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Dividend policy and bank opacity
Author(s) -
Tran Dung Viet,
Ashraf Badar Nadeem
Publication year - 2018
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1611
Subject(s) - dividend , dividend policy , transparency (behavior) , dividend payout ratio , monetary economics , economics , earnings , business , retained earnings , debt , earnings management , financial system , accounting , finance , political science , law
Abstract Does dividend policy increase or decrease bank opaqueness? Under the Dividend–Transparency Channel , paying dividends involves banks having greater discipline from the markets due to external financing and reduces private benefits of control, leading to lower earnings management concerns. Under the Dividend–Opacity Channel , due to a hesitancy to change dividend policy, banks have high vocations to engage earnings management to circumvent payout policy restrictions in debt covenants or to keep their dividend target unchanged. Employing a large sample of 2,483 U.S. bank holding companies from 2001:Q1–2013:Q4, the study documents the double‐edged sword of dividends on the discretionary behaviours of banks. Paying dividends makes banks less opaque to compare with nonpayers, which is consistent with the Dividend–Transparency Channel , however among dividend paying banks, excessive dividends involve banks to manage more their numbers, which is consistent with the Dividend–Opacity Channel . The findings are robust under different specifications. The results are of important interest to bank regulators.