WSJE:  A news station for first-year economics and finance students
          (a.k.a,  "Wall Street Journal (articles) --- Explained")

Dividend Cuts
Oct 28, 2018:  "A New GE Dividend Cut is Likely"
Oct 30, 2018:  "GE Shares Tumble Amid Big Payout Cut, Criminal Probe"

• Why do dividend cuts typically coincide with share price drops?

1. In our capitalist system, there is a division between the suppliers of capital (equity and bond holders) and the managers of a firm.  The suppliers of capital rely on managers to run the firm in their best interest.  Managers have the best, most up-to-date information about the firm's current health, business prospects, etc.  Therefore, the suppliers of capital must also rely on managers to convey important financial information.
2. Some shareholders buy certain stocks for their dividend income.  Some buy certain stocks with the understanding that dividends may not be paid out, but with the hopes that reinvested profits will lead to firm growth.
3. Managers of firms that pay dividends are generally loath to cut the dividend.  This is a behavioral trait.
4. When a firm's prospects are good, managers can maintain current dividend levels or even increase the dividend.
5. When a firm's prospects are poor, managers may be forced to cut the dividend (thus saving cash)
6. Therefore, dividend cuts can convey opaque information about a firm's prospects.

• Is this the whole story?
  • No, of course not.  A firm with excellent opportunities would rather invest profits (cash) in new projects rather than payout dividends.  In such cases, cutting a dividend and taking on a new project could be a positive signal to the market.
  • Therefore, when faced with a dividend cut investors must apply probabilities.  What is the probability that the cut is due to poor future prospects?  What is the probability that the cut is due to exciting new investment opportunities?