Dividends and Risk in European Banks

26 Pages Posted: 24 Aug 2009 Last revised: 8 Oct 2012

See all articles by Enrico Onali

Enrico Onali

Nottingham University Business School

Date Written: August 23, 2009

Abstract

Ceteris paribus, a large dividend payout ratio decreases the capital ratio of a bank. Under deposit insurance regulation, banks with a low capital ratio are encouraged to take on risk. I investigate the relation between dividends and risk in banking, using a sample of 335 banks for the period 2000-2007. Contrary to the extant literature about nonfinancial firms, I find evidence that dividends are positively related to default risk, and negatively related to retained earnings. Similar to nonfinancial firms, dividends are related to insider/outsider agency issues, profitability, and size.

Keywords: Dividend, Bank Risk Taking, Moral Hazard

JEL Classification: G21, G35

Suggested Citation

Onali, Enrico, Dividends and Risk in European Banks (August 23, 2009). 22nd Australasian Finance and Banking Conference 2009, European Finance Associaton Annual Meeting 2010. Available at SSRN: https://ssrn.com/abstract=1460145 or http://dx.doi.org/10.2139/ssrn.1460145

Enrico Onali (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

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