Academic journal article Academy of Accounting and Financial Studies Journal

Dividend Payouts of Commercial Banks

Academic journal article Academy of Accounting and Financial Studies Journal

Dividend Payouts of Commercial Banks

Article excerpt

INTRODUCTION

Dividend policy of firms has garnered a substantial amount of research attention over the last several decades. Recently, Fama and French (2001) document that the number of US listed firms paying cash dividends has declined dramatically since 1978. DeAngelo, DeAngelo, and Skinner (2004) document that the decline in the number of dividend payers is confined to industrial firms and is not realized by financial/utility firms. They find that the number of payers for financial/utility (industrial) firms increases (declines) by 9.5% (58.9%) from 1978 to 2000. Although, they also note that the proportion of financial/utility dividend payers on CRSP declined by 8.3% over the same time period. For example, based on the Compustat database in 2005, the banking industry accounts for 11.20% of the total market capitalization of all the dividend-paying firms and the dividends paid account for 14.64% of the total dividends paid by all the public firms in that year. More specifically, publicly traded banks (two-digit SIC code 60) paid dividends of $75.53 billion, which is higher than any other industries classified by the first two-digit SIC code. Yet, even though financial institutions account for a substantial portion of total dividends paid by public firms, much of the previous research excludes financial institutions (a notable exception is Cloyd, Robinson & Weaver, 2005). Financial institutions are often excluded because of their unique financial structure (high debt-to-equity ratios) and their regulatory environment. In addition, some previous research suggests that bank dividend policy is different from other industries (Dickens, Casey & Newman, 2002).

The composition of executives' stock and option holdings has been shown to be an important determinant of payout policy for industrial firms (Brown, Liang & Weisbenner, 2007). Managerial ownership as an incentive mechanism to reduce agency problems may mitigate free cash flow problems, thus result in higher payouts (Fenn & Liang, 2001). Because dividends also provide executives with liquidity and aid in diversification, higher stock ownership may be associated with higher dividends. On the other hand, managerial ownership may be a substitute for dividends to address agency problems (Agrawal & Jayaraman, 1994). Thus, the relation between stock ownership and dividend policy is an empirical question. Given most executive options are not dividend protected (Murphy, 1999) and option values decline when dividends are paid, a negative association between stock option ownership and dividends is expected. We examine these relations between managerial stock/stock option holdings and dividend payouts in financial institutions as well and expect that they may be influenced by the bank regulatory environment.

We analyze dividend policy for banks during deregulation in the 1990s and early 2000s and consider the impact of managerial stock and stock option holdings. We examine stock holdings and options held by the top five executives. We gather data from 1992 to 2007. We begin with 1992 to obtain lagged data since we utilize the ExecuComp database for executive compensation data which begins in 1993. We define two dates associated with deregulation: in 1996, the Economic Growth and Regulatory Paperwork Reduction Act improved the flow of credit to businesses and consumers and streamlined the mortgage lending process. In 1999, Gramm, Leach, Bliley Act removed many of the barriers which restricted the integration of commercial banking, insurance and investment banking. Another exogenous change in the business environment we study in the paper is the 2003 dividend tax. The deregulation provided bank managers more growth opportunities, competition and markets for corporate control. We expect the relations between managerial ownership and dividend policy for financial institutions to become stronger with the progress of deregulation.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 that decreased the individual tax rate on dividends from 38. …

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