In for a Bumpy Ride? Cash Flow Risk and Dividend Payouts

Abstract

This paper investigates the relation between cash flow risk and dividend policy. Consistent with the notion that shareholders expect stable dividends once a payout has been established, firms with high cash flow risk are more reluctant to initiate dividend payouts. For dividend payers, we find changes in cash flow risk to have an asymmetric effect on dividend changes: While decreases in cash flow risk lower the propensity to cut dividends, firms are not more likely to increase dividends if cash flow risk decreases. Analyzing dividend smoothing, we further document a positive effect of cash flow risk on the speed of dividend adjustments, indicating that higher cash flow risk is partly passed on to shareholders via more volatile dividends.

Keywords: cash flow risk, dividend changes, payout policy

JEL Classification: G32, G35