Corporate Payout Policy and Credit Risk: Evidence from Credit Default Swap Markets

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 the 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. This paper was accepted by Kay Giesecke, finance.

The Effect of War Risk on Managerial and Investor Behavior: Evidence from the Brussels Stock Exchange in the Pre-1914 Era

With two news-based measures on war, I document that managers mitigated war risk through dividend cuts, arguably to establish a war chest. Moreover, I find that companies postponed their initial public offerings and that foreign companies were more likely to delist after the onset of wars. Investors reacted negatively to the increase in war news coverage. There is evidence of mean-reversion after a threat of war and a negative drift following the start of war. Finally, I highlight the importance of proximity to military conflicts. In general, the evidence indicates that both managers and investors became more risk averse as a consequence of war news.

SENSITIVITY OF DIVIDENDS TO EARNINGS CHANGES

This paper deals with probabilities of dividend changes for a given change in earnings. This so-called sensitivity of dividends to earnings changes was analyzed on a sample of Advanced economies and Emerging and developing economies, according to International Monetary Fund classification. The main goal of the research is to empirically verify the assumption that companies are generally reluctant to cut or reduce dividends regardless of the stage of economic development of the country. In addition, the probabilities of dividend changes for a given change in earnings in characteristic groups of countries - Baltic countries and former Yugoslavia countries - have been analyzed. Research results show that earnings are significant dividend factor in all sample countries, that companies are generally reluctant to cut or decrease dividends and that dividends are less sensitive to earnings changes in Advanced economies, compared to Emerging and developing economies. Research has also shown that dividends are less responsive to earnings changes in former Yugoslavia countries compared to Baltic countries. These findings are in line with Lintner (1956) who has shown that reduction in earnings is not necessarily followed by reduction in dividends. Such behavior of dividends can be explained even by prospect theory created by Kahneman and Tversky (1979). They have shown that investors are more sensitive to negative events than to positive events and that investors do not make decisions in relation to the overall wealth but in relation to a particular reference point, which is usually the status quo. If this is the case, the previous dividends represent a specific reference point in relation to which investors make decisions. Having in mind asymmetric reaction of the investing public to dividend increases and dividend decreases (or dividend cuts), companies are reluctant to cut or decrease dividends because they are trying to avoid negative market reaction.