Dividend policy and bank opacity
Dung Tran () and
Badar Nadeem Ashraf
International Journal of Finance & Economics, 2018, vol. 23, issue 2, 186-204
Does dividend policy increase or decrease bank opaqueness? Under the Dividendâ€“Transparency Channel, paying dividends involves banks having greater discipline from the markets due to external financing and reduces private benefits of control, leading to lower earnings management concerns. Under the Dividendâ€“Opacity Channel, due to a hesitancy to change dividend policy, banks have high vocations to engage earnings management to circumvent payout policy restrictions in debt covenants or to keep their dividend target unchanged. Employing a large sample of 2,483 U.S. bank holding companies from 2001:Q1â€“2013:Q4, the study documents the doubleâ€ edged sword of dividends on the discretionary behaviours of banks. Paying dividends makes banks less opaque to compare with nonpayers, which is consistent with the Dividendâ€“Transparency Channel, however among dividend paying banks, excessive dividends involve banks to manage more their numbers, which is consistent with the Dividendâ€“Opacity Channel. The findings are robust under different specifications. The results are of important interest to bank regulators.
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