Corporate Payout Policy and Credit Risk: Evidence from CDS Markets

59 Pages Posted: 15 Sep 2017 Last revised: 11 Jan 2019

See all articles by Chengzhu Sun

Chengzhu Sun

Hong Kong University of Science & Technology (HKUST)

Shujing Wang

Tongji University

Chu Zhang

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Date Written: October 28, 2018

Abstract

We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. We separately analyze industrial firms and financial firms because of their distinct differences in risk-shifting incentives and information opacity. For industrial firms, CDS spreads increase substantially in response to dividend cuts, especially during recessions and among firms in financial distress. In contrast, CDS spreads have muted reactions to dividend raises and share repurchases. Additional investigation suggests that dividend cuts predict future credit rating downgrades. For financial firms, the results are robust and even stronger for dividend cuts. Collectively, our results are consistent with the information content effect of dividend cuts broadly dominating the wealth transfer effect for debtholders, especially for financial firms. Exploiting Troubled Asset Relief Program (TARP) as an exogenous shock to dividend policy, we further confirm the information effect of dividend cuts on credit risk.

Keywords: Credit default swaps, Dividend announcements, Industrial firms, Financial firms, Troubled Assets Relief Program

JEL Classification: G12, G14, G1

Suggested Citation

Sun, Chengzhu and Wang, Shujing and Zhang, Chu, Corporate Payout Policy and Credit Risk: Evidence from CDS Markets (October 28, 2018). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3036488 or http://dx.doi.org/10.2139/ssrn.3036488

Chengzhu Sun

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Shujing Wang (Contact Author)

Tongji University ( email )

Shanghai
China

Chu Zhang

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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