Corporate payout policy and credit risk: Evidence from credit default swap markets

Chengzhu Sun; Shujing Wang; Chu Zhang

doi:10.1287/mnsc.2020.3753

Corporate payout policy and credit risk: Evidence from credit default swap markets

Chengzhu Sun, Shujing Wang, Chu Zhang

Research output: Journal article publication › Journal article › Academic research › peer-review

5 Citations (Scopus)

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 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.

Original language	English
Pages (from-to)	5755-5775
Number of pages	21
Journal	Management Science
Volume	67
Issue number	9
DOIs	https://doi.org/10.1287/mnsc.2020.3753
Publication status	Published - Sept 2021

Keywords

Credit default swaps
Dividend announcements
Financial firms
Industrial firms
Troubled Asset Relief Program

ASJC Scopus subject areas

Strategy and Management
Management Science and Operations Research

More information

10.1287/mnsc.2020.3753

http://hdl.handle.net/10397/97180

Cite this

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title = "Corporate payout policy and credit risk: Evidence from credit default swap markets",

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 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.",

keywords = "Credit default swaps, Dividend announcements, Financial firms, Industrial firms, Troubled Asset Relief Program",

author = "Chengzhu Sun and Shujing Wang and Chu Zhang",

note = "Funding Information: History: Accepted by Kay Giesecke, finance. Funding: S. Wang acknowledges financial support from the Natural Science Foundation of China [Grant 71902140] and the Fundamental Research Funds for the Central Universities [Grant 22120190123]. C. Zhang acknowledges financial support from the Hong Kong Research Grants Council (RGC) General Research Fund [Grant HKUST16504214]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2020.3753. Publisher Copyright: {\textcopyright} 2020 INFORMS",

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KW - Troubled Asset Relief Program

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Corporate payout policy and credit risk: Evidence from credit default swap markets

Abstract

Keywords

ASJC Scopus subject areas

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