Download This PaperDo Creditors Have a Say on Dividends: Evidence from a Quasi Experiment
53 Pages Posted: 22 Apr 2020 Last revised: 2 Jun 2021
Date Written: April 17, 2020
Abstract
We investigate the impact of strengthening creditors’ right on firms’ dividend policies. Using the exogenous changes in creditor rights resulting from the staggered enactment of anti-recharacterization laws (ARL), we find that strengthening creditor rights can lead to an economically significant increase in dividend payment for shareholders, amounting to about 33 percent increase compared to the average sampled firm. The elevated impact of strengthening creditrs’ right on dividend payment is more pronounced for financially constrained, poorly governed, informationally opaque, and agency-prone firms. Using granular loan-contract information, we demonstrate that strengthening creditors’ right leads to elevated access to credit market and through this channel of enhanced debt capacity firms can redirect more funds for shareholders’ payout. Our results give credence to the stakeholder theory of firms, suggesting that improving the rights of one stakeholder can entail positive spillover effects on other stakeholders of firms.
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