Market Contestability and Bank Payout Policy

Abstract

We analyze the impact of market contestability on the payout policy of banks by exploiting plausibly exogenous changes in interstate geographical restrictions on branch expansion of banks. Leveraging branch-level data on bank deposits, we provide evidence of a negative impact of branching restrictions on payout ratios, which occurs only for banks with a low degree of market power. Our results are valid when we use different proxies for market contestability, and bootstrap simulations suggest that our results are not due to confounding factors. These findings support the view that banks might respond to a change in charter values due to market contestability.

Keywords: dividends, competition, payout policy, share repurchases

JEL Classification: G35