Market Contestability and Payout Policy

64 Pages Posted: 7 Jun 2019

See all articles by Amedeo De Cesari

Amedeo De Cesari

University of Manchester - Alliance Manchester Business School - Finance & Accounting Group

Dudley Gilder

Nottingham University Business School

Winifred Huang

University of Bath

Enrico Onali

Nottingham University Business School

Date Written: May 9, 2019

Abstract

We analyze the impact of market contestability on payout policy by exploiting plausibly exogenous changes in interstate geographical restrictions on branch expansion of financial institutions. Leveraging branch-level data on bank deposits enables us to capture the exposure of each bank to state-level branching restrictions. We provide evidence of a negative impact of branching restrictions on payout ratios, which occurs only for banks with a low degree of market power, suggesting that competition is indeed driving our results. We test two potential channels: a “charter-value” channel, which predicts that contestability decreases charter values and leads to risk-shifting; and a “signaling” channel, which predicts that managers increase payout ratios to signal to the market that they do not expect a long-term decrease in profitability as a result of heightened market contestability. We do not find robust evidence that high-risk banks raise payout ratios more than low-risk banks when market contestability increases. Rather, we find support for the signaling hypothesis, in that market contestability boosts the probability of dividend increases, while share repurchases, which lack an ongoing commitment, do not increase. Moreover, the price reaction to dividend cuts is statistically significant only when market contestability is high, and unlisted banks (which cannot be punished by the stock market) do not react to changes in market contestability.

Keywords: dividends, competition, payout policy, share repurchases

JEL Classification: G35

Suggested Citation

De Cesari, Amedeo and Gilder, Dudley and Huang, Winifred and Onali, Enrico, Market Contestability and Payout Policy (May 9, 2019). Available at SSRN: https://ssrn.com/abstract=3385441 or http://dx.doi.org/10.2139/ssrn.3385441

Amedeo De Cesari

University of Manchester - Alliance Manchester Business School - Finance & Accounting Group ( email )

Crawford House
Booth Street East
Manchester, M15 6PB
United Kingdom
+44 (0) 161 2754298 (Phone)

Dudley Gilder

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Winifred Huang

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://researchportal.bath.ac.uk/en/persons/winifred-huang

Enrico Onali (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

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