Signal or Solution? Unlocking the Power of Dividends in Mitigating Corporate Default Risk in China

The relationship between dividend policy and corporate risk has attracted significant attention. We extend this literature by examining how cash dividend distribution affects debt default risk through its role in mitigating agency conflicts. We find that both the presence of cash dividends and higher payout ratios significantly reduce corporate debt default risk, with signalling and internal governance serving as the key mediating mechanisms. Further analyses reveal that this risk‐reduction effect strengthens with macroeconomic uncertainty, operational risk, weak managerial incentives, a high interest‐bearing debt ratio, and among non‐mature firms. Moreover, the interaction between cash dividend distribution and debt default risk significantly promotes a shift toward a longer‐term debt maturity structure. We further demonstrate that the strategic choice of dividend policy has significant implications for corporate risk management and firm value.