Purpose The purpose of this paper is to address whether the past dividend policy of target firm impacts dividend policies following US mergers and acquisitions (M&A). Design/methodology/approach The authors use the catering theory as a theoretical approach to test dividend change after a merger-acquisition. For the empirical design, dividend policy is captured using dividend status, payout ratio and dividend yield, and specifications are estimated using Probit and OLS models. Findings The data indicate that dividend policy of the target affects dividend policy of the combined entity in cases of stock-based deals. This result provides support for catering theory, which maintains that managers of acquirers adjust dividend policies following transactions to cater to target shareholders’ preferences. Research limitations/implications Although the tests suggest significant results using dividend status and payout ratio as measures of dividend, the authors do not find a similar effect for dividend yield. Practical implications Financial analysts evaluating merger-acquisition announcements may wish to predict the dividend policy following stock-based deals as they project the likely impact of past dividend policies of target firms. The results are also likely to be useful to investors. Originality/value The paper presents new evidence about dividend policy following M&A. To the authors’ knowledge, this is the first study that examines how an acquirer’s dividend policy is affected by an acquisition.

This study examines 711 U.S. stock‐based acquisitions announced between 1985 and 2013 to analyze the relation between the acquirer's dividend policy and its stock returns when the acquisition is announced. Asymmetric information theory suggests that the lower the level of uncertainty about the acquirer's value, the smaller the acquirer's price drop when a stock‐based acquisition is announced. In support of this theoretical prediction, the current study identifies less negative acquirer stock returns around the announcement of stock acquisitions initiated by dividend‐paying firms compared with those initiated by non‐dividend‐paying firms.

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