Seminar
Bank Payouts During the Crisis of 2007-2009
Finance
Speaker: | Christian Laux, WU Vienna |
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Date: | Tuesday 10 October 2017 |
Time: | 13:45 |
Location: | Pearson Teaching Room, Building: one |
Further details
Abstract
We provide an extensive analysis of the payout policy of U.S. banks during the crisis to examine potential
risk-shifting and signaling motives of banks. Controlling for fundamentals, bank dividends appear
excessive in 2007, but not in 2008. Announcements of dividend cuts are not associated with a significant
negative price reaction both before the crisis and in 2007-2008. We do not find a significant association
between dividend changes in 2007 and future performance, while banks that perform worse in 2009 did
reduce dividends in 2008. For banks, where insiders are less optimistic as measured by insider net buying
ratio in 2006 and 2007, we find a weakly significant negative association between the 2007 change in
dividend and the 2008 stock return, consistent with risk shifting. While insiders of banks that increase
dividends in 2007 and 2008 have lower insider net buying ratios than insiders of banks that did not
increase dividends, this results is consistent with other explanations than pessimistic insiders increasing
dividends. Overall, we do not find clear evidence of risk shifting or signaling at the beginning of the
crisis. Our results show that both motives, while often difficult to distinguish, are both important in a
crisis. Thus, it is not sufficient to align incentives of bank insiders with those of debt holders or
government. Instead, an explicit constraint on bank payout policy in the crisis is important.