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Accounting Department's Lecture

TIME:14:30 Jul17,2018

PLACE:Room 1008, Business Building
TOPIC:The Effect of CDS Trading Initiation on Dividend Payout Policy

This study examines whether the initiation of credit default swaps trading affects firm dividend policies. Reduced monitoring by banks following CDS initiation increases the potential for wealth expropriation from equityholders to managers, leading to overinvestment arising from the firm having excess free cash flow. Using a difference-in-difference research design, we predict and find evidence consistent with firms mitigating the increased agency problem following CDS initiation by increasing dividend payout to equityholders. Consistent with the agency explanation for the increase in dividends following CDS initiation, we also find evidence that the increase in dividends is larger for firms with larger free cash flow, and for firms whose lead arranger banks have relatively less strong reputations in the loan syndication market. We also find evidence that dividend increases are larger for firms with more liquid CDS markets. Inferences regarding the increase in dividends are unchanged using matched sample and instrumental variable approaches. In addition, we find no evidence of a predetermined trend in dividends before CDS trading initiation.