Dividend policy in banking: evidence from the largest banks

In the previous section I investigated what explains the largest banks’ dividend policy. My model finds that growth opportunities, profitability , cash generation ability, ownership structure and risk are among the main variables that explains the dividend payments in the banking industry.
This last section has the ambition to add something more about dividend disbursements. I want to combine the results of my analysis with the data about the recent financial crisis. My work is inspired by the paper of Acharya, Gujral and Shin (2009). They find evidence that during the period 2007-2009 banks capital composition shifted radically from one based on common equity to that based on hybrid capital instruments such as preferred equity and subordinated debt.
Common equity has been eroded by large financial losses as it is shown in table 8. The overall losses in the period 2008-2010 reached an aggregate measure of more than $1700bn worldwide. Additionally, the impact was not equal among regions. As it might be expected, the effects of the crisis were deeper where this had its origins. In fact the Americas Region accounted for about 63% of the total losses, while Europe (35%) and Asia (2%) resulted to be respectively slightly and substantially less exposed. Also if the crisis was already noticeable at the beginning of 2008, it reached its peak in the fourth quarter of 2008 where the reported losses were the highest both in America and Europe. In Asia, instead, the trend was different compared to the other regions and most of the losses were reported in the first quarter of 2008.
However, this is not the only effect that caused the common equity erosion. Acharya et al. (2009) find that common equity diminished also because of large scale payments of dividends, in spite of widely anticipated credit losses. As it can be noticed by looking at figure 1, dividend payments have been very substantial in relation to total equity, especially in the middle of the financial crisis. Banks find themselves deprived of common equity capital precisely when it was most needed for their financial soundness. This is exactly against the principle of the priority of debt over equity. For a bank for which a credit loss can be anticipated with certainty , the payment of dividends represents a prevarication of debt-holders and also of taxpayers who actually founded the bailout. In particular I want to focus on those banks who received public money and I would like to prove if these were among the ones who actually paid out more dividends during and before the crisis.