Bank Payout Motives at the Start of the Crisis of 2007-2009

Abstract

We study U.S. banks’ payout policy in 2007-2008. We start by benchmarking bank payouts in 2007 and 2008 against a model of payouts before the crisis. We then investigate stock price reactions to dividend changes and cross-sectional variation in the relation between insider information about banks’ future performance and payout policy to gauge the role of wealth transfer and fear of adverse market reactions underlying payout decisions in both years. While we do not find conclusive evidence of either motive in 2007-2008, our results corroborate concerns that it can be necessary to constrain dividends when a crisis unfolds.

Keywords: dividends, total payout, financial crisis, insider trading

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