Bank dividends and signaling to information-sensitive depositors

Cristiano Forti and Rafael F. Schiozer

Journal of Banking & Finance, 2015, vol. 56, issue C, 1-11

Abstract: This study investigates whether banks use dividends to signal asset quality and liquidity to their debtholders. We exploit an exogenous shock to the asset opaqueness and perception of risks of Brazilian banks caused by the global financial turmoil of 2008. Our empirical identification takes advantage of the cross-sectional heterogeneity of types of depositors in Brazilian banks and the existence of several owner-managed banks (for which shareholder-targeted signaling is implausible) to identify that information-sensitive depositors (institutional investors) are targets of dividend signaling by banks. These costly signaling efforts are particularly strong during financial crises when asset opaqueness, informational asymmetry and depositors’ concerns regarding bank liquidity are exacerbated. From a policy perspective, our results favor the imposition of limits on bank dividends during financial crises, because the banks’ need to signal their financial health through dividends during crises intensifies the pro-cyclical effects of bank capital on lending.

Keywords: Payout policy; Dividends; Banks; Signaling (search for similar items in EconPapers)
JEL-codes: G21 G35 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:56:y:2015:i:c:p:1-11

DOI: 10.1016/j.jbankfin.2015.02.011

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