How do bond investors perceive dividend payouts?

Ike Mathur, Manohar Singh, Ali Nejadmalayeri, Pornsit Jiraporn

Research output: Contribution to journalArticlepeer-review

7 Scopus citations


We explore how bond investors view corporate cash distributions through dividends and how that view influences corporate cost of debt. Explaining between 45 and 67 percent of variance in credit spreads at the time of issuance, our model reveals a non-linear association between dividend payouts and investment return expected by bondholders. In particular, while bondholders view cash disbursements in small amounts as a positive signal, large dividend payouts are viewed negatively. Our results thus provide support for both the signaling hypothesis and for the agency-cost-of-debt hypothesis. The results are robust even after controlling for firm size, growth opportunities, profitability, leverage, business risk, asset tangibility, and term structure. Exploiting the 2003 dividend tax cut as an exogenous shock, we demonstrate that our results are not vulnerable to endogeneity problems. Finally, we find no evidence of corporations timing the payouts strategically to influence the cost of debt.

Original languageEnglish (US)
Pages (from-to)92-105
Number of pages14
JournalResearch in International Business and Finance
Issue number1
StatePublished - Jan 1 2013

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting (miscellaneous)
  • Finance


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