Journal of Corporate Finance 22 (2013) 5465

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Journal of Corporate Finance

journal homepage: www.elsevier.com/locate/jcorpfin

Dividend payouts: Evidence from U.S. bank holding companies

in the context of the nancial crisis
Jos Filipe Abreu a,, Mohamed Azzim Gulamhussen b, 1
a
b

Banking Supervision Department, Banco de Portugal, Av. Almirante Reis, 71-5, 1150-012 Lisbon, Portugal
ISCTE Business School, Instituto Universitrio de Lisboa, Av Foras Armadas, 1649-026 Lisbon, Portugal

a r t i c l e

i n f o

Article history:
Received 31 July 2012
Received in revised form 30 March 2013
Accepted 1 April 2013
Available online 8 April 2013
JEL classification:
G21
G28
G35

a b s t r a c t
We study dividend payouts of 462 U.S. bank holding companies before and during the 2007
09 financial crisis. Fama and French (2001) characteristics (size, profitability and growth
opportunities) explain dividend payouts before and during the financial crisis. The agency cost
hypothesis explains dividend payouts before and during (more pronouncedly) the financial crisis. The signaling hypothesis explains dividend payouts during the financial crisis.
Regulatory pressure was ineffective in limiting dividend payouts by undercapitalized banks
before the financial crisis. Our findings have implications for corporate finance and governance
theories, and also for the regulatory reforms that are being discussed among policymakers.
2013 Elsevier B.V. All rights reserved.

Keywords:
Banks
Bank regulation
Dividends
Financial crisis

1. Introduction
Researchers apply corporate finance and governance theories to financial firms on the grounds of the inherent interplay of
interests of a wider set of stakeholders (depositors and regulators, as well as shareholders and managers), which make their
agency and governance problems more complex, and the relevance of financial firms for the good functioning and soundness of
modern financial systems (see, among others, Anderson and Campbell, 2004; Brook et al., 2000). The financial crisis has further
enhanced the interest in the application of corporate finance and governance theories due to the unique macroeconomic context
and the regulatory shift which is believed to have hit financial firms the most (see, for example, Erkens et al., 2012). We
contribute to this emerging strand in the literature by studying banks' dividend payout decisions before and during the financial
crisis.
Of the several corporate finance and governance issues that are attracting the attention of scholars, dividend policy is receiving
significant attention, particularly from regulators and investors. The recent proposals to increase oversight of the dividend
payouts by the Federal Reserve Board (FRB, 2011) and the Basel Committee on Banking Supervision (BCBS, 2011) point towards
the increasing regulatory relevance of banks' dividend payout policy. Forcing banks to plowback their earnings may however have
the unintended consequence of reducing their ability to both signal their future growth prospects to suppliers of debt and equity,
and reduce agency conflicts of their managers with dispersed shareholders. Our paper sheds critical light on the tension between
Corresponding author. Tel.: +351 213130511; fax: +351 213532591.
E-mail addresses: jfabreu@bportugal.pt (J.F. Abreu), mohamed.azzim@iscte.pt (M.A. Gulamhussen).
1
Tel.: +351 210464131; fax: +351 217964710.
0929-1199/$ see front matter 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.jcorpn.2013.04.001

