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Agency Conflicts and Dividend Persistence

Abstract

Bank dividends are unusually persistent. In a crisis, they exacerbate systemic risk and raise concerns for regulators. Bank managers, however, may keep dividends elevated to mitigate agency conflicts with shareholders. One theory holds that persistent dividends may substitute for monitoring by dispersed shareholders. A second theory proposes that they attract institutional shareholders who monitor banks, mitigate agency conflicts, and seek to protect their investments’ value. After controlling for regulatory enforcement actions, we test both theories using 7722 bank-quarter observations spanning the 2007–2009 financial crisis. Our results suggest that dividend persistence increases with managerial agency conflicts but decreases in the presence of concentrated institutional shareholders, consistent with the second theory. In addition, contrary to the first theory, dispersed shareholders have no influence on bank dividend policies. Instead, these dispersed shareholders are associated with more frequent stock repurchase programs.

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Notes

  1. An additional historical study supports an agency cost or clientele explanation of bank payout policies. Mayne (1980) establishes that, in the 1970s, when many banks were converting into bank holding companies (BHCs), banks that were affiliated with BHCs had more generous dividend payouts than banks that were not. Mayne (p. 474) argues that “this may be due to differences in the pattern of ownership or in responsiveness to capital market pressures, the stock of the large firms being more likely to be widely held and publicly traded.”

  2. For example, the absence of analyst coverage does not mean that there are no agency conflicts, but that we are unable to use analyst coverage as a proxy for relative agency conflicts.

  3. The smaller banks in our sample were not subject to analyst coverage, according to I/B/E/S; some had ordinary shares that did not trade on continuous markets. The sample includes banks categorized as national commercial banks (Standard Industrial Classification, or SIC, code 6021), state commercial banks (SIC code 6022), commercial banks not classified elsewhere (SIC code 6029), federal savings institutions (SIC code 6035), and savings institutions (SIC code 6036).

  4. We use the search functionalities made available by the regulators at the following URLs: Fed: https://www.federalreserve.gov/apps/enforcementactions/search.aspx; OCC: https://apps.occ.gov/EASearch/; FDIC: https://orders.fdic.gov/s/searchform.

  5. We obtained the amount and type of capital support received by each bank, as well as the date it was received and when it was repaid or disposed of on the market, from the Transactions Investment Program Reports, dated July 26, 2013 and available from http://www.treasury.gov/initiatives/financial-stability/reports/Pages/TARP-Investment-Program-Transaction-Reports.aspx.

  6. We independently replicated the conclusions of Moyer et al. (1989) using our sample. We find that monitoring efforts are influenced by demand (they increase with the holdings and dispersion of institutional investors and with the share of uninsured short-term creditors on the balance sheet; they decrease with the concentration of institutional investors), opaqueness (monitoring efforts increase with the proportion of short-term investments and loans on the balance sheet), and agency conflicts between shareholders and managers (monitoring efforts are higher for BHCs than for other listed savings institutions).

  7. Conclusions are unchanged if we instead use the Tobin’s Q minus the mean Tobin’s Q of sample banks during the quarter, the ordinal rank of a bank’s Tobin’s Q every quarter, or the market-to-book ratio.

  8. The CPP variable may be endogenously determined if US authorities exerted pressure on undercapitalized banks that took CPP funds to shrink dividends. In untabulated results, we find that our conclusions are unaffected if we omit the CPP variable, suggesting that CPP is orthogonal to the variables of interest, and that if endogeneity is a concern, caution should be exercised in interpreting the CPP variable rather than the variables of interest.

  9. There is little evidence in the academic literature that artificially low LIBOR submissions by certain LIBOR-quoting banks had any meaningful effect on LIBORs (e.g., Abrantes-Metz et al. 2012). This is possibly a consequence of excluding the top and bottom quartiles of quote submissions in the calculation of these rates.

  10. In untabulated regressions, we find that our conclusions are unchanged if we replace PROFITABILITY with the natural logarithm of the Z-score, a measurement of bank risk-taking (Laeven and Levine 2009).

  11. When a covariate does not satisfy the assumption, the effect of the covariate may be time-dependent and the parameter estimate has to be interpreted as the covariate’s average effect. This time dependence is unlikely to affect the interpretation of results when the sample is large (Therneau and Grambsch 2000), as in our case. When we apply the non-proportionality test of Grambsch and Therneau (1994) to the Andersen-Gill regressions of Table 3 we find that INSTIT_CONCENTRATION and INSTIT_DISPERSION do not satisfy the proportionality assumption in dividend cut and omission models, respectively. When we interact these covariates with the TED indicator of crisis intensity, the covariates and their interaction terms pass the non-proportionality test; our conclusions are unaffected, although the effect of shareholder dispersion is dampened by the interaction term of dispersion and crisis intensity in the omission model.

  12. Our conclusions are identical if, instead, we explicitly control for zero dividends with a binary variable.

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Correspondence to Benoit d’Udekem.

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Previous titles of this paper were “Rational Dividend Persistence in Banking”, “Rational Dividend Addiction in Banking” and “Dividend Persistence and Agency Costs in Banking: Evidence from the Financial Crisis.” I thank Ariane Szafarz and Kim Oosterlinck for their helpful suggestions and comments. I also thank José Filipe Abreu, Iñaki Aldasoro, Howard Bodenhorn, Claire Célerier, Benoît Dewaele, Florence Duvivier, Mathias Efing, Eric Hilt, Marek Hudon, Pierre-Guillaume Méon, Enrico Onali, George Pennacchi, Lev Ratnovski, James Thewissen, Emre Unlu, Adrian van Rixtel, Ekaterina Zatonova, as well as an anonymous referee, and participants at the 2014 Paris Financial Management Conference; the Midwest Finance Association 2015 Annual Meeting in Chicago; the SCSE 2015 Annual Meeting in Montreal; the AFFI 2015 Annual Meeting in Cergy; the EFMA 2015 Annual Meeting at Nyenrode University; the IFABS Corporate Finance Conference 2015 in Oxford; the 15th FDIC/JFSR Annual Bank Research Conference in Washington, DC; the 2016 AEFIN Finance Forum in Madrid; and the 2016 Rome Conference on Money, Banking & Finance. I am grateful to the members of Centre Emile Bernheim for their support.

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d’Udekem, B. Agency Conflicts and Dividend Persistence. J Financ Serv Res 60, 207–234 (2021). https://doi.org/10.1007/s10693-021-00348-x

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Keywords

  • Banks
  • dividends
  • stock repurchases
  • agency conflicts
  • institutional shareholders

JEL classification codes

  • G21
  • G32
  • G35