Working Paper: NBER ID: w19707
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: bank capital; dividend policy; financial stability; risk-shifting; externalities
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 |
|---|---|
| Dividend payouts by one bank (G35) | equity value of another bank (G21) |
| Dividend payouts by one bank (G35) | likelihood of default on debt obligations (G33) |
| Dividend payouts by one bank (G35) | negative externalities affecting equity value of other banks (F65) |
| equity value of Bank A (G21) | likelihood of default on obligations to Bank A (G33) |
| Franchise value of a bank below threshold (G21) | risk-shifting incentives become dominant (D82) |
| Risk-shifting incentives (D82) | excessive dividends relative to coordinated policy (G35) |