Dividend Signaling and Bank Payouts in the Great Financial Crisis

We study the dividend payouts of U.S. banks during the 2008 financial crisis. We show that banks with a higher share of short term liabilities to total liabilities, which were thus more exposed to the 2008 rollover crisis, increased their dividend payouts relative to less exposed banks. This relative increase in dividend payouts is concentrated in relatively cash-rich banks and is not driven by other systematic differences in bank asset portfolios across broad asset classes. The relative dividend payout increase was associated with a short-run increase in stock valuations and a decrease in short-term bond yields, as well as credit default swap premia. We argue that these empirical facts are consistent with a †dividend signaling channel†, whereby dividend payouts impact the coordination problem and rollover decisions of short-term lenders.