J.F. Abreu, M.A. Gulamhussen / Journal of Corporate Finance 22 (2013) 5465

55

the dividend payout decisions (before and) during the financial crisis by explicitly considering the major regulatory shifts that
occurred during this period.
Although not new, 2 the regulatory focus on dividend payouts by banks contrasts with the minimal attention paid to the issue
in the literature, especially because empirical tests on dividends commonly exclude financial firms due to the specificity of their
leverage and reporting norms, thus hindering direct comparisons with non-financial firms (Foerster and Sapp, 2005). However,
the fact that banks are regulated and supervised raises questions about the extent to which theories developed for non-financial
firms are applicable to financial firms.
Dividend policy in the context of financial firms has been addressed to some extent previously. We summarize the main
studies in Table 1. For example, Filbeck and Mullineaux (1993), Collins et al. (1994) and Boldin and Leggett (1995) test the
signaling hypothesis and the evidence largely indicates that dividends are used as a signaling mechanism by banks. These studies
do not account for the influence of regulatory pressure. An exception though is Theis and Dutta (2009) who in their study on the
influence of the inside ownership on dividend payout control for the level of capitalization of banks. We extend these studies by
considering the Fama and French (2001) characteristics of dividend payers, and the agency cost hypothesis alongside the
previously tested signaling hypothesis. In addition, and so that the agency context in which financial firms operate is explicitly
factored in, we deploy several measures of regulatory pressure based on the minimum capital requirements.
Regulators impose a minimum level of capital and recommend that banks operate with an adequate level of capital above that
minimum (i.e., a capital buffer that protects debtors against losses and, hence, against the possibility of failure). 3 In the wake of
the 200709 financial crisis, regulators were heavily criticized for the inadequate amount of minimum capital required by their
frameworks (see, among others, Allen and Carletti, 2010; Goodhart and Persaud, 2008). To address this inadequacy, the Basel III
proposal incorporates a more challenging definition of capital and strengthens the capital requirements. Furthermore, the
proposal explicitly requires banks to conserve a certain amount of capital above the regulatory minimum to build buffers in good
times that can be used to absorb losses during bad times. The capital conservation buffer is specifically defined in the proposal
and should be met with common equity. Additionally, national regulators have the discretion to demand larger buffers in periods
of excessive credit growth (the countercyclical buffer). Although banks are allowed to draw on the buffer during periods of stress,
plowback of earnings will be imposed if banks fall into the buffer range, and these constraints will increase as their actual capital
ratios approach the minimum requirement (BCBS, 2011).
Broadening the scope of the restrictions placed on dividend payout, the Federal Reserve Board also requires large bank holding
companies to submit their capital plans to the Federal Reserve on an annual basis. Furthermore, the Board has asked these banks
to provide prior notice to the Federal Reserve under certain circumstances before making a capital distribution, which can be
overruled by the Federal Reserve (FRB, 2011). These circumstances include the existence of unresolved supervisory issues, the
inability to maintain capital above the minimum requirements, the inappropriateness of the capital plans and distributions, and
the presumption of unsound or illegal practices.
We test four hypotheses in the present study: (i) the applicability of Fama and French's (2001) characteristics of dividend
payers (size, profitability and growth opportunities); (ii) the signaling hypothesis, which states that dividends are used as an
indicator of future prospects; (iii) the agency cost hypothesis, which states that dividends counterbalance the increased need for
monitoring associated with independent banks; and (iv) the regulatory pressure hypothesis, which states that undercapitalized
banks tend to retain earnings rather than pay dividends. The analysis covers two distinct macroeconomic environments: before
and during the financial crisis. The sample includes 462 U.S. bank holding companies and contains 435 observations made before
the financial crisis (i.e., from 2004 to 2006) and 441 observations made during the financial crisis (i.e., from 2007 to 2009), for a
total of 876 observations. Focusing on the U.S. provides a large dataset, while restricting the sample to bank holding companies
reduces the problems associated with unobserved heterogeneity.
A major finding of our study is that dividend policy depends on the macroeconomic conditions (i.e., before and during the
financial crisis). The findings indicate that Fama and French's (2001) characteristics of dividend payers can be applied to banks in
both periods. That is, the larger, more profitable and low growth banks pay more dividends in both periods. Evidence also
supports the agency hypothesis in both periods, although it is stronger during the financial crisis. The signaling hypothesis on the
other hand only applies to the period during the financial crisis. Regulatory pressure was ineffective at limiting undercapitalized
banks' dividend payouts before the financial crisis, justifying the implementation of regulatory reforms.
We contribute to the evolving body of literature examining corporate financial decisions in the banking industry in several
ways. First, the Fama and French (2001) characteristics of dividend payers are extended to the case of banks. Second, previous
studies focus primarily on the Fama and French (2001) characteristics, the agency and signaling determinants of the dividend
payers without controlling for regulatory pressure. Third, the present study assesses the dividend policy during the 200709
financial crisis, which as an exogenous shock to the economy, provides an interesting setting for the study of corporate finance
and governance decisions. Finally, this paper contributes to the regulatory reforms that intend to constrain dividend payments
under certain limiting conditions.

