Sovereign Ceilings and Corporate Payouts: How Rating Constraints Shape Dividend Policy
About this event
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Speaker
Dr Perikles Boumparis, Lecturer in Finance and DPD of Banking and Finance MSc at Newcastle University Business School.
Abstract
This study investigates how credit rating downgrades affect dividend policies. We exploit the sovereign ceiling rule, which prevents corporate credit ratings from exceeding their country's sovereign rating, to identify exogenous variation in corporate credit ratings. Following a sovereign downgrade, we find that 'bound’ firms, those with credit ratings equal to or higher than the respective sovereign rating, reduce dividend distributions relative to other domestic firms. The effect is more pronounced in countries with weaker creditor and shareholder rights and among firms that relied on external financing for payouts prior to the downgrade. Additional analysis confirms the parallel trends assumption, as bound firms show no differential dividend policy before the sovereign downgrade year. Our results remain robust across a series of tests, including alternative measures of dividend policy, falsification tests addressing macroeconomic shocks unrelated to sovereign downgrades and controls for differences in credit quality. This study enhances our understanding of corporate payout policy by highlighting how sovereign credit constraints influence firms' payout decisions through the sovereign ceiling channel.