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

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  • Chengzhu Sun

    (School of Accounting and Finance, Hong Kong Polytechnic University, Kowloon, Hong Kong)

  • Shujing Wang

    (Department of Economics and Finance, School of Economics and Management, Tongji University, Shanghai 200092, China)

  • Chu Zhang

    (Department of Finance, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

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.

Suggested Citation

  • Chengzhu Sun & Shujing Wang & Chu Zhang, 2021. "Corporate Payout Policy and Credit Risk: Evidence from Credit Default Swap Markets," Management Science, INFORMS, vol. 67(9), pages 5755-5775, September.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:9:p:5755-5775
    DOI: 10.1287/mnsc.2020.3753
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