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Published online by Cambridge University Press: 06 April 2009
Avner Kalay makes a point that managerial reluctance to cut dividends is a necessary condition for the existence of a signaling equilibrium in which dividends are employed as a signaling device. He argues, however, that the available empirical evidence is unable to confirm the reluctance to cut dividends. In particular, the well-known Lintner's (1956) partial adjustment model, which is often cited in support of the reluctance to cut dividends, is empirically indistinguishable from an alternative model which is devoid of such a reluctance. Kalay then conducts an alternative test, but it too leads to an inconclusive result on the issue.
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