Do Managers Cut Dividends Because They “Have To?” working paper

I find that the decision to cut dividends is caused by the depletion of financial slack – excess cash plus the unused capacity to issue default-risk-free debt. This negative association between financial slack and the likelihood of a dividend reduction is more pronounced for firms facing higher costs of external finance and is concentrated among firms that have already exhausted their capacity to issue safe debt. After the emergence of repurchases, managers have become less hesitant to cut dividends to preserve financial slack. I conclude that managers cut dividends to restore financial flexibility and prevent reliance on risky debt or equity finance