Moral Hazard, Dividends, and Risk in Banks
51 Pages Posted: 6 Jan 2012
Date Written: January 1, 2012
Abstract
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.
Keywords: Dividend, bank risk, moral hazard
JEL Classification: G21, G35
Suggested Citation: Suggested Citation
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