Dividends reduce the value of lender claims, and this is why bondholders often limit the firm's ability to distribute cash to equity holders.

Question

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Dividends are a form of cash distribution to equity holders. When a company pays dividends, it is reducing the amount of cash that is available to pay back lenders, which can ultimately reduce the value of their claims. As a result, bondholders often include limit covenants in their agreements with the firm, which restrict the amount of cash that can be distributed to equity holders as dividends or other forms of capital distributions.

Dividends Reduce the Value of Lender Claims, and This Is