Corporate Payout Policy and Credit Risk: Evidence from Credit Default Swap Markets

We examine whether and how payout policy affects credit risk using evidence from the default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions among firms experiencing financial distress. also react more strongly permanent less anticipated cuts. The size reaction is pronounced for firms, which are inherently opaque. In contrast, weakly raises share repurchases. results show that information effect changes dominates wealth-transfer effect. This paper was accepted by Kay Giesecke, finance.