2
For example, the 1933 Home Owners' Loan Act required the thrift subsidiaries of holding companies to give notice of dividend distributions 30 days in
advance (Kroszner and Strahan, 1996). More recently, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 restricted capital
distributions for banks classied as undercapitalized under the PCA thresholds.
3
The Basel Accords promoted the international harmonization of minimum capital requirements, and both the Basel I and II frameworks provide national
supervisors with discretion to dene higher levels of minimum capital. The design of Basel II is clearer on this aspect: Pillar 1 denes the minimum capital
requirements, while Pillar 2 explicitly addresses the need for supervisors to assess the adequacy of internal capital while considering all the material risks.

56

Table 1
Selected literature on the determinants of dividends.
This table synthesizes selected literature on the determinants of dividends for U.S. bank holding companies.
Author(s) (year
of publication)

Analysis
period

Methodology

Dependent variable

Independent variables

Relevant findings

177 publicly traded U.S. 19731987

bank holding companies

Event study

Unexpected dividend announcements have a direct impact

on equity valuation (do not reject the signaling hypothesis).

104 publicly traded U.S. 19771985

bank holding companies

Generalized least squares

regression

Dividend-to-earning
ratio

Firms' value, market-to-book

equity ratio, dummy for money
center banks
Dividend per share, dividend-toincome ratio, capital, size and
asset growth variables and
dummies for bank type and location
Dividend-to-share price ratio,
dummy reflecting debt issuance,
debt-to-share price ratio

Market-to-book equity ratio is negatively related with

dividends (no support for the signaling hypothesis).

Boldin and
Leggett
(1995)

207 publicly traded U.S.

bank holding companies

December
1989

Ordered probit
response model

Banks' rating provided

by a private company

Filbeck and
Mullineaux
(1999)

318 dividend increases

announcements by
publicly traded
U.S. bank holding
companies
99 U.S. bank holding
companies

19761994

OLS

Abnormal return
associated with the
announcement of
dividend increase

2006

OLS

Dividend-to-share
price ratio

Market-to-book ratio, size,

earning volatility, future earnings,
tier 1 capital ratio, insider
holdings, past dividends

Tobit

Dividend-to-total
asset ratio

Size, profitability, historical

assets growth, market-to-book
equity ratio, dummy for
independence, capitalization,
regulatory pressure

Theis and Dutta

(2009)

This paper

462 publicly traded U.S. 20042009

bank holding companies

Dividends per share and retained earning (inverse of

dividend-to-income ratio) impact positively banks'
quality (do not reject the signaling hypothesis).
Past debt issuance has no significant impact on abnormal
returns associated with dividend announcements (do not
reject the agency hypothesis).

Results do not support the applicability of the Fama and

French (2001) characteristics of dividend payers to banks (size
impacts negatively dividends while profitability and
investment opportunities have no significant impact). Positive
impact of the level of capital on dividends (do not reject the
regulatory pressure hypothesis). Non-linear relationship
between insider holdings and dividends (do not reject the
agency hypothesis).
There is no one-size-fits-all in terms of the determinants of
dividend policy, which depend on the macroeconomic
conditions. The Fama and French (2001) characteristics of
dividend payers can be applied in the case of banks to both
time periods. That is, the larger, more profitable and lowgrowth banks pay more dividends in both time periods. We
do not reject the agency hypothesis in both periods but the
evidence is stronger during the financial crisis. During the
financial crisis, we do not reject the signaling and the
regulatory pressure hypotheses.

J.F. Abreu, M.A. Gulamhussen / Journal of Corporate Finance 22 (2013) 5465

Filbeck and
Mullineaux
(1993)
Collins et al.
(1994)

Sample

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57

The remainder of the paper is organized into four sections. We present the literature review in Section 2. We describe the sample
and the variables in Section 3. We discuss the findings in Section 4, and the main conclusions and policy implications in Section 5.

