Dividend Restrictions and Asymmetric Information

58 Pages Posted: 24 May 2021 Last revised: 10 Aug 2021

See all articles by Mads Nielsen

Mads Nielsen

Université de Lausanne (SFI)

Suzanne Vissers

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: June 25, 2021

Abstract

We develop a dynamic model of banks whose insiders have superior information about the impact of a pending shock to the bank’s cash holdings and can signal the bank’s type through its dividend policy. Banks that will be adversely affected by the shock have incentives to pool with unaffected banks to increase their market value. To avoid being mimicked, the unaffected banks can credibly signal via a more aggressive payout strategy. Dividend payout restrictions have the potential to prevent a separating equilibrium from forming. This leads to the bad type adopting a more aggressive payout policy with a higher risk of default but mitigates the distortion of the good type's policy. We identify a number of scenarios where this trade-off presents an opportunity for regulatory intervention and some where it does not.

Keywords: Asymmetric Information; Banking; Financial Regulation; Dividend Signaling; Dividend Restrictions

JEL Classification: G14, G21, G28, G35

Suggested Citation

Nielsen, Mads Bibow Busborg and Vissers, Suzanne, Dividend Restrictions and Asymmetric Information (June 25, 2021). Available at SSRN: https://ssrn.com/abstract=3850035 or http://dx.doi.org/10.2139/ssrn.3850035

Suzanne Vissers

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Extranef 128
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://www.suzannevissers.com

Swiss Finance Institute

c/o University of Geneva
Bd du Pont-d'Arve 40
Geneva 4, CH-1211
Switzerland

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