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Bank holding company dividends and repurchases during the financial crisis

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Abstract

Many large U.S. bank holding companies (BHCs) continued to pay dividends during the 2007-09 financial crisis, even as financial market conditions deteriorated, large losses accumulated, and emergency capital and liquidity were being provided by the official sector. In contrast, share repurchases by these BHCs dropped sharply in the early part of the crisis. Documenting this divergent behavior is one of the key contributions of this paper. The paper also examines the role that repurchases played in large BHCs’ decisions to reduce or eliminate dividends. The key findings are that smaller BHCs in the sample with higher levels of repurchases before the financial crisis reduced dividends later and by less than BHCs with lower pre‐crisis repurchases, suggesting that repurchases may have served as a cushion against cutting dividends. In contrast, there is only a weak relationship between pre‐crisis repurchases and the timing and extent of dividend reductions for the larger BHCs, even though these BHCs were more likely overall to reduce or eliminate dividends during the crisis.

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  • Hirtle, Beverly, 2014. "Bank holding company dividends and repurchases during the financial crisis," Staff Reports 666, Federal Reserve Bank of New York, revised 01 Apr 2016.
  • Handle: RePEc:fip:fednsr:666
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    1. Chinmoy Ghosh & J. Randall Woolridge, 1988. "An Analysis Of Shareholder Reaction To Dividend Cuts And Omissions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 11(4), pages 281-294, December.
    2. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
    3. Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, vol. 53(1), pages 313-333, February.
    4. Enrico Onali, 2014. "Moral Hazard, Dividends, and Risk in Banks," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 128-155, January.
    5. Hirtle, Beverly, 2004. "Stock repurchases and bank holding company performance," Journal of Financial Intermediation, Elsevier, vol. 13(1), pages 28-57, January.
    6. Alice Adams Bonaimé & Kristine Watson Hankins & Jarrad Harford, 2014. "Financial Flexibility, Risk Management, and Payout Choice," Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1074-1101.
    7. Chay, J.B. & Suh, Jungwon, 2009. "Payout policy and cash-flow uncertainty," Journal of Financial Economics, Elsevier, vol. 93(1), pages 88-107, July.
    8. Bessler, Wolfgang & Nohel, Tom, 2000. "Asymmetric information, dividend reductions, and contagion effects in bank stock returns," Journal of Banking & Finance, Elsevier, vol. 24(11), pages 1831-1848, November.
    9. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2006. "Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory," Journal of Financial Economics, Elsevier, vol. 81(2), pages 227-254, August.
    10. Allen Berger & Robert DeYoung & Mark Flannery & David Lee & Özde Öztekin, 2008. "How Do Large Banking Organizations Manage Their Capital Ratios?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 34(2), pages 123-149, December.
    11. Srivastav, Abhishek & Armitage, Seth & Hagendorff, Jens, 2014. "CEO inside debt holdings and risk-shifting: Evidence from bank payout policies," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 41-53.
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    Cited by:

    1. Floyd, Eric & Li, Nan & Skinner, Douglas J., 2015. "Payout policy through the financial crisis: The growth of repurchases and the resilience of dividends," Journal of Financial Economics, Elsevier, vol. 118(2), pages 299-316.
    2. Debbaut, Peter & Ennis, Huberto M., 2014. "Large U.S. Bank Holding Companies During the 2007-09 Financial Crisis: An Overview of the Data," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 113-157.

    More about this item

    Keywords

    bank capital; stock repurchases; bank dividends; financial crisis;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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