Rational Dividend Addiction in Banking

Benoît D'Udekem

No 14-013, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: Banks cut dividends with great reluctance, as if addicted to them. Their apparent addiction is a major cause of concern for regulators because it could endanger the whole banking system. However, banks may be rational in maintaining elevated dividends if agency costs are high and dividends substitute for shareholder monitoring. Banks may rely on persistent dividend policies to uphold a reputation among investors, especially during crises, when issuing equity becomes likelier. In support of this hypothesis, we find that during and after the financial crisis, dividend persistence increases with the severity of agency costs to which banks are subject; it decreases in the presence of concentrated shareholders, except when stress is acute. By contrast, share repurchases also substitute for shareholder monitoring but trigger no addiction.

Keywords: banks; dividends; agency costs; share repurchases (search for similar items in EconPapers)
JEL-codes: G21 G28 G35 (search for similar items in EconPapers)
Pages: 42 p.
Date: 2014-06-20
New Economics Papers: this item is included in nep-ban and nep-cfn
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