Characteristics of New Zealand dividend omissions and resumptions

Abstract

Purpose For firms listed on the New Zealand Stock Exchange, which is a relatively thinly traded market, the purpose of this paper is to examine the nature of stock returns associated with a dividend omission announcement when computations specifically address thin trading, and whether specific firm characteristics affect the likelihood and nature of a dividend omission. Design/methodology/approach First, event study analysis is used to check if dividend omissions actually do impact share prices in terms of short-term abnormal returns and longer-term cumulative abnormal returns (CARs) in a thinly traded market. Second, binomial logistic regression analysis is used to determine what, if any, company characteristics are associated with the decision to omit a dividend. Third, multinomial logistic regression analysis is employed to determine what firm characteristics are associated with continuing (or ending) a phase of no dividends before a dividend resumption. Findings Dividend omissions generate immediate negative abnormal returns, and there is a longer-term persistence of negative CARs. The size and duration of these abnormal returns are smaller, but still significant, when thin-market-specific methodology is employed. With respect to firm characteristic, smaller firms, firms with decreased earnings, a higher level of extraordinary charges, greater leverage and firms with a higher book-to-market value are associated with a greater likelihood of making an omission. With respect to the length of time between an omission and resumption of dividend payments, earnings decreases, a higher book-to-market value, a higher level of extraordinary charges and a decrease in firm debt level become significant. Originality/value This paper adds value in two dimensions. First, it considers dividend omissions in three different, but inter-connected ways. Second, the use of multinomial logistic regression to examine an aspect of the non-payment hiatus breaks new ground.

A Study of the Abnormal Dividend Decisions of New Zealand Firms during COVID-19

“…Previously, Benartzi et al (1997), Benito and Young (2003) and Krieger et al (2020) show that size, cash flow and profitability significantly influence the dividend cut or omission decisions of the US and UK firms. Anderson et al (2020) and Kraiger and Anderson (2020) also report that size plays an important role in the NZX firms' dividend decisions. Instead, we find no such significant evidence for the NXZ firms in our sample.…”

“…where Y is a categorical variable denoting the type of a dividend decision; Yi = k denotes the probability of a firm i announcing a decision to maintain the normal dividend level (k = 1, the reference category), or to increase (k = 2), reduce (k = 3), omit (k = 4) or cancel (k = 5) the dividend; F indicates a multinomial linear function; X is a vector of firm characteristic variables including the pre-COVID payout ratio, firm size in logarithm, long-term debt ratio, profitability, growth, cash holding, firm age in logarithm, volatility of stock returns, and industry sector controls. These firm characteristics are widely used in the previous dividend studies (Fama and French 2001;Benito and Young 2003;Kraiger and Anderson 2020). Cejnek et al (2021) show that financial firms exhibited more pronounced dividend smoothing behavior during the COVID-19 pandemic year 2020.…”

“…In the Australasian region, Kraiger and Anderson (2020) find that firm size and growth are important characteristics associated with the NZX firms' dividend omission decisions. Dempsey et al (2019) report that the firms having high dividend payout ratios tend to have low earnings growth in Australia.…”

“…The evidence from New Zealand is similar. Kraiger and Anderson (2020) report significant negative abnormal returns of −1.53% on the announcement day of dividend omissions and −1.62% on the following day, while significant negative cumulative abnormal returns over −5% were observed in the post-announcement period.…”

“…Furthermore, the dividend yields of the NZX stocks contributed to 61.5% of the total stock returns, compared to a 41.5% contribution for the stocks of other developed markets. Although Ellahie and Kaplan (2021) report that the dividends of the NZX firms have been stable over time while Kraiger and Anderson (2020) provide empirical evidence for the dividend omission and resumption decisions of the NZX firms, the existing literature does not offer sufficient understanding of the other types of dividend decisions in New Zealand. The current study contributes new evidence to the literature by investigating five different types of dividend decisions during the COVID-19 pandemic.…”