Dividend Policy Adjustments and Market Signaling Across Crisis and Non-Crisis Periods

Abstract

This study investigates how dividend policy adjustments function as market signaling mechanisms across crisis and non-crisis periods, with particular emphasis on the COVID-19 financial crisis. The primary objectives are to examine (i) whether dividend payout decisions influence firm performance, (ii) whether performance and financial constraints affect dividend policy, and (iii) how crisis conditions alter the signaling intensity of dividend announcements. Despite extensive literature on dividend irrelevance, signaling, and agency theories, limited empirical research comparatively evaluates dividend signaling strength across stable and crisis environments using integrated dynamic econometric techniques. Furthermore, prior studies have not sufficiently examined how financial constraints mediate dividend decisions during systemic shocks. This study addresses these gaps by providing a dynamic and crisis-sensitive empirical framework.

The research adopts a quantitative panel data methodology using 106 French firms listed on the SBF 120 index over the period 2016–2021, covering both pre-crisis (2016–2018) and crisis (2019–2021) phases. Secondary data were collected from annual reports and financial databases. Descriptive statistics, correlation analysis, VIF diagnostics, and dynamic panel regression models estimated through the System Generalized Method of Moments (SGMM) were employed to address endogeneity, reverse causality, and simultaneity bias. Model validity was confirmed using Sargan tests, Arellano-Bond autocorrelation tests, and instrument diagnostics.

The findings reveal strong dividend persistence over time, confirming dividend smoothing behavior. Financial constraints (KZ index) significantly reduce dividend payouts during crisis periods, while the COVID-19 crisis itself exerted a statistically significant negative effect on both dividend distribution and firm performance (ROA and ROE). Dividend payments negatively affected performance during crisis conditions, suggesting a trade-off between shareholder payouts and financial resilience. Although profitability indicators did not significantly drive dividend decisions during the crisis, firm size, leverage, and growth opportunities positively influenced dividend payouts. The explanatory power and robustness of the dynamic models confirm that dividend policy operates as a signaling tool, particularly under heightened uncertainty.

The novelty of this study lies in its integration of dividend policy, financial constraints, and firm performance within a dynamic crisis-sensitive SGMM framework, providing comparative insights across economic cycles. Unlike prior static or single-period analyses, this research highlights the conditional nature of dividend signaling and the strategic role of payout decisions during systemic disruptions.

The study concludes that dividend policy remains a strategic communication mechanism during crises but entails a trade-off between signaling strength and financial sustainability. Managers must balance liquidity preservation with investor expectations, especially under financial constraints.

However, the research is limited to French listed firms and the COVID-19 crisis period, which may restrict generalizability to other institutional settings or crisis types. Additionally, behavioral finance variables such as investor sentiment were not explicitly incorporated.

Future research should conduct cross-country comparative analyses, incorporate event-study methodologies to capture short-term market reactions, explore sector-specific heterogeneity, and integrate behavioral finance perspectives to better understand dividend signaling dynamics in uncertain environments.