Understanding Bank Payouts During the Crisis of 2007-2009

Peter Cziraki, C. Laux, G. Lóránth

    Research output: Working paperDiscussion paperOther research output

    Abstract

    We provide an extensive analysis of the payout policy of U.S. banks in 2007-2008 to identify the main drivers of their payout decisions. We use established models that relate dividends to fundamentals to provide a benchmark for the normal level of payouts. Based on these models, bank dividends appear excessive in 2007, but not in 2008. We exploit cross-sectional heterogeneity to examine why bank payouts change during the crisis. Banks with low capital ratios have low abnormal payouts during the crisis, and banks with high managerial ownership also have lower payouts. Managers of banks that reduce dividends in 2008 buy more shares than before the crisis. Finally, we examine the correlation between dividends and future performance, as well as announcement returns around dividend changes and repurchases. We find that banks that reduce dividends in 2008 perform worse in 2009, but we do not find that announcements of dividend cuts are associated with a significant negative price reaction in 2007-2008. Our results in general do not support the active wealth transfer hypothesis and provide mixed evidence on banks fearing the adverse effect of dividend cuts.
    Original languageEnglish
    Place of PublicationTilburg
    PublisherTILEC
    Number of pages73
    Publication statusPublished - 1 Sep 2016

    Publication series

    NameTILEC Discussion Paper
    Volume2016-019

    Fingerprint

    Dividends
    Wealth transfer
    Benchmark
    Announcement
    Payout policy
    Capital ratios
    Repurchase
    Payout
    Managers
    Price reaction
    Announcement returns
    Managerial ownership

    Keywords

    • dividends
    • total payout
    • financial crisis
    • insider trading

    Cite this

    Cziraki, P., Laux, C., & Lóránth, G. (2016). Understanding Bank Payouts During the Crisis of 2007-2009. (TILEC Discussion Paper; Vol. 2016-019). Tilburg: TILEC.
    Cziraki, Peter ; Laux, C. ; Lóránth, G. / Understanding Bank Payouts During the Crisis of 2007-2009. Tilburg : TILEC, 2016. (TILEC Discussion Paper).
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    abstract = "We provide an extensive analysis of the payout policy of U.S. banks in 2007-2008 to identify the main drivers of their payout decisions. We use established models that relate dividends to fundamentals to provide a benchmark for the normal level of payouts. Based on these models, bank dividends appear excessive in 2007, but not in 2008. We exploit cross-sectional heterogeneity to examine why bank payouts change during the crisis. Banks with low capital ratios have low abnormal payouts during the crisis, and banks with high managerial ownership also have lower payouts. Managers of banks that reduce dividends in 2008 buy more shares than before the crisis. Finally, we examine the correlation between dividends and future performance, as well as announcement returns around dividend changes and repurchases. We find that banks that reduce dividends in 2008 perform worse in 2009, but we do not find that announcements of dividend cuts are associated with a significant negative price reaction in 2007-2008. Our results in general do not support the active wealth transfer hypothesis and provide mixed evidence on banks fearing the adverse effect of dividend cuts.",
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    Cziraki, P, Laux, C & Lóránth, G 2016 'Understanding Bank Payouts During the Crisis of 2007-2009' TILEC Discussion Paper, vol. 2016-019, TILEC, Tilburg.

    Understanding Bank Payouts During the Crisis of 2007-2009. / Cziraki, Peter; Laux, C.; Lóránth, G.

    Tilburg : TILEC, 2016. (TILEC Discussion Paper; Vol. 2016-019).

    Research output: Working paperDiscussion paperOther research output

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    Cziraki P, Laux C, Lóránth G. Understanding Bank Payouts During the Crisis of 2007-2009. Tilburg: TILEC. 2016 Sep 1. (TILEC Discussion Paper).