The Impact of Dividend Covenants on Investment and Operating Performance

Journal of Business, Finance, and Accounting, Forthcoming

45 Pages Posted: 21 Nov 2015

See all articles by Boochun Jung

Boochun Jung

University of Hawaii - School of Accountancy

Woo-Jong Lee

Seoul National University

Yanhua Sunny Sunny Yang

University of Connecticut - School of Business; University of Connecticut - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 19, 2015

Abstract

This paper examines the influence of dividend covenants in corporate bonds on investment and operating performance. Prior literature analytically demonstrates that by limiting dividend distribution to shareholders, dividend restrictions effectively place a minimum on investment expenditures (Smith and Warner, 1979; Kalay, 1982). This suggests a positive relation between dividend covenants and investment. The literature also conjectures that the influence of dividend covenants on investment 1) mitigates the under-investment problem associated with debt financing; or 2) exacerbates over-investment. We empirically document that the presence of dividend covenants is associated with a higher level of investment and poorer future performance. Further analyses confirm that the higher level of investment is consistent with dividend covenants exacerbating over-investment, not mitigating under-investment. Our results shed light on the cost aspect of dividend covenants proposed in prior literature (e.g., Smith and Warner, 1979).

Keywords: Dividend covenants, Investment, Operating performance

JEL Classification: M41

Suggested Citation

Jung, Boochun and Lee, Woo-Jong and Yang, Yanhua Sunny, The Impact of Dividend Covenants on Investment and Operating Performance (November 19, 2015). Journal of Business, Finance, and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2693412

Boochun Jung (Contact Author)

University of Hawaii - School of Accountancy ( email )

College of Business Administration
Honolulu, HI 96822
United States

Woo-Jong Lee

Seoul National University ( email )

Gwanak-ro 1, Gwanak-gu
Seoul, 151-916
Korea, Republic of (South Korea)

Yanhua Sunny Yang

University of Connecticut - School of Business ( email )

2100 Hillside Road
Storrs, CT 06269-1041
United States
8604864696 (Phone)
8604864838 (Fax)

HOME PAGE: http://www.business.uconn.edu/person/yanhua-sunny-yang/

University of Connecticut - School of Business ( email )

2100 Hillside Rd, Unti 1041A
Storrs, CT 06238
United States
8604864696 (Phone)

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