An International Comparison of Accounting-Based Payout Restrictions in the United States, United Kingdom and Germany

Agency theory shows that payout constraints can play an important role in debt contracting and mitigating debt-related incentive problems. In this paper, we compare how, empirically, corporations in the UK, the US and Germany are restricted in their ability to pay dividends (and other forms of payouts) to shareholders. Our study is novel in two respects: First, although there is ample evidence on the use of accounting-based payout restrictions in US debt contracts, and some evidence in the UK, there are no comparable studies on accounting- based payout constraints in German debt contracts. Second, we include debt contracts as well as regulation on dividends in the comparison to highlight the interdependencies between mandated and contractual payout restrictions. Despite marked institutional differences between the US, the UK and Germany, our comparison demonstrates that corporations are restricted in a similar fashion in all three countries. This holds for the shape of the dividend restrictions based on accounting numbers as well as some key accounting principles determining net earnings and other accounting numbers used in payout restrictions. We find that differences mainly exist with regard to the origin of the restrictions. In Germany, dividend restrictions are predominantly mandated; in the UK, mandated restrictions are supplemented by debt covenants. In the US, dividend restrictions follow primarily from debt contracting. By integrating contractual provisions as well as regulation on dividends, our comparison provides additional insights into the debt contracting process and offers a more complete picture than previous studies.