3.4% -7.7% ***

Asset GrowthT-1 123 572 34.5% 3.2% *** 9.5% -1.1% ***

Asset GrowthT-2 116 562 8.7% 19.5% ** 5.5% 4.3%

Sales Growth^ 124 566 8.1% -3.7% ** 2.4% -4.8% ***

Sales GrowthT-1 121 567 13.9% 1.4% 5.9% -1.4% ***

Sales GrowthT-2 113 556 22.6% 9.2% 6.7% 4.9%

Operating Cash Flow Growth^ 122 529 -73.4% -71.1% -125.7% -114.8%

Capital Expediture Growth^ 73 313 164.1% 102.6% -7.1% 6.5%

^ - Data was been Winsorized at the 1% level

*,**,*** denote significance difference at 10%,5%, and 1%

Table 24 - Summary Stats Grouped by Decision to Maintain Real Dividend with OCF<0

& Income<0The following table provides summary statistics for firms from the years 1987-2007 that paid dividends in yearT-1 Firms are grouped by

whether or not they maintained or increased dividends versus cut their real dividends from yearT-1 to yearT. Real dividends are calculated by

scaling dividends by the Consumer Price Index in yearT. Significance differences are calculated via a t-test for the mean and Wilcoxon Ranksum

test for the median.

69

Fama-French Industry

Total Firms

(1987-2007)*

Dividend

Payers Never Cut

Payers %

of Total

Never Cut %

of payers

Electronic Equipment 1932 119 51 6.2% 42.9%

Petroleum 1261 209 73 16.6% 34.9%

Business Services 1122 189 84 16.8% 44.4%

Pharmaceutical Products 1000 83 39 8.3% 47.0%

Laboratory Equipment 983 148 54 15.1% 36.5%

Restaurants & Hotel/Motel 952 242 91 25.4% 37.6%

Retail 801 178 56 22.2% 31.5%

Medical Equipment 608 56 23 9.2% 41.1%

Machinery 546 151 42 27.7% 27.8%

Computers 513 40 16 7.8% 40.0%

Entertainment 435 61 18 14.0% 29.5%

Other Mining 423 31 7 7.3% 22.6%

Banking 388 94 36 24.2% 38.3%

Healthcare 371 47 22 12.7% 46.8%

Construction Materials 361 134 34 37.1% 25.4%

Business Supplies 343 62 25 18.1% 40.3%

Precious Metals 336 45 15 13.4% 33.3%

Household & Consumer Goods 322 97 43 30.1% 44.3%

Chemicals 314 136 53 43.3% 39.0%

Food 294 113 45 38.4% 39.8%

Automobiles 253 98 31 38.7% 31.6%

Steel Works 250 103 19 41.2% 18.4%

Electrical Equipment 241 72 18 29.9% 25.0%

Construction 240 70 21 29.2% 30.0%

Personal Services 237 44 14 18.6% 31.8%

Shipping Containers 222 88 39 39.6% 44.3%

Apparel 208 64 21 30.8% 32.8%

Rubber & Plastic 192 47 20 24.5% 42.6%

Toys & Recreation 185 38 8 20.5% 21.1%

Printing & Publishing 161 57 26 35.4% 45.6%

Textiles 113 39 9 34.5% 23.1%

Fabricated Products 70 22 3 31.4% 13.6%

Agriculture 68 21 7 30.9% 33.3%

Beer & Liquor 68 18 8 26.5% 44.4%

Aircrafts 60 21 9 35.0% 42.9%

Transportation 51 20 6 39.2% 30.0%

Coal 50 16 7 32.0% 43.8%

Candy & Soda 48 14 4 29.2% 28.6%

Shipbuilding & Railroad 34 16 7 47.1% 43.8%

Defense 27 9 1 33.3% 11.1%

Tobacco 22 10 4 45.5% 40.0%

Wholesale 4 0 0 0.0% 0.0%

Insurance 2 1 1 50.0% 100.0%

Finance 2 1 0 50.0% 0.0%

Real Estate 1 1 1 100.0% 100.0%

Other 162 1 1 0.6% 100.0%

Total 16276 3126 1112 19.2% 35.6%

Table 25 - Dividend Policy by Industry

The following table provides information on the number of firms in 48 Fama-French industry classifications during the sample years 1987-2007.

