A macro-analysis of financial decisions: An examination of special dividend announcements

•This paper investigates macro-level explanations for why firms pay special dividends.•Both the business cycle and market condition affect the propensity and abnormal returns of special dividends.•The signalling effect of special dividends is stronger and companies paying dividends are better performers in recessions.•This paper enhances the understanding of why firms disburse extra cash dividends at the aggregate level.

This paper investigates macro-level explanations for why firms pay special dividends. We find both the business cycle and market condition affect the propensity and abnormal returns of special dividends. Firms are more likely to announce special dividends in market or economic downturns than upturns. They tend to use additional cash for business growth in expansions and distribute it to reduce agency costs in contractions. The signaling effect of special dividends is stronger and companies with these announcements are better performers in recessions than in expansions. This research sheds light on and enhances the understanding of why firms disburse extra cash dividends at the aggregate level.