Has the implementation of the mandatory solvency and liquidity tests before distributions after the 2019 Reform of the Belgian "CSA" had an impact on the propensity of firms to distribute dividends and on the size of the dividends distributed

Abstract

This thesis aims at evaluating whether or not the implementation of the new double test inducing companies to check both their solvency and liquidity positions before allowing them to distribute dividends or other types of remuneration has had an impact on their propensity to distribute dividends and the size of the dividends distributed. The companies types targeted by this legislation are the Limited Liability Companies and Cooperative Companies. This test is the result of the numerous changes implemented by the Reform of the legislation applicable to companies and associations in Belgium in 2019. Furthermore, the implementation of this test also had consequences on the external auditor profession. Indeed, they are now entitled to perform certain special missions in the context of this test. They have to issue special reports in the intention of the management Boards of the firms regarding certain aspects of the test performed. In the context of the solvency test, external auditors issue a report in the intention of the General Assembly stating whether or not the intermediary set of financial statements provided reflect the reality and has been established in accordance to the applicable accounting and legal framework if applicable. In the context of the liquidity test, external auditors have to issue a special report concluding on the adequacy and fairness of historical and forecasted accounting and financial data provided by the entity as well as on the appropriateness of the hypotheses used as a basis by the Board of Directors. In order to conduct this analysis, several steps were followed. First and foremost, an extensive literature review was built. This first step aims at giving a clearer overview of the existing literature related to the covered topics and at identifying potential research gaps. The literature review was articulated based on the following structure. Firstly, the context in which the Reform of the legislation occurred was detailed taking into account the changes introduced by the Reform of the legislation based on different articles, the law itself and notes issued by the Institute of External Auditors. After that, the corporate capital structure stability of firms and its determinants are studied . This aspect is relevant as it is central in the Reform and also used in the computation of many concepts related to the covered topic such as the going concern principle. The discussion aims first at giving an overview of the diverging opinion of authors related to the corporate capital structure stability. Then, the main determinants having an influence on the financial leverage of companies are addressed. This section also approaches the dividend policy of firms and the determinants of the latter. This was done in order to try to understand the factors that could have an influence on the core topic of this thesis which is on one hand the impact of the Reform on the propensity of firms to distribute dividends and on the other hand, the size of the dividends distributed. After defining the environment and giving further details on the covered topic based on the existing literature, a statistical analysis was conducted. The goal of this analysis is to determine whether or not the propensity of firms to distribute dividends and the size of the dividends distributed were influenced by the implementation of the new double test in 2019. In order to do so, a sample of very big Public Limited Companies active in various sectors in Belgium except the financial and public sectors was built using the database Bel-first. The initial sample was then downsized based on unconsolidated financial information and on the availability of financial information for the financial years 2017 to 2021. Companies with complete accounting periods ending on 31st December were selected. As a result, we obtain a total sample of 3830 observations. In the first place, the main statistical model was defined using two dependent variables, one aiming at measuring the propensity of firms to distribute dividends (“DIV”) and the other aiming at measuring the size of the dividends (“logDIV”), one variable of interest, the variable “DOUBLETEST” related to the implementation of the new regulation in 2019 and controls variables. The main model was then studied. Based on that first test, it was found that the implementation of the double test did have a negative impact on both the propensity of firms to 4 distribute dividends and on the size of the dividends distributed. Then, additional tests were performed to check the relevance of the findings highlighted beforehand. In order to do so, the initial sample was divided in subgroups based on criteria such as the solvency level compared to the median of the sample or the liquidity level compared to the median of the sample. Based on these additional tests, it was noted that on the liquidity side, neither of the “high liquidity observations” or the “low liquidity observations” were really impacted by the implementation of the double test. Still, on the solvency side, it was pointed out that the “low solvency observations” are the most impacted. In other words, based on supplemental analyses conducted, it can be stated that the real target of the implementation of the new regulation is the companies which have sufficient financial resources, intermediary liquidity positions and low solvency positions. Companies that could potentially have distributed dividends before the Reform but harming the operations at the same time. As a conclusion, based on the literature reviewed and on the statistical analysis performed, it can be stated that the implementation of the double test has had impacts on the propensity of firms to distribute dividends and on the size of the dividends distributed. At least, this is applicable for the companies included in the selected sample. However, there are some nuances. Indeed, not surprisingly, the most impacted firms are the firms directly targeted by the regulation, namely the ones located in the middle when it comes to their liquidity position and in the lower side when it comes to solvency position. That can be explained by the fact that these companies are the ones that might harm the business and its continuance the most if undertaking unjustified distributions. As a consequence, the results of the analysis conducted suggest that the will of the legislator when implementing the Reform was partly met. Still some further discussion points on potential hidden impacts and area of discussion such as the inexistence of a materiality threshold and the impact on the distribution frequency are raised. These left the door open for further research.