Dividend commitment in firm bylaws and capital structure change. (1st November 2020)

• Record Type: Journal Article
• Authors: Cheng, Linyin; Wang, Guojun; Wang, Yuetang; Yang, Dan
• Is Part Of: European financial management. Volume 27:Number 5(2021)
• Page Start: 841
• Page End: 864
• Publication Date: 2020-11-01
• Subjects: capital structure -- China -- dividend commitment -- dividend policy -- leverage; Finance -- European Union countries -- Periodicals; International finance -- Periodicals; Corporations -- European Union countries -- Finance -- Periodicals; 332.094
• DOI: 10.1111/eufm.12293
• Languages: English
• ISSNs: 1354-7798

Abstract

Abstract: Dividend policies can predict changes in capital structure. We focus on a unique setting, namely, dividend commitment emerging from a new dividend policy in China, and explore its relation to leverage. We find a commitment to increase dividends is associated with a subsequent reduction in leverage, and this negative relation is enhanced in firms without preliminary conditions specified for their commitments or with greater dividend smoothing in previous periods. Robustness tests support the main findings. Further analysis addresses four internal mechanisms that play essential roles in the above link, and we provide further details about how leverage is reduced.