Does Affiliation to Business Groups Moderate the Relation Between Dividend Policy and Creditors' Rights?

Abstract

This study examines the impact of the Insolvency and Bankruptcy Code (IBC), 2016 on dividend policy using a panel of Indian firms from 2010 to 2019 sourced from the Prowess IQ database. We find a significant decline in both the intensity and propensity of dividend payments post-IBC, consistent with the notion that firms reduce payouts to retain internal funds and reduce reliance on debt. However, this negative effect is less pronounced for business group-affiliated firms, especially those linked to India's Top 50 diversified business groups, suggesting more efficient internal capital markets and higher dividend capacity. Sub-sample analysis reveals that unlevered firms do not exhibit changes in dividend policy post-IBC, while levered firms do, confirming internal financing as a key mechanism. Further, we document a post-IBC decline in firm leverage, supporting a deleveraging trend. Our results remain robust to alternate dividend definitions and instrumental variable regressions addressing endogeneity concerns using the GMM framework.