Market Contestability and Bank Payout Policy
76 Pages Posted: 7 Jun 2019 Last revised: 29 Sep 2020
Date Written: May 9, 2019
Abstract
We analyze the impact of market contestability on the payout policy of banks by exploiting plausibly exogenous changes in interstate geographical restrictions on branch expansion of banks. Leveraging branch-level data on bank deposits, 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. Our results are valid when we use different proxies for market contestability, and bootstrap simulations suggest that our results are not due to confounding factors. These findings support the view that banks might respond to a change in charter values due to market contestability.
Keywords: dividends, competition, payout policy, share repurchases
JEL Classification: G35
Suggested Citation: Suggested Citation