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Regulatory hypothesis and bank dividend payouts: Empirical evidence from Italian banking sector

Badar Nadeem Ashraf, Sidra Arshad, Mohammad Morshedur Rahman, Muhammad Kamal and Khalid Khan
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Sidra Arshad: School of Public Administration, China University of Geosciences Wuhan, Wuhan 430074, Hubei, P. R. China
Mohammad Morshedur Rahman: School of Management, Huazhong University of Science and Technology, Wuhan 430074, Hubei, P. R. China
Khalid Khan: Department of Economics, Lasbela University of Agricultural Water and Marine Sciences, Uthal, Lasbela, Balochistan, Pakistan

Journal of Financial Engineering (JFE), 2015, vol. 02, issue 01, 1-15

Abstract: This study examines the regulatory hypothesis for bank dividend payouts using a panel dataset of 229 Italian banks over the period 2005–2012. Regulatory hypothesis suggests that undercapitalized banks face more regulatory pressure for increasing capital levels by paying lower amount of dividends. Empirical results support the regulatory hypothesis by finding that the Italian banks having lower equity to total assets ratios or lower regulatory capital ratios retain more profits and pay lower amount of dividends. Results also suggest that dividend payer banks try to maintain dividends at previous level by not skipping or reducing dividends. Results further support that Fama and French (2001)'s three characteristics of dividend payers are also applicable to banks. That is, big-in-size, more profitable and low growth Italian banks pay higher amount of dividends. Findings of this study have important implications for recent regulatory proposals that suggest a direct regulation of dividends. A direct regulation of dividends, on one hand, and regulatory pressure on dividend payout decisions through capital requirements, on the other hand, may have unintended consequences for dividends as signaling and agency cost reducing tools.

Keywords: Regulatory hypothesis; banking; dividend policy; Italy; capital regulation; G2; G35 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S2345768615500099

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