Bank Capital and Dividend Externalities

Hyun Song Shin, Viral Acharya and Hanh Le

No 9479, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: While losses were accumulating during the 2007-09 financial crisis, many banks continued to maintain a relatively smooth dividend policy. We present a model that explains this behavior in a setting where there are financial externalities across banks. In particular, by paying out dividends, a bank transfers value to its shareholders away from its creditors, who in turn are other banks. This way, one bank's dividend payout policy a ects the equity value and risk of default of otther banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.

Keywords: Risk-shifting; Externalities; Franchise value; Financial crises (search for similar items in EconPapers)
JEL-codes: G01 G21 G24 G28 G32 G35 G38 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Bank Capital and Dividend Externalities (2017)
Working Paper: Bank capital and dividend externalities (2016)
Working Paper: Bank Capital and Dividend Externalities (2014)
Working Paper: Bank Capital and Dividend Externalities (2013)
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