Bank Capital and Dividend Externalities

Hyun Song Shin, Viral Acharya and Hanh Le

No 9865, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.

Keywords: Risk-shifting; Externalities; Franchise value; Financial crises (search for similar items in EconPapers)
JEL-codes: G01 G21 G24 G28 G32 G35 G38 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-ban
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Related works:
Journal Article: Bank Capital and Dividend Externalities (2017)
Working Paper: Bank capital and dividend externalities (2016)
Working Paper: Bank Capital and Dividend Externalities (2013)
Working Paper: Bank Capital and Dividend Externalities (2013)
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