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Rational Dividend Addiction in Banking

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  • Benoît D'Udekem

Abstract

Banks cut dividends with great reluctance, as if addicted to them. Their apparent addiction is a major cause of concern for regulators because it could endanger the whole banking system. However, banks may be rational in maintaining elevated dividends if agency costs are high and dividends substitute for shareholder monitoring. Banks may rely on persistent dividend policies to uphold a reputation among investors, especially during crises, when issuing equity becomes likelier. In support of this hypothesis, we find that during and after the financial crisis, dividend persistence increases with the severity of agency costs to which banks are subject; it decreases in the presence of concentrated shareholders, except when stress is acute. By contrast, share repurchases also substitute for shareholder monitoring but trigger no addiction.

Suggested Citation

  • Benoît D'Udekem, 2014. "Rational Dividend Addiction in Banking," Working Papers CEB 14-013, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/171659
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    More about this item

    Keywords

    banks; dividends; agency costs; share repurchases;
    All these keywords.

    JEL classification:

    • 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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