The Impact of Stock Price Crash Risk on Bank Dividend Payouts

Justin Yiqiang Jin and Yi Liu ()
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Justin Yiqiang Jin: DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, ON L8S 4M4, Canada
Yi Liu: School of Business, Trent University, 55 Thornton Road South, Oshawa, ON L1J 5Y1, Canada

JRFM, 2024, vol. 17, issue 5, 1-25

Abstract: In this study, we examine whether and how banks employ dividend payout policies in response to the risk of stock price crashes. Using a sample of U.S. banks, we find that banks increase their dividend payouts when faced with a higher risk of stock price crashes. In addition, we find that well-capitalized banks tend to pay more dividends when the risk of a stock price crash is elevated. This aligns with the regulatory pressure theory that banks distribute dividends when they have sufficient capital that meets or exceeds the regulatory standards. This is also in line with the signaling theory that dividend payments reflect a bank’s confidence in its financial health. Furthermore, we find that financially opaque banks tend to make more dividend payments when they are at a higher risk of stock price crashes. This supports the agency cost theory, suggesting that dividends counterbalance the need to monitor bank managers in less transparent reporting environments.

Keywords: stock price crash risk; dividend payouts; bank capitalization; bank opacity (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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