Corporate Bond Price Reactions to Dividend Changes

39 Pages Posted: 22 Aug 2016 Last revised: 16 May 2017

See all articles by Xiaoting Wei

Xiaoting Wei

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics

Cameron Truong

Monash University; Financial Research Network (FIRN)

Viet Minh Do

Monash University - Department of Accounting; Financial Research Network (FIRN)

Date Written: April 26, 2017

Abstract

Employing an event study approach, we examine 5,574 bond return reactions to unexpected quarterly dividend change announcements in the U.S. corporate bond market over the period 2002–2014. Overall, we report a significant bond price reaction in the same direction as dividend changes, which supports the hypothesis that dividend changes signal future firm performance. We also find that the bond return reaction is more pronounced if the dividends are reduced than if they are increased. We document a wealth transfer effect when riskier bonds are issued by firms with a low cash ratio and are approaching maturity. These results still hold after we control for the financial crisis and dividend covenants and when we use alternative variables to capture the dividend surprise.

Keywords: corporate bond, dividend announcement, information content hypothesis, wealth transfer hypothesis

JEL Classification: G14, G35

Suggested Citation

Wei, Xiaoting and Truong, Cameron and Do, Viet Minh, Corporate Bond Price Reactions to Dividend Changes (April 26, 2017). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2826566 or http://dx.doi.org/10.2139/ssrn.2826566

Xiaoting Wei (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics ( email )

Kingsley Street
acton, ACT 0200
Australia

Cameron Truong

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Viet Minh Do

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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