2. Related literature
The literature on dividend behavior dates back to Lintner's (1956) seminal study in which managers were interviewed about
their dividend payout policies. His findings indicated the irrelevance of capital spending, as formalized later by Modigliani and
Miller (1961). The study also found that managers prefer to base their decisions on earning potential rather than on target payout
ratios, and that managers avoid making changes in payout ratios if these changes are not sustainable. His study introduced the
partial adjustment hypothesis (the gradual adjustment of dividends to earnings increases), and the permanent earning
hypothesis (dividends will increase only when the permanent earnings increase), concluding that temporary earnings will not
influence dividend payouts (see also Daniels et al., 1997).
A natural corollary of the early evidence from the field is that dividend payouts can reliably signal the quality of the permanent
earnings while concurrently decreasing any uncertainty surrounding firm value (see, among others, Bhattacharya, 1979; Dong et
al., 2005; Miller and Rock, 1985). If managers misleadingly raise dividends despite low permanent earnings, they will have to
reduce dividend payouts in the future, as these payouts may not be sustainable in the long run. Unlike share repurchases, which
are used by managers to signal temporary changes in their firms' earnings or to indicate that their firms are undervalued, changes
in dividend payouts provide a reliable signal of the permanent earning potential or quality (Jagannathan et al., 2000) or the value
of the firms' growth options (Jensen et al., 2010).
The discretion to determine the dividend payout can exacerbate the agency conflict between shareholders and managers
(Jensen, 1986), a problem that is particularly severe for banks due to their highly levered capital structures (John et al., 2010,
among others). Managers of firms with dispersed owners may be more difficult to discipline than those of firms with more
concentrated owners. Large dividend payouts reduce the amount of cash available to managers and, consequently, act as a
substitute for monitoring while reducing agency costs (see, among others, Easterbrook, 1984; Rozeff, 1982). The agency
hypothesis posits that the managers of banks with dispersed owners will pay more dividends to alleviate agency problems.
The fact that banks are regulated and monitored by supervisors raises questions about the extent to which regulatory
oversight or pressure influences dividend payouts (in the presence of signaling and agency). Highly levered capital structures may
mean that the banks hold small capital buffers and are therefore, not allowed to distribute dividends. This constraint may induce
banks to retain their earnings to strengthen their capital base and guarantee their compliance with the regulatory minimum
capital requirements. The regulatory pressure hypothesis posits that the pressure associated with holding capital levels near or
below the minimum requirement will lead banks to plowback earnings to recapitalize themselves.
In Table 1 we summarize the main papers related to dividend policy of bank holding companies. The Table shows that previous
studies either fail to explicitly address the regulatory pressure hypothesis or consider it using only the equity-to-total asset ratio
instead of the regulatory definition of capital. Thus, it cannot be asserted that corporate finance and governance theories are
applicable to financial firms until such an empirical test is conducted. Our study also fills this gap in the literature.
The evidence regarding the Fama and French (2001) characteristics of dividend payers (size, profitability and historical
growth opportunities) in the banking sector is mixed. Theis and Dutta (2009) did not find support for the positive relationship
between size and dividend payouts in a sample of 99 U.S. bank holding companies. 4 Collins et al. (1994) found a statistically
significant inverse relationship between growth opportunities and dividend payouts in a sample of 104 U.S. bank holding
companies, while Theis and Dutta (2009) did not find a statistically significant relationship between these two elements. 5 The
easy access to alternative sources of capital and the greater stability in earnings, generally also associated with larger banks,
should be positively related with dividend payouts, whereas the availability of investment opportunities should be negatively
related with dividend payouts. Therefore, our hypothesis is that the Fama and French (2001) characteristics of dividend payers
apply to banks (i.e., larger, profitable and low growth banks should exhibit higher payout ratios).
For bank holding companies, the existing evidence largely supports the signaling hypothesis. Boldin and Leggett (1995) found
that dividend payouts positively impacted external ratings of 207 listed bank holding companies. 6 Along a similar line, Filbeck
and Mullineaux (1993) also found that unexpected dividend announcements had positive impacts on valuations of 177 publicly
traded U.S. bank holding companies. Collins et al. (1994) did not find a positive relationship between the market-to-book equity
ratio and dividend payouts in 104 U.S. bank holding companies. 7 Our signaling hypothesis is that banks pay out dividends to
convey information to the market about their future growth opportunities.
4
Carow et al. (2004) found a similar non-signicant relationship in 372 U.S. mutual thrifts whereas Dickens et al. (2002) found a positive and signicant
association between size and dividend payouts in 677 U.S. commercial banks.
5
In addition to bank holding companies, Casey and Dickens (2000) and Dickens et al. (2002) found similar negative relationship between historical growth
opportunities and dividend payouts in 41 commercial banks and 372 mutual thrifts in the U.S. However, Kroszner and Strahan (1996) did not nd a similar
statistically signicant relationship in 1285 thrifts.
6
In a study of 56 listed commercial banks, Bessler and Nohel (1996) found that 81 different dividend reductions negatively inuenced equity valuations. These
reductions had stronger effects on larger banks. In a study of 406 U.S. banking rms' IPOs (117 banks and 289 thrifts), Cornett et al. (2011) used dividend
distributions to determine the underlying motivation driving banks to go public. The researchers concluded that the post-IPO dividend initiation or increase is
predictive of a subsequent acquisition by another bank.
7
The combination of these ndings indicates that dividend levels are less important than the signal given by dividend changes. We acknowledge one
anonymous referee for this comment.

