Dividends from unrealized earnings and default risk

Ester Chen, Ilanit Gavious () and Nadav Steinberg
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Ester Chen: Peres Academic Center
Ilanit Gavious: Ben-Gurion University of the Negev

Review of Accounting Studies, 2019, vol. 24, issue 2, No 4, 535 pages

Abstract: Abstract Using hand-collected data on Israeli firms’ unrealized earnings and debt restructurings following adoption of the International Financial Reporting Standards (IFRS), we investigate whether and how dividend payouts based on unrealized revaluation earnings affect a firm’s default risk. Our results indicate that, in the era of fair value accounting, whether the dividend payment originates from unrealized or realized earnings has a significant effect on a firm’s default risk, above and beyond the effect of the extent of the payment. Specifically, controlling for various determinants of financial risk, including the amount of the dividends paid, we find that firms are four times more likely to subsequently require debt restructuring, if they distribute dividends based on unrealized earnings. However, this enhanced risk seems to be mispriced by the market: cost of debt proxies are generally insignificantly different for these firms, following payouts originating from unrealized earnings, than for firms that never make such risky payouts.

Keywords: Cost of debt; Default risk; Dividends; Fair value accounting (search for similar items in EconPapers)
JEL-codes: G35 M21 M41 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Dividends from Unrealized Earnings and Default Risk (2017)
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DOI: 10.1007/s11142-019-9483-5

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