THE STOCK-MARKET REACTION TO DIVIDEND CUTS AND OMISSIONS BY COMMERCIAL-BANKS

We postulate that the announcement effect of dividend reductions shoul d be more severe for banks than for non-financial firms because bank c ustomers may avoid financially weak institutions and discontinue the r elationship when negative information is released. To test our hypothe sis we investigate a total of 81 dividend reductions by 56 commercial banks listed on the NYSE, AMEX and NASDAQ for the period 1974-1991. We find significant abnormal returns of -8.02% for the two-day event win dow and -11.46% for a two-week period. These negative valuation effect s are stronger than those reported in studies for dividend reductions of non-financial firms and for other negative bank announcements. We a lso explore the relationship between abnormal returns and specific ban k characteristics cross-sectionally and find a stronger reaction for l arger banks.