Investment and Deleveraging Financed by Dividends: Evidence from Japanese Business Groups

With a large sample from Japan during the period of 1990-2012, we find firms that belong to business groups (‘keiretsu’) pay more cash dividends than firms not affiliated with any group. The difference between the two groups of firms is greater when the dividend-receiving firms have better investment opportunities, are in financial distress, or when the linkage between them and the dividend-paying firms is stronger. Using exogenous changes to taxes on corporate dividends and difference-in-difference and falsification tests, we further establish that keiretsu firms’ dividend payouts have a causal impact on receiving firms’ investment and debt policies. Our results highlight the importance of inter-firm financing, especially during periods of high external financing costs, even for firms in a developed economy.