12 J. Bus. Entrepreneurship & L. 361 (2019)
The Social Costs of Dividends and Share Repurchases

handle is hein.journals/jbelw12 and id is 358 raw text is: 






     THE SOCIAL COSTS OF DIVIDENDS AND

                 SHARE REPURCHASES


                           J.B. Heaton*

A B STR A C T   ................................................................................. 3 6 1
IN T R O D U CTIO N   .......................................................................... 363
I.  L E G AL  R U LE S  ..................................................................... 367
       A .    C ontract Law .................................................... 367
       B.     Corporate  Law .................................................. 368
       C.      Voidable Transfer Law ...................................... 369
II.  SHAREHOLDER INCENTIVES: A SIMPLE MODEL .................... 370
III. DIVIDENDS AND SHARE REPURCHASES: SOME DATA ........... 373
IV . SO CIAL C O ST S  .................................................................... 375
       A .    B enefits  .............................................................  3 75
       B.     Costs: Riskier D ebt ........................................... 376
       C.     Costs: A Large Bankruptcy System .................... 377
       D.     Costs: More Fragile Firms ................................ 378
       E.     Costs: Harm    to Unsophisticated and Involuntary
              C reditors ...........................................................  3 79
       F.     Costs: Distortions to the Supply of Securities .... 379
C O N C L U SIO N   ............................................................................. 3 8 0

                           ABSTRACT

       A long-held view in the academy is that shareholders are
residual claimants in the sense that shareholders are paid in full only
after the corporation pays its creditors. The reality on the ground is far
different. Corporations give assets away to their shareholders long before
they have satisfied creditors, both voluntary contract creditors and
involuntary tort creditors. In particular, existing US. corporate and
voidable transfer laws allow corporations to pay dividends and make
share repurchases up to the point where the corporation is insolvent or
nearly so. Voluntary creditors can limit dividends and share repurchases
by contract, but involuntary creditors like tort claimants cannot, and
unsophisticated voluntary creditors rarely do so. I use a simple Black-
Scholes model of a debtor firm to illustrate the incentive that shareholders
have to take dividends and share repurchases before debts are repaid. I

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