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A retailer of children’s clothes announces a cut in dividends following a year in which both...

A retailer of children’s clothes announces a cut in dividends following a year in which both revenues and earnings dropped significantly. How would you expect its stock price to react? Explain.

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The stock price is expected to decrease significantly reacting to the announcement of the cut in dividends. A decrease in dividends sends a negative singal to the market. It implies that the performance of the company is going to be very poor and the company may struggle to generate enough cash to pay dividends. The drop in both revenues and earnings is a sign of poor performance of the company.

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