Creditor rights and the outcome model of dividends

Using a sample of 22,374 firms from 35 countries, we examine the role of creditor rights, shareholder rights, and corporate governance in determining corporate dividend policy. We find that, while all three variables play a significant role in determining both the likelihood and the dividend amount, the effect of country-level creditor rights dominate. In subsequent analysis, we show that the outcome model is most effective in countries with strong creditor rights. When creditor rights are weak, creditors demand, and firms consent to lower dividends. These findings show that creditors, and not shareholders, exert the greatest influence over corporate dividend policy.

► We explore the relationship between shareholder and creditor rights and dividend policy.
► We measure shareholder rights at the firm- and country-level.
► The outcome model of dividends is most effective when shareholder and creditor rights are strong.
► The outcome model of dividends is much less effective when creditor rights are weak.
► Creditors exert the greatest influence on corporate dividend policy.