The effects of relaxing Australia’s statutory dividend restrictions

This paper investigates the consequences of removing the requirement from Australian corporate law that dividends can only be paid out of retained earnings. Using a difference-in-difference design, I find that firms with negative retained earnings and more volatile earnings increased dividends after the law change, consistent with the arguments of proponents of the law change. However, I further find that the law change is associated with a significant increase in cost of debt, decrease in debt maturity and increased reliance on bank debt. These results are consistent with increased agency costs of debt after the relaxation of dividend restrictions.