Moral Hazard, Dividends, and Risk in Banks
University of Wales System - Bangor University, Bangor Business School
January 1, 2012
Bangor Business School Research Paper No. 11/012
The relation between dividends and bank soundness has recently drawn much attention from both academics and policy makers. However, the existing literature lacks an investigation of the relation between dividends and bank risk taking. I find a positive relation between default risk and payout ratios, although this relation is insignificant for very high levels of default risk. Capital requirements and the desire to preserve the charter can offset the positive relation between default risk and payout ratios. Dividends can increase despite very high default risk, and during the recent financial crisis many banks paid out dividends after recording a loss.
Number of Pages in PDF File: 51
Keywords: Dividend, bank risk, moral hazard
JEL Classification: G21, G35working papers series
Date posted: January 6, 2012
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