Working Paper: CEPR ID: DP9865
Authors: Viral V. Acharya; Hanh Le; Hyun Song Shin
Abstract: In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks.
Keywords: externalities; financial crises; franchise value; risk-shifting
JEL Codes: G01; G21; G24; G28; G32; G35; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank B's dividend payouts (G35) | Bank A's risk of default (G21) |
| Bank B's dividend payouts (G35) | Bank A's equity value (G21) |
| Bank B's maximum dividends (G35) | Bank A's maximum dividends (G35) |
| Risk-shifting incentives (D82) | Bank B's dividend payouts (G35) |
| Bank B's dividend payouts (G35) | loss of franchise value (G32) |