Dividend policy and bank opacity

Abstract

Does dividend policy increase or decrease bank opaqueness? Under the Dividend–Transparency Channel, paying dividends involves banks having greater discipline from the markets due to external financing and reduces private benefits of control, leading to lower earnings management concerns. Under the Dividend–Opacity Channel, due to a hesitancy to change dividend policy, banks have high vocations to engage earnings management to circumvent payout policy restrictions in debt covenants or to keep their dividend target unchanged. Employing a large sample of 2,483 U.S. bank holding companies from 2001:Q1–2013:Q4, the study documents the double‐edged sword of dividends on the discretionary behaviours of banks. Paying dividends makes banks less opaque to compare with nonpayers, which is consistent with the Dividend–Transparency Channel, however among dividend paying banks, excessive dividends involve banks to manage more their numbers, which is consistent with the Dividend–Opacity Channel. The findings are robust under different specifications. The results are of important interest to bank regulators.

Discretionary Loan Loss Provision Behaviour and Banks’ Liquidity Creation

“…Our findings stand the test of various sensitivity tests to demonstrate their robustness and consistent with prior findings in the literature. In their recent paper, Tran and Ashraf (2018) report that banks that pay dividends are more transparent, DLLP of dividend paying banks are lower and EM behaviour is associate with opacity. They also find that even after controlling for various control measures, banks with growth prospects, high profit and higher capital base are less likely to resort to EM are therefore less opaque.…”

“…As mentioned above, the versatility and intent to use discretionary feature of the LLP by banks have been explored by many researchers. There are studies that looked at the behavioural pattern of usage of the provision during the crisis eras and normal business cycle (Laeven & Majnoni, 2003;El Sood, 2012;Agénor & Zilberman, 2015); relationship between pro-cyclical use of the LLP and uncertainty of the financial system as well as the systemic risk (Borio, Furfine, & Lowe, 2001;Wong, Fong, & Choi 2011); accommodating use of LLP and pro-cyclicality (Saurina, 2009;Perez, Salas-Fumas, & Saurina, 2008); the role that LLP plays in managing earnings, regulatory capital, signaling and tax (Lobo & Yang, 2001;Kanagaretnam, Lobo, & Yang, 2005;Anandarajan, Hasan, & McCarthy, 2007;Perez, Salas-Fumas, & Saurina, 2008;Peterson, 2015;2017a;2017b;Andries, Gallemore, & Jacob, 2017;Tran, Hassan, & Houston, 2018); LLP allowance discretion by bank managers under various accounting and regulatory country setups (Leventis, Dimitropoulos, & Anandarajan, 2011;Kilic, Lobo, Ranasinghe, & Sivaramakrishnan, 2012;Alali & Jaggi, 2011;Wezel, Chan Lau, & Columba, 2012;Ryan & Keeley, 2013;Hamadi, 2016;Marton & Runesson, 2017); LLP and bank operations (Tran & Ashraf, 2018;Tran, Hassan, & Houston, 2019); LLP and credit competition (Dou, Ryan, & Zou, 2016); relationship between LLP and characteristics of auditor (Kanagaretnam, Lim, & Lobo, 2010;Dahl, 2013); relationship between corporate governance, institutional control and discretionary LLP (Fonseca & Gonzàlez, 2008;…”

“…On the other hand, lower earning banks undertake the opposite strategy. In exploring the information conveyance property of DLLP further, Tran and Ashraf (2018) found that although dividend paying banks tend to manipulate their earning through DLLP less than banks that do not pay dividend, there is a positive relationship between dividend paying banks' choice to use DLLP as a tool to manage earning and the amount of dividend banks pay. As mentioned before, our primary interest lies this discretionary portion of the allowance since it lends itself for manipulation and thought to harnesses power to create, among other things, liquidity.…”

Activity Strategies, Information Asymmetry, and Bank Opacity

“…Our second measure involves only negative DLLP. We choose negative DLLP as our second because positive LLP can convey private information about bank's future prospects, involving a transparency-enhancing accounting discretion rather than earnings management (Tran and Ashraf, 2018). Next, we calculate industryadjusted DLLP for each bank for each quarter.…”

“…Next, we investigate whether specific financial policies can minimize the effect diversification of activities has on bank earnings management. Tran and Ashraf (2018) notes that paying dividends induces banks to engage in less earnings management when compared with nonpayers. Dividends could mitigate the increased information asymmetry and agency problems caused by diversification of activities because dividends are a costly signal which remove cash from the firm and constrain the discretion of managers.…”