Erik Devos

Elective Stock Dividends and REITs: Evidence from the Financial Crisis

In response to the recent financial crisis, the U.S. Government introduced new rules which allow Real Estate Investment Trusts (REITs) to issue elective stock dividends (ESDs), i.e., noncash dividends, to satisfy their distribution requirements. The purported goal of these rules was to provide temporary relief to REITs facing cash flow problems. We investigate how the introduction of these rules affects dividend policy of REITs. Surprisingly, we document that only 17 REITs chose to issue elective stock dividends. We examine the characteristics of these REITs and find that their cash flows are similar to REITs that do not select these dividends. This suggests that cash flow problems are unlikely to be the primary determinant of the ESD issuance decision. Instead, our findings indicate the decision to pay ESDs is related to the level of loans that are close to maturity, REIT size, growth prospects and poor performance during the financial crisis. Furthermore, we find that the same factors determine the ratio, amount and frequency of stock dividends issued by these REITs. We also examine the response of shareholders to ESDs announcements and find positive abnormal returns surrounding these dividend announcements.

The Effects of Relative Changes in CEO Equity Incentives on the Cost of Corporate Debt

We examine how effort and risk incentives embedded in CEO equity incentives are related to the cost of debt and the role credit worthiness plays in this relationship. Our empirical approach addresses a number of unanswered questions in the literature by examining the sources and effects of co-movements in CEO incentives, whether the proportionality of these movements is rationally priced, and whether the effects are concentrated among bonds with greater likelihood of default. Our findings confirm that effort and risk incentives are rationally priced by bond market participants. We also show that significant cross-sectional effects are more pronounced for speculative bonds, implying that previously documented links between equity incentives and the cost of debt may not be generalizable to all debt issues.

Labor Unemployment Risk and Tax Aggressiveness

This paper examines whether firms exhibit less tax aggressiveness in order to mitigate workers’ exposure to unemployment risk. We use unemployment insurance (UI) benefit laws as a proxy for unemployment risk and multiple measures of tax aggressiveness. Given that tax aggressiveness is risky and costly for the firm and its employees, we argue that high state UI benefits lower labor unemployment risk and, hence provide firms with an opportunity to exhibit more tax aggressiveness. Consistent with this hypothesis, we find a negative relation between firms’ tax aggressiveness and unemployment risk. In additional analysis, we also find that the negative relation is more pronounced for firms in industries that are more labor intensive. Our results are robust to the exclusion of industries with a dispersed labor force and an alternative proxy for unemployment risk. Overall, our findings suggest that labor market frictions have implications for corporate tax policy.

Debt Covenants and the Speed of Capital Structure Adjustment

This paper examines the impact of debt covenants on the speed of capital structure adjustment. Overall, we find that covenants lower the speed of adjustment by 10–13%, relative to the speed of adjustment of firms without covenants. The speed of adjustment is significantly lower, by 40–50%, for firms with the most intense covenant provisions. In particular, we find that capital covenants, as opposed to performance covenants, appear to be the main mechanism that lowers the speed of adjustment, delaying the speed of capital structure adjustment by 86%. We find that the speed of adjustment is reduced more for strict capital covenants than for strict performance covenants. We also show that, for firms that are cash and financially constrained, covenants impede the speed of adjustment even more. Lastly, we show that the negative relationship between covenants and the speed of adjustment is more pronounced for firms that are over-levered.