Large Dividend Increases and Leverage
48 Pages Posted: 16 Jun 2017 Last revised: 25 Oct 2017
Date Written: September 15, 2017
This study documents the fact that large dividend increases are followed by a significant increase in leverage, consistent with management increasing the dividend to use up excess debt capacity. However, the leverage increase is not captured by a standard partial adjustment model of leverage. Nor does it reflect variables known to be related to dividend increases, such as firm maturity, investment, and risk. Instead, the dividend increase signals a complex change in the way firms adjust to their leverage target, but it does not signal a change in the target.
Keywords: Capital structure, dividend policy, dividend changes, leverage
JEL Classification: G32, G35
Suggested Citation: Suggested Citation