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

See all articles by Chengzhu Sun

Chengzhu Sun

The Hong Kong Polytechnic University

Shujing Wang

Tongji University

Chu Zhang

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

Date Written: September 26, 2020

Abstract

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

Sun, Chengzhu and Wang, Shujing and Zhang, Chu, Corporate Payout Policy and Credit Risk: Evidence from CDS Markets (September 26, 2020). Forthcoming at Management Science, Available at SSRN: https://ssrn.com/abstract=3036488 or http://dx.doi.org/10.2139/ssrn.3036488

Chengzhu Sun

The Hong Kong Polytechnic University ( email )

M849, 8/F Li Ka Shing Tower
Hung Hom
Kowloon, 999999
Hong Kong

HOME PAGE: http://https://af.polyu.edu.hk/people/academic-staff/dr-chengzhu-sun/

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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