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The Effects of Credit Rating Change on Corporate Dividend Policy

This paper empirically analyzes the effects of credit rating change on corporate dividend policy. Sample firms are collected from the Korea Exchange from 1997 to 2015 using FnGuide.com and the KIS Value Library database. The number of firm-year observations is 3,206 for the full sample and the analytical models are the fixed effects panel regression model and logistic model. The empirical results are as follows. First, the credit rating changes have important effects on the subsequent dividend policy. However, the credit rating downgrades have negative and significant effects on the subsequent dividend policy, whereas the credit rating upgrades are insignificant on it. That is, the credit rating downgrades and upgrades have asymmetric effects on the subsequent dividend policy. Second, the firms downgraded from investment grade to speculative grade are more likely to decrease their dividend ratios following credit rating changes. Third, the credit rating downgrades are more likely to decrease dividends and to omit dividends. That is, the credit rating downgrades are positively associated with the probability of dividend decreases and dividend omissions. These findings imply that firms’credit rating changes play a significant role in dividend policy choices.