Will Cash Dividend Policy Cause The Wealth Redistribution Between Stockholders And Bondholders?

This paper examines whether cash dividend policy causes the wealth redistribution between shareholders and bondholders. This paper first addresses this issue in a traditional way by analyzing stock and bond price reaction to dividend changes. Following we investigate this potential conflict of interest from a different perspective:will listed company increases cash dividends after issuing corporate bonds, i. e. do managers who are in control of cash dividend policy act in away that is consistent with wealth redistribution hypothesis? This paper uses all Chinese corporate bonds issued from 2007 to June 2013 as sample base and chooses convertible bonds and all the market of the same time period as benchmark. The empirical studies find no evidence to support the wealth redistribution hypothesis. Therefore, the agency problem between shareholders and bondholders related to under-investment is not very severe in Chinese capital market.Bond covenant hypothesis holds that existing bond covenants restrict companies from manipulating cash dividend policy. But our empirical results do not support this explanation. Besides, reputation theory holds that bond-issuing companies believe reputation is more valuable than what can be transferred from creditors in a one-time expropriation of wealth. Our study finds strong support for this argument in a sample consisting of private companies.