Junk Bonds, the Relevance of Dividends and the Limits of Managerial Discretion

Thursday, January 1st, 1987 at 12:00 am by Richard A. Booth
Richard A. Booth, Junk Bonds, the Relevance of Dividends and the Limits of Managerial Discretion, 1987 Colum. Bus. L. Rev. 553

Junk bonds have thus become an important takeover tool because investors view them as a means of assuring themselves that the target company will pay dividends. In short, the use of junk bonds is simply an expression of the bidder’s belief (together with that of the investors who back up the bidder) that the target company should be paying dividends rather than retaining its cash and pursuing a growth strategy. Given that attractive investment opportunities, like all other resources, are scarce, it seems likely that bidders and junk bond investors are often quite correct. If so, junk bonds should be viewed as a healthy development which in the end will further discipline managers to scrutinize growth opportunities more closely, reducing risk for investors in general and ultimately attracting more rather than less capital to the market.

Author Information

Associate Professor, Case Western Reserve University School of Law. A.B. 1973, University of Michigan; J.D. 1976, Yale Law School.