In a recent paper, referenced above, author JB Heaton analyzes the extent to which the ability of corporations to return capital to their shareholders through dividends and repurchases results in substantial social costs. As a result, he argues that it would be beneficial to restrict dividend payments and share repurchases. Heaton notes that dividend and share repurchases: dramatically increase the riskiness of corporate debt, diverting large resources into credit monitoring and speculation; require a larger bankruptcy system to process large and complex corporate failures; make firms more fragile and less resilient to financial crises; unfairly shift costs to involuntary and unsophisticated creditors; and distort the supply of securities toward riskier debt. Heaton argues that equity holders are residual interest holders but routinely get paid before creditors and that corporate law is too permissive in allowing returns of capital. Creditors may limit dividend payments and share repurchases through the imposition of covenant restrictions but, due to competition in the credit markets, many credit agreements and notes are “covenant-lite.” Heaton analyzes the dividend and share repurchase issue, which has been receiving intense scrutiny of late, from a very different perspective worth adding to any discussion.
