Large dividend increases and leverage

Cooper, I A and Lambertides, N (2018) Large dividend increases and leverage. Journal of Corporate Finance, 48. pp. 17-33. ISSN 0929-1199

Abstract

This study documents the fact that large dividend increases are followed by a significant increase in leverage, consistent with management increasing the dividend to use up excess debt capacity. However, the leverage increase is not captured by a standard partial adjustment model of leverage. Nor does it reflect variables known to be related to dividend increases, such as firm maturity, investment, and risk. Instead, the dividend increase signals a complex change in the way firms adjust to their leverage target, but it does not signal a change in the target.