Blockholders and Leverage: When Debt Leads to Higher Dividends

51 Pages Posted: 26 Aug 2009 Last revised: 20 Feb 2015

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University

Douglas V. DeJong

University of Iowa - Tippie College of Business

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Gerard Mertens

Erasmus University Rotterdam (EUR) - Department of Financial Management

Date Written: April 4, 2013

Abstract

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

de Jong, Abe and DeJong, Douglas V. and Hege, Ulrich and Mertens, Gerard, Blockholders and Leverage: When Debt Leads to Higher Dividends (April 4, 2013). ECGI - Finance Working Paper No. 261/2009. Available at SSRN: https://ssrn.com/abstract=1461492 or http://dx.doi.org/10.2139/ssrn.1461492

Abe De Jong

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Douglas V. DeJong (Contact Author)

University of Iowa - Tippie College of Business ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0919 (Phone)

Ulrich Hege

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France
+33 5 61 12 86 01 (Phone)

HOME PAGE: http://https://www.tse-fr.eu/people/ulrich-hege

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Gerard Mertens

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2556 (Phone)
+31 10 408 9017 (Fax)

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