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Paying dividends: Cash or credit?

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Abstract

This paper examines to what extent firms utilize lines of credit to fund cash dividends. We find that higher dividend payouts are related to higher liquidity and that dividend-paying firms who experience cash shortages will utilize credit lines to continue dividend payments. Additionally, we show that credit lines are a permanent component of dividend-paying firms’ capital structure. Our sample statistics indicate that dividend-paying firms are considerably different than non-dividend-paying firms. Dividend payers tend to be more liquid despite having less cash, have smaller credit line balances, have higher market capitalizations, have less long-term debt, are more profitable, and spend less on capital investments. We conclude that access to credit lines is an important component of dividend-paying firms’ capital structure while the level of cash is not.

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Notes

  1. Financials and utilities are routinely omitted from samples due to financials firm having distinctively financial statements and the heavy regulation of both industries (See Fama and French, 2001).

  2. Recent studies by Sufi (2009), Lins et al. (2010), and Kahle and Stulz (2013) have expanded their definition of liquidity to include a firm’s credit lines.

  3. All regressions are run using pooled OLS with standard errors that are corrected for heteroskedasticity and firm-level clustering.

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Authors and Affiliations

  1. Mitchell College of Business, University of South Alabama, Mobile, 36688, USA

    Chris M. Lawrey

  2. School of Business Administration, University of Mississippi, University, Oxford, MS, 38677, USA

    Kathleen P. Fuller

  3. Raj Soin College of Business, Wright State University, Dayton, 45435, USA

    Brandon C. L. Morris

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  1. Chris M. Lawrey
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  2. Kathleen P. Fuller
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  3. Brandon C. L. Morris
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Correspondence to Chris M. Lawrey.

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Lawrey, C.M., Fuller, K.P. & Morris, B.C.L. Paying dividends: Cash or credit?. J Asset Manag 21, 513–523 (2020). https://doi.org/10.1057/s41260-020-00180-3

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