Dividend Cut at Aviva

My Corporate Finance class and I will begin looking at dividend policy tomorrow. Today, Aviva, the insurance giant, announced that it was cutting its dividend by more than a quarter. Subsequent to this announcement its shares fell 12.5% (story here). Why did Aviva shares fall so much? After all, the classic Miller and Modigliani irrelevance theorem suggests that a firm's dividend policy has no effect on the value of the firm. One explanation is that Aviva's managers were signalling to its shareholders that the future prospects of the company are not as good as was once thought. In a paper with Qing Ye and Wenwen Zhan, I find that dividends also played a very important information communication role is early capital markets. 

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