Bank Capital and Dividend Externalities

62 Pages Posted: 2 Jun 2014

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Hanh T. Le

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

Hyun Song Shin

Bank for International Settlements (BIS)

Multiple version iconThere are 4 versions of this paper

Date Written: March 2014

Abstract

In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.

Keywords: externalities, financial crises, franchise value, risk-shifting

JEL Classification: G01, G21, G24, G28, G32, G35, G38

Suggested Citation

Acharya, Viral V. and Le, Hanh T. and Shin, Hyun Song, Bank Capital and Dividend Externalities (March 2014). CEPR Discussion Paper No. DP9865. Available at SSRN: https://ssrn.com/abstract=2444886

Viral V. Acharya (Contact Author)

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

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Hanh T. Le

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

44 W 4th St
Suite 9-160
New York, NY 10012
United States

HOME PAGE: http://people.stern.nyu.edu/hle/

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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