Competition and Bank Payout Policy

Abstract

Leveraging branch‐level data on bank deposits, we provide evidence of a negative impact of branching restrictions on payout ratios, which occurs only for banks with a low charter value, as proxied by the market‐to‐book ratio. The results for the market‐to‐book ratio extend to the Lerner index, the return on assets, and the Z‐score, suggesting that risk‐shifting incentives drive our results rather than signaling incentives or agency costs. Our results are robust to different proxies for banking competition and identification strategies, and bootstrap simulations suggest that our results are not due to confounding factors.

Bank dividend payout policy and debt seniority: Evidence from US Banks

“…, 2020; De Cesari et al. , 2023). On the other hand, DivPremium is the stock market dividend premium variable, calculated as the log difference in the value‐weighted average MBV of dividend payers and value‐weighted average MBV of dividend non‐payers (Baker and Wurgler, 2004).…”

“…Similarly, Pugachev (2019), Koussis and Makrominas (2019), and De Cesari et al. (2023) provide evidence in favour of the risk‐shifting behaviour by showing that wealth expropriation is the dominant driver of risky banks’ dividends. Cziraki et al.…”

“…, 2020; De Cesari et al. , 2023) and the signalling hypothesis (Easterbrook, 1984; Rozef, 1982; Jensen, 1986; Abreu and Gulamhussen, 2013). In practice, these studies ignore the debt channels through which these theories might hold as they only examine these theories from the risk and growth opportunity perspectives.…”

“…This is because from the bank shareholders’ perspective, the optimal dividend policy is determined by the charter value of the bank when the risk of default is nontrivial. That is, in a scenario in which a bank's charter value is lower than a certain threshold, it is prudent to escape the burden of debt and breach the priority of debtholders over equity holders by distributing cash in the form of dividends, thereby leaving depositors and subordinated debtholders holding an empty shell (De Cesari et al., 2023). 1 This is highly likely in the presence of deposit insurance and other implicit government guarantees, such as bailout packages and too‐big‐to‐fail policies, all of which reduce the risk of financial loss for creditors and other stakeholders (Bessler and Nohel, 1996).…”

“…First, our paper provides a significant contribution to the dividend policy strand as it tests three key dividend theories (i.e., risk-shifting, monitoring, signalling). We are not aware of any study examining the monitoring hypothesis in the dividend payout literature, but we are aware of many theoretical and empirical studies that examine the risk-shifting hypothesis (e.g., Kanas, 2013;Onali, 2014;Cziraki et al, 2016;Acharya et al, 2017;Duqi et al, 2020;De Cesari et al, 2023) and the signalling hypothesis (Easterbrook, 1984;Rozef, 1982;Jensen, 1986;Abreu and Gulamhussen, 2013). In practice, these studies ignore the debt channels through which these theories might hold as they only examine these theories from the risk and growth opportunity perspectives.…”