The Impact of Technical Defaults on Dividend Policy

38 Pages Posted: 15 Jan 2013 Last revised: 2 Oct 2015

See all articles by Laarni T. Bulan

Laarni T. Bulan

Cornerstone Research

Tyler Hull

University of Massachusetts Boston

Date Written: October 17, 2012


This paper examines how loan covenant violations impact firm dividend policy. Using contract-level loan data for nonfinancial firms in the U.S., this study provides evidence that the occurrence of a covenant violation significantly increases the likelihood of a dividend reduction in the subsequent quarter. Moreover, we show that the degree of creditor-shareholder conflict and firm financial constraints are important determinants of dividend cuts upon technical default. Additionally, this paper finds the tendency of dividend cuts upon technical default weakened after the repeal of the Glass-Steagall Act. These findings suggest that loan covenants serve a critical role in mitigating creditor-shareholder conflicts.

Keywords: Dividend policy, Loan covenants, Technical default

JEL Classification: G21, G35

Suggested Citation

Bulan, Laarni Tobia and Hull, Tyler, The Impact of Technical Defaults on Dividend Policy (October 17, 2012). Journal of Banking and Finance, Vol. 37, No. 3, 2013, Available at SSRN:

Laarni Tobia Bulan

Cornerstone Research ( email )

Boston, MA
United States

Tyler Hull (Contact Author)

University of Massachusetts Boston ( email )

100 William T Morrissey Blvd
Boston, MA 02125
United States

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