What factors determine dividend smoothing by US and EU banks?

Abstract

Using a relatively large sample of European and US banks for the period 1998-2016, we investigate the determinants of bank dividend smoothing based on agency, asymmetric information and risk-shifting theories. We show that dividend payout ratio smoothing practices were implemented on both continents before and after the crisis of 2007 and were more strongly pronounced for EU banks. Our findings mostly support agency-based explanations of bank dividend behavior as evidenced by higher payout ratio smoothing for banks with higher (initial) dividend payouts, lower ownership concentration, public banks, and banks with lower growth opportunities and weaker investor protection. Evidence in favor of asymmetric information explanations is stronger for EU countries, where smaller (more opaque) banks appear to smooth more. In both continents, banks that rely more heavily on equity issuances are found to smooth dividend payout ratios more, suggesting that banks aim at improving access to equity markets. We also provide evidence in support of risk-shifting, as evidenced by the persistence of dividend payout ratio smoothing in the crisis years and higher dividend smoothing for banks under greater regulatory pressure.Additional analysis using a time series partial adjustment model for dividend levels provides evidence supporting the prevalence of dividend smoothing and the suggested theoretical explanations. K E Y W O R D Sagency, asymmetric information, bank dividend policy, bank regulation, legal origin, risk-shifting

Real regulatory capital management and bank payouts: Evidence from available‐for‐sale securities

“…We add to this debate by providing new evidence that when capital constraints prevent banks from distributing resources to shareholders, banks engage in gains trading to circumvent these restraints and boost payouts. In this respect, our results complement the evidence provided by Koussis and Makrominas (2019) and Onali (2014) and are consistent with banks engaging in risk-shifting via their payout policies.…”

“…Acharya et al (2011) observe that the fear of "runs" leads banks to continue paying dividends to keep depositors calm even when it would be prudent to cease paying dividends. Koussis and Makrominas (2019) provide some nuance to these earlier findings by showing that both US and European banks engage in dividend payout smoothing, conditional on the prevalence of some agency-based determinants such as lower ownership concentration, lower growth opportunities, smaller size and weaker investor protection.…”

“…Second, the paper contributes to the literature on payouts in the banking industry (Acharya et al, 2011;Dickens et al, 2002;Floyd et al, 2015;Hirtle, 2014;Kanas, 2013;Kauko, 2012;Koussis & Makrominas, 2019;Onali, 2014). Previous studies show payout policies are pivotal to financial institutions, as high payouts are a crucial source of information for depositors, allowing them to assess an institution's liquidity and profitability (Hirtle, 2014;Kauko, 2012).…”

“…As documented in prior research (e.g., Floyd et al, 2015;Hirtle, 2014;Koussis & Makrominas, 2019;Onali, 2014), extending the analysis to both dividends and share repurchases is necessary to fully analyze bank payout policies.…”

Characteristics identifying the companies conducting different dividend policy: evidence from Poland

“…Maintaining the dividend at a certain level regardless of net profit changes, i.e. dividend smoothing, is still under discussion in Europe (Kent & De Ridder, 2018, p. 138;Fliers, 2019, p. 98), USA (Koussis & Makrominas, 2019, p. 1030), Asia (Al-Najjar & Kilincarslan, 2017Rhee & Park, 2018, p. 37, Ali et al, 2019 and Latin America (Mosionek-Schweda et al, 2017, p. 67).…”