Creditor Rights, The Agency Costs Of Debt And Dividend Policy

Creditor protection is important to corporate governance and financing. When the legal system can not protect creditors well, insiders may not repay debts, and then conflicts between shareholders and creditors will increase, which will lead to high agency cost of debt and high debt financing costs. However, dividend policy is an effective mechanism of lowering the agency cost. Present Paper on dividend policy in China mainly studies from shareholders and ignores importance of creditor rights in corporate governance. Based on this, this paper studies from the standpoint of creditors, combines with legal provisions and financial marketization index, then constructs the creditor rights index. Using a sample of 3175 data from 2003 to 2007, we analyze the influence of creditor rights to dividend policy. We find that both the probability and amount of dividend payouts are significantly higher with poor creditor rights. This result shows that companies don't use the dividend policy as a substitute for weak creditor rights to minimize the agency costs of debt in China. Next, we also compared the differences of the relationship of creditor rights and dividend policy between state-owned companies and non-state-owned. Then we find, compared to non-state-owned corporations, the state-owned companies even less need dividend policy to reduce agency cost of debt. The reason of this phenomenon in China is weak investor protection and imperfection of financial market. So in order to improve creditor rights and reduce agency costs of debt, we should improve the legal protection, relax limitation of bond issue, develop bond credit rating mechanism, reduce government intervention, promote non-state-owned financial institutions, and finally improve the financial markets.