Creditors and dividend policy: Reputation building versus debt covenant

Agency problem between shareholders and creditors can be reduced by two mechanisms namely reputation-building and debt covenant. Prior studies document supporting evidence for both hypotheses with a positive relationship between creditor rights and dividend policy. However, they fail to test reputat...

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Bibliographic Details
Published inEuropean research on management and business economics Vol. 25; no. 3; pp. 114 - 121
Main Author Tran, Quoc Trung
Format Journal Article
LanguageEnglish
Spanish
Published Amsterdam Elsevier 01.09.2019
Elsevier España, S.L.U
Academia Europea de Direccion y Economia de la Empresa
Subjects
Collateral
Conflicts of interest
Costs
Covenants
Credit bureaus
Credit reports
Creditors
Debt covenant
Decision making
Dividend distributions
Dividend policy
Hypotheses
Reputation building
Reputations
Stock exchanges
Stockholders
Variables
United States > US
Creditors
Dividend policy
G34
Reputation building
Debt covenant
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Summary:Agency problem between shareholders and creditors can be reduced by two mechanisms namely reputation-building and debt covenant. Prior studies document supporting evidence for both hypotheses with a positive relationship between creditor rights and dividend policy. However, they fail to test reputation-building mechanism and debt covenant mechanism separately. This paper finds that credit information and legal rules supporting moveable assets are promising variables to fill this gap since the two mechanisms provide opposite effects of credit information and legal rules on dividend policy. With a sample of 37,673 observations collected across 39 countries over the period from 2013 to 2015 we find supporting evidence for debt covenant hypothesis and creditor information has a complementary effect on legal rules in determining corporate dividend policy.
ISSN:2444-8834
2444-8842
DOI:10.1016/j.iedeen.2019.06.001