Reported are the number of firms per industry in three categories: total firms, firms that paid a dividend at some point in the sample, and firms that

once they began paying dividends never cut them during the sample. The final two columns show the percentage of total firms who paid dividends

and the percentage of dividend payers who never cut respectively. *The total firms does not include financial firms or utilities based on SIC code.

70

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% of firms

Figure 1 - Percentage of Firms Maintaining or Increasing Dividends by Year

71

Figure 2 – Financing Methods of Dividend Paying Firms with Cash Shortfalls

The following four charts categorize firms by the financing activities they undertake to finance dividends when cash generated from operations is not sufficient to fund the payout (i.e.,

Dividends>OCF). If a firms cash levels decreased by a sufficient amount to cover dividend payments, firms were placed in the “Reduction in Cash Reserves” regardless of financing

behavior. If a firms cash levels did not decreased by a sufficient amount to cover dividend payments they firms are categorized by the type of external funds raised. Cutting firms had the

additional option of omitting dividends, thus eliminating the need for financing.

Reduction in Cash Reserves

30%

Asset Sales6%

Issued Stock25%

Issued Debt24%

Other15%

A. Maintaining Firms When OCF and Income<0

Reduction in Cash Reserves

30%

Omitted Dividends

33%Asset Sales

3%

Issued Stock13%

Issued Debt14%

Other7%

B. Cutting Firms When OCF and Income<0

Reduction in Cash Reserves

33%

Asset Sales5%

Issued Stock18%

Issued Debt32%

Other12%

C. Maintaining Firms When OCF<Last Dividend

Reduction in Cash Reserves

52%Omitted

Dividends17%

Asset Sales3%

Issued Stock10%

Issued Debt11% Other

7%

D. Cutting Firms When OCF<Last Dividend

72

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

0 5 10 15 20 25 30 35

% of Firms

Number of Prior Years Paying Dividends

Figure 3 - Percentage of Firms Maintaining Dividend by Dividend Payment History

OCF<Last Year's Dividend

All Firm who maintained last year

Linear (OCF<Last Year's Dividend)

Linear (All Firm who maintained last year)

73

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1985 1990 1995 2000 2005 2010

% of Firms

Figure 4 - Percentage of Firms Maintaining or Increasing Real Dividends by Year

74

THOMAS O. MILLER

West Chester University College of Business and Public Affairs (610) 416 5389 327 Anderson Hall tmiller@wcupa.edu West Chester, Pa 19383 EDUCATION: Pennsylvania State University Smeal College of Business 2006-2011 Ph. D. in Business Administration (Finance) Dissertation Chair and Advisor: David Haushalter Villanova University 2000-2006 Masters in Business Administration (Finance Concentration) Bachelor of Science in Business Administration, magna cum laude Majors: Finance and Management Information Systems (Mathematics Minor) EMPLOYEMENT: West Chester University College of Business and Public Affairs 2011-present Assistant Professor of Finance (Tenure Track) RESEARCH INTERESTS: -Corporate Finance -Financial Markets -Investments -Dividend and Payout policy -Mergers & Acquisitions -Derivatives PUBLICATIONS: 1. Miller, T.O. and Pagano, M.S. (2007) Who Wants to Dance? Some Possible Exchange Partners. Journal of Trading. Volume 2 Issue 2. pg. 63 2. Miller, T.O. and Pagano, M.S. (2006) Leases, Seats, and Spreads: The Determinants of the Returns to Leasing a NYSE Seat. Advances in Quantitative Analysis of Finance and Accounting. New Series Volume 3. pg. 159 WORKING PAPERS: -How Sticky Are Dividends? Analysis under Cash Shortfalls

HONORS AND AWARDS:

University Fellowship from Pennsylvania State University, 2006-2010 Assistantship to Villanova University MBA program, 2004-2006 Beta Gamma Sigma international business honor society, 2003-present Augustinian Grant, full-tuition at Villanova University, 2000-2004