Breaking Rigid Payment, Dividend Policy, and Creditor Interest Protection
HU Conghui, YU Jun, WEI Qianxin
Business School, Beijing Normal University; School of Accounting, Shandong University of Finance and Economics; Finance Department, Hubei University of Technology
Summary:
In recent years, default events in China's bond market have occurred frequently. According to Wind statistics, from 2014 to 2023, a total of 1,116 bonds defaulted in the bond market. The market interprets these bond market default events as the government breaking rigid payment guarantees for bonds. In this context, the issue of creditor interest protection has attracted widespread attention. This paper takes the cash dividend policy of bond-issuing companies as a research perspective, exploring the conflicts of interest between shareholders and creditors and further discussing effective ways to protect creditor interests from the perspective of corporate governance. Theoretically, the issuance of cash dividends can either exacerbate the conflict of interest between creditors and shareholders or signal the company's stable profitability in the future. In the context of breaking rigid payment guarantees, does the cash dividend policy of bond-issuing companies exacerbate the conflict of interest between creditors and shareholders, or convey information about the company's stable future profitability to creditors？ To answer this question, we use A-share listed companies with undue corporate bonds during the period when cash dividend announcements were made from 2010 to 2022 as samples and employ the event study method to investigate the reaction of the bond secondary market price to corporate cash dividend policies. The empirical results show that the larger the scale and increase in the announced cash dividends, and the poorer the continuity of the dividend policy, the lower the cumulative excess returns in the bond secondary market after the announcement. Furthermore, the negative reaction of the bond market to dividend payments becomes significant only after breaking rigid payment guarantees and is more prominent in financially distressed enterprises and private enterprises, indicating that creditors pay more attention to corporate operating information after rigid payment guarantees break. The heterogeneity analysis based on corporate governance characteristics shows that better equity checks and balances, as well as the supervision of independent directors and intermediaries, can effectively alleviate creditors' concerns about potential conflicts of interest. The academic contributions of this paper are mainly reflected in the following aspects: First, it reveals the conflicts of interest between shareholders and creditors regarding dividend policies in emerging markets. The results of this paper show that Chinese bond investors will “vote with their feet” against enterprises with higher or increasing cash dividends, confirming creditors' concerns that shareholder-dominated corporate financial policies may harm their interests in emerging markets with underdeveloped bond contract clauses. Second, from the perspective of creditors, this paper discusses the economic consequences of dividend policies and provides new insights for formulating dividend policies. Previous studies have paid less attention to creditors' interests in dividend decisions. By examining the reaction of bond secondary market investors to corporate cash dividend policies, this paper provides direct evidence of the conflict of interest between shareholders and creditors regarding dividend policies. Third, the results of this paper show that when rigid payment guarantee have been brolen, bond prices in the secondary market will decline significantly after announcements of dividend policies that may harm creditors' interests. Moreover, the negative reactions in the secondary market are greater for bonds issued by financially weaker enterprises, those with high equity concentration, and those lacking effective supervision, providing new evidence for the validity of bond pricing in China's secondary bond market and revealing the internal logic through which corporate financial policies affect bond prices in the secondary market after breaking rigid payment guarantees. The policy implications of this paper are mainly reflected in the fact that future guidance on dividend policies for listed companies should emphasize balancing the interests of both shareholders and creditors while simulrareovsly “rewarding shareholders.” Strengthening checks and balances on the powers of major shareholders, better leveraging the role of independent directors, and fully exerting the supervisory role of market intermediaries can help alleviate conflicts of interest between creditors and shareholders regarding dividend policies.
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