Blockholders and Leverage: When Debt Leads to Higher Dividends
51 Pages Posted: 26 Aug 2009 Last revised: 20 Feb 2015
Date Written: April 4, 2013
This paper focuses on dominant owners’ use of leverage to finance their blocks and its relationship to dividend policy. We postulate that the leverage of blockholders leads to higher dividend payouts and lower investments because dividends are needed to service blockholder debt (Debt Service Hypothesis). We use data for France where blockholders have tax incentives to structure their leverage in pyramidal holding companies. We find strong evidence for our hypothesis: dividend payouts increase in proportion to pyramidal debt of dominant owners. We inspect pyramidal entities individually and find that dividends received are explained by debt obligation needs. Companies dominated by levered blockholders invest significantly less. Alternative explanations for payout policy in pyramids, based on investments or cash preferences, cannot explain the dividend pattern.
Keywords: payout policy, blockholders, leverage, debt service hypothesis, concentrated ownership, investment policy, pyramids.
JEL Classification: G32, G34, G35
Suggested Citation: Suggested Citation