Dividend policy in banking: evidence from the largest banks

    9  Introduction  9  Introduction Dividends are of great importance in establishing a company’s value. In particular, models like the Dividend Discount Model (Gordon (1959)) are widely used in finance to value financial companies. DDM model is based on the theory that a stock’s price is the present value of its future dividends. Also Fama and French (1998) find empirical support for this relationship. Therefore, having reliable estimates of dividend payments and understanding the key drivers behind dividend policy decisions is extremely important. Many works are available in literature about the explanatory factors for the dividend policy. However, the majority of them aims to explain this phenomenon for industrial companies. This study wants to explain what drives dividend payments for the largest world listed banks. My sample is composed by 82 banks from 23 countries. I expect that dividend payments in banking depend on: size, growth opportunities, profitability and ability of the firm to generate cash. I measured dividend policy using the ratio dividend over equity. I first created a general model which has, as dependent variable, the ratio between dividends and equity, and includes basic explanatory factors: ln[total assets] (size), market to book ratio (growth opportunities), ROA (profitability) and free cash flows divided by total assets (cash generation ability). I expect to find positive relationships for all the explanatory factors. Then I added risk factors to this general model. I wanted to investigate if risk influences dividend payments. For this reason I constructed market risk indicators and other risk factors to measure default risk. I suppose to have a negative relation between risk and dividends. In fact, the higher the riskiness of the bank, the lower should be the dividend disbursement. Moreover, it might be that major shareholders or, more in general, the ownership structure, influences the management of banks in deciding the dividend distribution strategy. I included in the general model variables representative of the ownership structure. I found statistically significant results for both risk and ownership structure factors. This results permitted me to expand my initial model taking them into account. The last part of this study is inspired by the work of Acharya, Gujral and Shin (2009). They find that common equity during the recent financial crisis diminished not only because of big financial