Dividend Reductions and Commercial Banks

Abstract

We assess the information conveyed by commercial bank announcements of dividend reductions. Valuation effects on announcing banks are negative and significantly greater than for industrial firms. Cross-sectional regressions indicate the importance of the size of dividend reductions but there is no evidence of clientele effects. Dividend reductions by money center banks generate negative effects on other banks, providing evidence of contagion. In comparison, dividend reductions by regional banks have a positive competitive effect on banks located in the same geographical area, which supports Peltzman's view that regulation constrains competition in the banking industry. The difference in external effects by type of bank provides evidence that the "too big to fail" doctrine can be viewed as a regulatory response to the potential for market failure intrinsic to bank contracting.

JEL Classification: G21, G35, G38