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Dividend policy in banking: evidence from the largest banks

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 with data covering years 2003-2009. My initial model uses investment opportunities, size, profitability and cash generation ability to explain dividend payments. Empirical analysis suggests a positive and statistically significant relationship between investment opportunities, profitability and cash generation ability. A positive relation is suggested also for size even if the result is not supported by statistics. Then, I tested if banks’ dividend policies are driven also by risk and ownership structure. Market and default risk indicators have been constructed, along with measures of ownership concentration. A significant negative relation results between market risk indicators and dividends, while no relation is statistically supported if I include default risk variables. To an higher ownership concentration corresponds less dividends. This result is consistent with the extent that controlling shareholders are concerned about the financial health and efficiency of the firm, avoiding to use excess cash to pay out dividends (e.g. Shleifer and Vishny (1986), Jarrell and Poulsen (1987), Brickley, Lease, and Smith (1988), Graves and Waddock (1990)). The last section of the work is inspired by the paper of Acharya, Gujral and Shin (2009). They find that during the period 2007-2009, in spite of largely anticipated credit losses, banks paid out large amounts of dividends. Consequently, I defined a sub-sample of 24 bailed out banks and I tested if these banks were among the ones who paid out more dividends during and before the crisis. Looking at the year of the bailout and at the previous one, a positive and significant relation is found. Moreover, from an historical perspective, bailed out banks show, almost always, higher dividend payments than the other non-saved. This may suggests that among the causes who exacerbated the financial crisis there were also dividend policies out of the control of market participants and regulators. This could be an useful starting point in the reconstruction of a sound financial system.

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    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

Laurea liv.II (specialistica)

Facoltà: Economia

Autore: Rodolfo Pambianco Contatta »

Composta da 57 pagine.


Questa tesi ha raggiunto 182 click dal 19/07/2011.

Disponibile in PDF, la consultazione è esclusivamente in formato digitale.