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Recently a number of corporations are cutting or eliminating their dividends in response to the pandemic....

Recently a number of corporations are cutting or eliminating their dividends in response to the pandemic. How do you believe the market would react to such a news – would the price of the stock of the company go up or down? Explain your answer with appropriate justification.

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Answer #1

Cutting or eliminating dividends sends a negative signal to the market, which causes the price of the stock to go down. The corporations are facing a decline in sales and hence cash flows. The performance of the corporations have been severely impacted due to the pandemic.

Cutting or eliminating dividends implies that the corporations are not able to generate sufficient free cash flows and investors see this as a bad news and start selling shares of the stock, which leads to the decline in the price of the stock.

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