Bank dividend payout policy and debt seniority: Evidence from US banks

Abstract

Bank depositors and creditors are expected to play an important role in banks’ dividend policy since they can either discipline or incentivise managers to pay larger dividends. We provide evidence suggesting that depositors are more influential than subordinated debtholders in disciplining banks facing extreme solvency situations from wealth expropriation, which is consistent with the monitoring hypothesis. The results for solvent banks show that deposits and subordinated debt explain larger dividends, suggesting that signalling incentives drive these cash payments. Diving deeper into our groups of banks, we observe that the risk-shifting hypothesis becomes more nuanced as listed banks exercise wealth expropriation after the crisis through the uninsured deposits channel. Our results provide significant support for major dividend theories, unravelling the debt channels through which these theories may hold.