Dividends and Risk in European Banks
26 Pages Posted: 24 Aug 2009 Last revised: 8 Oct 2012
Date Written: August 23, 2009
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: Suggested Citation