CDS Trading Initiation, Information Asymmetry, and Dividend Payout

Wayne R. Landsman (), Chao Kevin Li () and Jianxin Donny Zhao ()
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Wayne R. Landsman: Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina 27599
Chao Kevin Li: The School of Accounting, Auditing and Taxation, Business School, UNSW Sydney, New South Wales 2052, Australia
Jianxin Donny Zhao: Goizueta Business School, Emory University, Atlanta, Georgia 30322

Management Science, 2023, vol. 69, issue 1, 684-701

Abstract: This study uses an information-asymmetry framework to examine the effect of initiation of credit default swaps (CDS) trading on firm dividend payout policy. We find evidence that CDS initiation is associated with increasing dividends, which is consistent with firms distributing excess free cash flow to mitigate exacerbated manager-equityholder agency conflicts resulting from reduced monitoring by banks following CDS initiation. Additional findings support this explanation by showing that the dividend increases are concentrated among borrowing firms with higher agency cost before CDS initiation, among firms whose lead arranger banks have a relatively less strong reputation in the loan-syndication market, and among firms whose loans are subject to less intense monitoring features—that is, less restrictive loan covenants—following CDS initiation. Additional analyses also suggest that inferences are robust to controlling for the potential effects of CDS initiation on capital structure.

Keywords: CDS trading; dividend payout; agency costs (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:1:p:684-701

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