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

Onali, Enrico, Moral Hazard, Dividends, and Risk in Banks (January 1, 2012). Bangor Business School Research Paper No. 11/012, Available at SSRN: https://ssrn.com/abstract=1980130 or http://dx.doi.org/10.2139/ssrn.1980130

Enrico Onali (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, Avon BS8 ITH
United Kingdom