Understanding Bank Payouts During the Crisis of 2007-2009

Abstract

We provide an extensive analysis of the payout policy of U.S. banks during the crisis to examine potential risk-shifting and signaling motives of banks. We estimate an empirical model of bank payouts to assess the extent to which changes in payouts are commensurate with worsening fundamentals. Controlling for fundamentals, bank dividends appear excessive in 2007, but not in 2008. Announcements of dividend cuts are not associated with a significant negative price reaction neither before the crisis nor in 2007-2008. Dividend changes in 2007 do not predict performance in 2008, however, banks that reduce dividends in 2008 perform worse in 2009. For banks where insider net purchases are higher in 2006 and 2007, we find a weakly significant negative association between dividend changes in 2007 and performance in 2008. Overall, we do not find clear evidence of either risk-shifting or signaling at the beginning of the crisis.

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

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