Dividend commitment in firm bylaws and capital structure change |
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| Authors: | Linyin Cheng Guojun Wang Yuetang Wang Dan Yang |
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| Affiliation: | 1. Business School, Nanjing University, Nanjing, China;2. School of Management and Engineering, Nanjing University, Nanjing, China;3. Business School, Beijing Normal University, Beijing, China |
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| 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. |
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| Keywords: | capital structure China dividend commitment dividend policy leverage |
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