The Role of Banks in Dividend Policy

31 Pages Posted: 8 Sep 2009

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Aron A. Gottesman

Pace University - Lubin School of Business - Department of Finance and Economics

Anthony Saunders

New York University - Leonard N. Stern School of Business

Yi Tang

Fordham University - Gabelli School of Business

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Date Written: August 2009

Abstract

We document a significant inverse relationship between a firm’sdividend payouts and reliance on bank loan financing. Banks limitdividend payouts to shareholders in order to protect the integrity oftheir senior claims on the firm’s assets. Moreover, dividendpayouts decline in the presence of monitoring by relationship banks,which acts as an effective governance mechanism, thereby reducing thegains from pre-committing to costly dividend payouts. Bank monitoringand corporate governance (insider stake and institutional blockholdings) are complementary mechanisms to resolve firm agency problems,both reducing the firm’s reliance on dividend policy.

Suggested Citation

Allen, Linda and Gottesman, Aron A. and Saunders, Anthony and Tang, Yi, The Role of Banks in Dividend Policy (August 2009). NYU Working Paper No. FIN-09-005; Pace University Finance Research Paper No. 2009/08. Available at SSRN: https://ssrn.com/abstract=1469124 or http://dx.doi.org/10.2139/ssrn.1469124

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

Aron A. Gottesman

Pace University - Lubin School of Business - Department of Finance and Economics ( email )

One Pace Plaza
New York, NY 10038
United States
212-346-1912 (Phone)
212-346-1573 (Fax)

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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