Stockholder-bondholder conflict and dividend constraints

Abstract This paper examines a large, randomly chosen, sample of bond indentures focusing on the constraints they set on dividend payments that have the potential to transfer wealth from the bondholders (i.e., payments which are financed by a new debt issue or reduced investment). The nature of these restrictions support the hypothesis that bond convenants are structured to control the conflict of interest between stockholders and bondholders. Further, the empirical evidence suggests that these constraints are not binding — i.e., stockholders do not pay themselves as much dividends as they are allowed to. Explanations of this puzzling empirical regularity are suggested.

[1]  John B. Long,et al.  The market valuation of cash dividends: A case to consider , 1978 .

[2]  Jerold B. Warner,et al.  On financial contracting: An analysis of bond covenants , 1979 .

[3]  W. Mikkelson.  CONVERTIBLE CALLS AND SECURITY RETURNS , 1981 .

[4]  Stephen A. Ross,et al.  The determination of financial structure: the incentive-signalling approach , 1977 .

[5]  Ronald W. Masulis,et al.  The Option Pricing Model and the Risk Factor of Stock , 2019, World Scientific Reference on Contingent Claims Analysis in Corporate Finance.

[6]  F. Black.  The Dividend Puzzle , 1976 .

[7]  E. Fama.  The Effects of a Firm's Investment and Financing Decisions on the Welfare of its Security Holders , 1978 .

[8]  Merton H. Miller,et al.  DEBT AND TAXES , 1977 .

[9]  S. Myers.  Determinants of corporate borrowing , 1977 .

[10]  M. C. Jensen,et al.  THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE , 1976 .

[11]  Merton H. Miller.  The Cost of Capital, Corporation Finance and the Theory of Investment , 1958 .

[12]  F. Black,et al.  The Pricing of Options and Corporate Liabilities , 1973, Journal of Political Economy.

[13]  E. Fama,et al.  The Theory of Finance , 1974 .

[14]  Myron S. Scholes,et al.  Dividends and taxes , 1978 .

[15]  Boris I Bittker.  Federal income taxation of corporations and shareholders , 1979 .

[16]  A. Kalay.  Corporate dividend policy : a collection of related essays , 1979 .

[17]  F. Modigliani,et al.  DIVIDEND POLICY, GROWTH, AND THE VALUATION OF SHARES , 1961 .