This study examines the equity market response to a firm's dividend reduction/omission declaration when it is preceded by a downward revision of a corporate bond rating. Specifically, this research investigates the possible link between information-based theories of bond rating and dividend policy by analyzing how one instance of bond rating agency review combined with firm dividend signals may lessen the degree of asymmetric information in the securities markets.;Where information-asymmetry exists in capital markets, information-based theories suggest that the bond rating agency reclassification provides unique information. Ederington and Goh (1998) find that corporate bond rating downgrades forecast declines in actual earnings. Ghosh and Woolridge (1988) find that lower earnings preceding dividend reduction/omission attenuate the negative effect on stock prices. Thus, the combined results of these two studies imply that corporate bond rating downgrade announcements preceding the declaration of dividend reduction/omission may attenuate the negative effect on stock prices at the dividend announcement. This study, which has the purpose of linking information-asymmetries in bond-rating and dividend announcements, holds that if the dividend reduction/omission announcement is preceded by a bond rating downgrade, the negative market effect may be significantly reduced.;Since bond rating agencies play an important role in reviewing major corporate activities and in processing and evaluating information, and given that the dividend policy of firms represents another major corporate decision, it is conjectured that rating agencies may be perceived as an additional mechanism that influences the market assessment of dividend decisions.;Results show that the market response to dividend reduction/omission announcements is attenuated following a bond rating downgrade announcement. However, evidence shows that part of the changes in investor perception and the reduction in market reaction may be attributed to other factors. Consistent with the literature, these findings indicate that the stock price returns are not significantly tied to the magnitude of dividend reduction or to the number of slots a bond rating is lowered.
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