The US financial crisis and corporate dividend reactions: for better or for worse?

We examine how changes in dividend policy in 2008 as the financial crisis was unfolding influenced firm risk-adjusted returns in the following years. Our sample consists of NYSE- and NASDAQ-traded firms that paid dividends in 2007. We divide these firms into four groups based on their dividend policy in 2008. We find that firms that decreased or eliminated dividends in 2008 had higher risk-adjusted returns in 2009. The higher risk-adjusted return is consistent with the better corporate governance in 2007. This finding suggests that the firms that quickly reacted to the deteriorating economic conditions by cutting dividends and preserving cash were able to better weather the coming financial crisis.