Dividends from Unrealized Earnings and Default Risk

Ester Chen (), Ilanit Gavious () and Nadav Steinberg
Additional contact information
Ester Chen: Peres Academic Center
Ilanit Gavious: Ben-Gurion University

No 2017.05, Bank of Israel Working Papers from Bank of Israel

Abstract: Using hand-collected data on Israeli firms’ unrealized earnings and debt restructurings following adoption of the IFRS, we investigate whether and how dividend payments based on unrealized revaluation earnings affect a firm’s default risk. Our results indicate that in the era of fair value accounting, the origin of the dividend payout—coming from unrealized versus 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 (originating from either realized or unrealized earnings), companies are over three 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; firms that distribute dividends based on unrealized earnings exhibit an insignificantly different cost of debt than firms that never do so.

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)
Pages: 49 pages
Date: 2017-06
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2017.05.pdf First version, 2017 (application/pdf)

Related works:
Journal Article: Dividends from unrealized earnings and default risk (2019)
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