Bank loan price reaction to dividend announcements: an empirical analysis of the secondary loan market

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Gonzalez Rodriguez, Karen Pamela
University of Lethbridge. Dhillon School of Business
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Lethbridge, Alta. : University of Lethbridge, Dhillon School of Business
In this thesis, I examine the secondary loan price reaction to dividend announcements. Using a sample of loans from 254 US firms covering the period between 2000 and 2016, I find that loans are associated with significantly negative abnormal returns around dividend cut announcements, consistent with the information content hypothesis. In contrast, there are no abnormal returns around dividend increase announcements. Further analysis shows that the information content effect of dividend increases is offset by the wealth transfer effect. The results provide evidence that the information content and the wealth redistribution hypotheses are not mutually exclusive, and loan prices react according to the combination of both hypotheses. Additionally, empirical evidence indicates that cash holdings, monitoring incentives, the structure of debt contracts, and covenants can help mitigate the costs arising from agency conflicts.
dividend changes , financial contracting , information content , secondary loan market , wealth redistribution