TY - JOUR
T1 - Dividends from unrealized earnings and default risk
AU - Chen, Ester
AU - Gavious, Ilanit
AU - Steinberg, Nadav
N1 - Funding Information:
Acknowledgements The authors would like to thank two anonymous referees, Peter D. Easton (editor), Emanuel Barnea, Eli Bartov, Nadine Baudot-Trajtenberg, Mike Borns, Oded Cohen, Efrat Cohen-Patito, Karnit Flug, Dan Galai, Gitit Gur-Gershgoren, Eran Haimar, Sigal Isaschar, Daniel Jacobzon, Meir Klugman, Gilad Livne, Yaron Levi, Diane Romm, Eyal Rozen, Slomi Shuv, Roy Stein, Nathan Sussman, Zvi Wiener, Yishay Yafeh, and workshop participants at the Hebrew University in Jerusalem, Bar-Ilan University, the Bank of Israel, and IDC’s Fair Value Forum. We gratefully acknowledge the financial support of The Raymond Ackerman Family Chair in Israeli Corporate Governance and the Guilford Glazer School of Business and Management at Ben-Gurion University. All errors remain our responsibility. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Israel.
Funding Information:
The authors would like to thank two anonymous referees, Peter D. Easton (editor), Emanuel Barnea, Eli Bartov, Nadine Baudot-Trajtenberg, Mike Borns, Oded Cohen, Efrat Cohen-Patito, Karnit Flug, Dan Galai, Gitit Gur-Gershgoren, Eran Haimar, Sigal Isaschar, Daniel Jacobzon, Meir Klugman, Gilad Livne, Yaron Levi, Diane Romm, Eyal Rozen, Slomi Shuv, Roy Stein, Nathan Sussman, Zvi Wiener, Yishay Yafeh, and workshop participants at the Hebrew University in Jerusalem, Bar-Ilan University, the Bank of Israel, and IDC?s Fair Value Forum. We gratefully acknowledge the financial support of The Raymond Ackerman Family Chair in Israeli Corporate Governance and the Guilford Glazer School of Business and Management at Ben-Gurion University. All errors remain our responsibility. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Israel.
Publisher Copyright:
© 2019, Springer Science+Business Media, LLC, part of Springer Nature.
PY - 2019/6/15
Y1 - 2019/6/15
N2 - Using hand-collected data on Israeli firms’ unrealized earnings and debt restructurings following adoption of the International Financial Reporting Standards (IFRS), we investigate whether and how dividend payouts based on unrealized revaluation earnings affect a firm’s default risk. Our results indicate that, in the era of fair value accounting, whether the dividend payment originates from unrealized or realized earnings has a significant effect on a firm’s default risk, above and beyond the effect of the extent of the payment. Specifically, controlling for various determinants of financial risk, including the amount of the dividends paid, we find that firms are four times more likely to subsequently require debt restructuring, if they distribute dividends based on unrealized earnings. However, this enhanced risk seems to be mispriced by the market: cost of debt proxies are generally insignificantly different for these firms, following payouts originating from unrealized earnings, than for firms that never make such risky payouts.
AB - Using hand-collected data on Israeli firms’ unrealized earnings and debt restructurings following adoption of the International Financial Reporting Standards (IFRS), we investigate whether and how dividend payouts based on unrealized revaluation earnings affect a firm’s default risk. Our results indicate that, in the era of fair value accounting, whether the dividend payment originates from unrealized or realized earnings has a significant effect on a firm’s default risk, above and beyond the effect of the extent of the payment. Specifically, controlling for various determinants of financial risk, including the amount of the dividends paid, we find that firms are four times more likely to subsequently require debt restructuring, if they distribute dividends based on unrealized earnings. However, this enhanced risk seems to be mispriced by the market: cost of debt proxies are generally insignificantly different for these firms, following payouts originating from unrealized earnings, than for firms that never make such risky payouts.
KW - Cost of debt
KW - Default risk
KW - Dividends
KW - Fair value accounting
UR - http://www.scopus.com/inward/record.url?scp=85061924484&partnerID=8YFLogxK
U2 - 10.1007/s11142-019-9483-5
DO - 10.1007/s11142-019-9483-5
M3 - Article
AN - SCOPUS:85061924484
VL - 24
SP - 491
EP - 535
JO - Review of Accounting Studies
JF - Review of Accounting Studies
SN - 1380-6653
IS - 2
ER -