Bank Dividend Policy during the Financial Crisis 2007-2009: an Empirical Analysis

5 1. Introduction If it is true that dividends impact firm value, the explanatory factors of dividend policy deserve investigation. As no clear reason for dividend payments is apparently evident, researchers proposed a variety of theories. The majority of dividends theories were formulated during periods of little economic duress so the steep recent recession offers an opportunity to study dividend policy under drastic economic stress. Furthermore most empirical evidence is focused on US companies and the results from US firms may not be fully consistent with the conditions of European companies. Thus this study aims to empirically indentify banks‟ dividend determinants during a steep recession in US and Europe and investigate if the relationship that exists between dividend policies of banks and their determining factors changes across the economic cycle. I use as data source Bank Scope and the period observation is from 2006 to 2010. Among the extensive literature that investigates the explanation for paying dividends, strong support exists for the signaling explanation including research by Aharony and Swary (1980), Asquith and Mullins (1983), Kalay and Lowenstein (1986), Healey and Palepu (1988), and Nissim and Ziv (2001). The signaling hypothesis suggests that managers as insiders choose dividend payment levels and dividend increases to signal private information to investors. Weak to little support for the tax preference and agency cost explanation. The tax preference theory argue that a lower capital gains tax rate and deferral of capital gains tax should prompt investors to prefer non dividend-paying stocks. The agency cost explanations states that firms pay dividends to help reduce the costs associated with the separation of ownership and control. No support to the bird-in-the-hand explanation, that asserts that dividends (bird in the hand) are better than earnings (a bird in the bush), since the latter may never realize as future