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

Chengzhu Sun (), Shujing Wang () and Chu Zhang ()
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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

Management Science, 2021, vol. 67, issue 9, 5755-5775

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: dividend announcements; credit default swaps; industrial firms; financial firms; Troubled Asset Relief Program (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:9:p:5755-5775

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