Fill-in blank

1. _______ are an example of a tax-paying group that have a tax preference for high dividends.

Problem Solving

Good News: J.P. Morgan Cuts Its Dividend to a Nickel

On February 23, 2009, J.P. Morgan cut its quarterly dividend from 38 cents to five cents per share. The cut was a surprise to investors, but the banks share price increased by about 5%.

Usually dividend cuts or omissions are bad news, because investors infer trouble. Investors take the cut as a signal of a cash or earnings shortfall and they are usually right. Management knows that cuts will be treated as bad news, so they usually put off cuts until enough bad news accumulates to force them to act. For example, General Motors, which lost $39 billion in 2007 and $31 billion in 2008, continued paying quarterly dividends of 25 cents per share until June 2008, when it cut its dividend to zero.

J.P. Morgan Chase, however, remained profitable when other larger U.S. banks were announcing horrific losses

Can you think of a good explanations why investors interpreted the dividend cut by J.P. Morgan as a signal of good news, not of bad news?