Why do financially distressed firms pay dividends?
In this study we use a sample of 334 S&P500 companies to examine the extent to which financially distressed firms pay dividends in order to attract investors. We find a higher dividend yield and a higher pay-out ratio for financially distressed firms than for financially stable firms. We also find that financially distressed firms tend to change the dividend per share more rapidly than stable firms. Furthermore, these firms' dividends depend more on earnings than do the dividends of stable companies. This finding is consistent with the frequent dividend changes observed in distressed firms. Stable firms, in contrast, prefer paying dividends that are less dependent upon earnings. These results may stem from the relatively high level of importance that financially distressed firms ascribe to dividend payments or to the aggressive dividend policy that eroded the firms' financial stability and forced them to reduce the dividend per share rapidly.
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