Corporate Payout Policy and Credit Risk: Evidence from CDS Markets
Forthcoming at Management Science
46 Pages Posted: 15 Sep 2017 Last revised: 28 Sep 2020
Date Written: September 26, 2020
We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions and among firms experiencing financial distress. CDS spreads also react more strongly to permanent and less anticipated dividend cuts. The size of CDS reaction is more pronounced for financial firms, which are inherently more opaque. In contrast, CDS spreads react weakly to dividend raises and share repurchases. The results show that the information effect of dividend changes dominates the wealth transfer effect.
Keywords: Dividend announcements; Credit default swaps; Industrial firms; Financial firms; Troubled Asset Relief Program
JEL Classification: G12, G14, G1
Suggested Citation: Suggested Citation