When cutting dividends is not bad news: The case of optional stock dividends

- Optional stock dividends allow shareholders to choose between cash dividends and the equivalent number of new shares.
- In contrast to dividend cuts, shareholders do not view this option as bad news.
- Shareholders choose 55% of the total dividend in the form of stock dividend.
- Firms committed to paying dividends are more likely to offer optional stock dividends to their shareholders.
- Firms offer optional stock dividends to their shareholders when high leverage increases the need for equity.

We provide evidence on optional stock dividends, a mechanism that allows shareholders to choose between cash dividends and the equivalent number of new shares in lieu of cash. We find that, in contrast to dividend cuts, shareholders do not view this option as bad news. When firms offer optional stock dividend in lieu of cash dividends, the market does not react negatively. Facing the choice between cash and stock dividend, shareholders choose 55% of the total dividend in the form of stock dividend. Our findings suggest that firms that are more committed to paying dividends are more likely to offer optional stock dividends to their shareholders.