Evaluating the impact of dividend restrictions on euro area bank market values

Desislava Andreeva, Paul Bochmann and Julius Schneider

No 2787, Working Paper Series from European Central Bank

Abstract: This paper evaluates the impact of the March 2020 European Central Bank recommenda-tion that banks do not pay dividends or buy back shares on their market values. It documents a causal negative impact on bank share prices of around 7% during the two weeks following its announcement. The recommendation affected the market values of banks directly, by delaying investor cash flows and indirectly, by increasing the uncertainty about future distri-butions and thus banks’ equity risk premia. The impact differed across banks depending on their distribution plans and risk-adjusted profitability. Our analysis highlights the impor-tance of managing perceptions about dividend uncertainty through credible communication about the expected duration, frequency and severity of dividend restrictions to limit their unintended side effects. JEL Classification: G12, G21, G28, G35

Keywords: bank capital; bank cost of equity; bank dividends; banking supervision; COVID-19 pandemic (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-ban, nep-cba and nep-eec
Note: 2285252
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232787

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