The relationship between changes in corporate payout policy and capital structure

• Published in: Seonmul yeongu (Online) Vol. 32; no. 2; pp. 116 - 144
• Main Authors: Kim, Songhee, Khil, Jaeuk, Lee, Yu Kyung
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Group Publishing Limited 20.05.2024; Emerald Publishing; 한국파생상품학회
• Subjects: Asymmetry; Bankruptcy; Capital structure; Corporate profits; Costs; Dividend payout policy; Dividend policy; Equity capital; Growth rate; Investments; Investors; Pecking-order theory; Securities markets; Signaling theory; Trade-off theory; 경영학
• ISSN: 1229-988X; 2713-6647; 2713-6647; 1229-988X
• DOI: 10.1108/JDQS-09-2023-0030

This paper aims to investigate the impact of corporate dividend policy on the capital structure in the Korean stock market. To distinctly discern the voluntariness of changes in corporate dividend policy, we analyze companies that, following a substantial increase, do not reduce dividends for the subsequent two years or, after a significant decrease, do not raise dividends for the following two years. Our empirical findings indicate that companies that increase dividends experience a significant decrease in both book and market leverage, even after controlling for variables such as target leverage ratios. This result suggests that a large increase in dividends can effectively reduce information asymmetry, leading to a lower cost of equity. On the contrary, after a decrease in dividends, both book leverage and market leverage significantly increase, revealing a symmetric relationship between dividend policy and capital structure. In conclusion, large dividend increases in Korean companies not only reduce information asymmetry but also lower the cost of equity capital, resulting in observable changes in the leverage ratio.