Firms' dividend payments and financial insolvency: evidence from South Korea

초록

This study investigates the relationship between firms' dividend payments and their designation as financially insolvent. We aim to identify a forward-looking indicator that can help predict potential insolvency. Using data from firms listed on the Korea Composite Stock Price Index (KOSPI) and the Korea Securities Dealers Automated Quotations (KOSDAQ) markets between 2005 and 2023, we find that dividend payments are negatively associated with financial insolvency designations. This suggests that firms at risk of insolvency tend to conserve liquidity by postponing or withholding dividend payments prior to being officially designated as insolvent. These findings offer practical insights for investors seeking to protect capital and enhance their understanding of financial sustainability. Moreover, this study underscores the potential of dividend policy as a proactive indicator of financial distress, providing valuable implications for market participants and regulators seeking to promote financial stability.

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