How the timing of dividend reductions can signal value

This paper examines a firm's dividend reduction timing relative to other dividend reductions in the same industry. A model is proposed where the timing of dividend cuts signals true firm value. It is suggested that during periods of lower availability of external financing, firms with greater investment opportunities are among the first to make necessary dividend reductions to take advantage of such opportunities. When external financing is more available, firms with superior investment opportunities are able to access capital markets in lieu of dividend-reducing internal financing, indicating relatively higher firm values for earlier dividend reductions during periods of costly external financing, and significantly lower relative firm values for early reductions when financing is more easily obtained.