An International Comparison of Accounting-Based Payout Restrictions in the United States, United Kingdom and Germany

Accounting and Business Research, Vol. 28, pp. 111-129, Spring 1998

Posted: 17 Dec 1997

See all articles by Christian Leuz

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Leibniz Institute SAFE; CESifo Research Network; Center for Financial Studies (CFS)

Dominic Deller

Johan Wolfgang Goethe University

Michael Stubenrath

Johan Wolfgang Goethe University

Multiple version iconThere are 2 versions of this paper

Date Written: July 1997

Abstract

Agency theory shows that payout constraints can play an important role in debt contracting and mitigating debt- related incentive problems. In this paper, we compare how, empirically, corporations in the UK, the USA and Germany are restricted in their ability to pay dividends (and other forms of payouts) to shareholders. Our study is novel in two respects: First, although there is ample evidence on the use of accounting-based payout restrictions in US debt contracts, and some evidence in the UK, there are no comparable studies on accounting-based payout constraints in German debt contracts. Second, we include debt contracts as well as regulation on dividends in the comparison to highlight the interdependencies between mandated and contractual payout restrictions.

Despite marked institutional differences between the US, the UK and Germany, our comparison demonstrates that corporations are restricted in a similar fashion in all three countries. This holds for the shape of the dividend restrictions based on accounting numbers as well as some key accounting principles determining net earnings and other accounting numbers used in payout restrictions. Our comparison suggests, for instance, that historical cost valuation and conservatism are ubiquitous in restricting dividends. We find that differences mainly exist with regard to the origin of the restrictions. In Germany, dividend restrictions are predominantly mandated, in the UK, mandated restrictions are supplemented by debt covenants and in the US, dividend restrictions follow primarily from debt contracting. By integrating contractual provisions as well as regulation on dividends, our comparison provides additional insights into the debt contracting process and offers a more complete picture than previous studies.

JEL Classification: G35, G28, M41

Suggested Citation

Leuz, Christian and Deller, Dominic and Stubenrath, Michael, An International Comparison of Accounting-Based Payout Restrictions in the United States, United Kingdom and Germany (July 1997). Accounting and Business Research, Vol. 28, pp. 111-129, Spring 1998 , Available at SSRN: https://ssrn.com/abstract=47549

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Leibniz Institute SAFE ( email )

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CESifo Research Network

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Center for Financial Studies (CFS) ( email )

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Dominic Deller

Johan Wolfgang Goethe University ( email )

Mertonstrasse 17-25
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Germany

Michael Stubenrath

Johan Wolfgang Goethe University ( email )

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60325 Frankfurt am Main
Germany
+49 69 7982 8174 (Phone)
+49 69 7982 3457 (Fax)

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