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J.F. Abreu, M.A. Gulamhussen / Journal of Corporate Finance 22 (2013) 5465

The evidence on the agency hypothesis is also mixed. Filbeck and Mullineaux (1999) reported that dividend announcements
are not related with past financing announcements for U.S. bank holding companies, contradicting the agency argument that
dividends stimulate monitoring by keeping firms in the market for new capital (Easterbrook, 1984). Filbeck and Mullineaux
(1999) attributed this finding to the presence of regulators that reduce the need for market monitoring. To test the agency
hypothesis, Theis and Dutta (2009) examined the percentage of common stock held by insiders, assuming a negative relationship
between insider ownership and dividend payouts due to the reduced monitoring costs associated with higher insider ownership.
Their findings provide evidence of a non-linear relationship between insider ownership and dividend payouts. 8 Our hypothesis is
that banks that are more difficult to monitor will pay out higher dividend to counterbalance the increased need for monitoring.
Previous studies do not explicitly address the regulatory pressure hypothesis (see, for example, Boldin and Leggett, 1995;
Carow et al., 2004) or consider it using the equity-to-total asset ratio instead of the regulatory definition of capital (Bessler and
Nohel, 1996; Casey and Dickens, 2000; Dickens et al., 2002, in the context of commercial banks). The exception is Theis and Dutta
(2009), who considered the regulatory definition of capital and found a positive relationship between the level of capital and
dividend payouts (i.e., highly levered banks plowed their earnings back to strengthen their capital levels).9 Our hypothesis is that
banks facing regulatory pressure (i.e., undercapitalized banks) plowback their earnings and, therefore, curtail their dividend payouts.
3. Sample, variables and descriptive statistics
We collected firm-level data from Bankscope for U.S. listed bank holding companies with minimum total assets of 100 million
USD, which yielded 462 institutions. Banks that entered bankruptcy during the financial crisis were not considered. Our sample
spans two distinct macroeconomic environments: the period before the financial crisis, from 2004 to 2006 (435 observations),
and the period during the financial crisis, from 2007 to 2009 (441 observations). The final sample is an unbalanced panel with a
total of 876 observations.
We used the dividend payout (dividend payout) as the dependent variable and constructed it by averaging the
dividend-to-total asset ratio for each reference period. We used total assets to scale dividends to ensure that the results were
not driven by stock price and earning volatility associated with the financial crisis. We focus on the characteristics of regular
dividend payouts rather than on the prediction of the next year's dividend. Therefore, we use an averaging period that is longer
than one year. 10 We opt a three-year averaging period for two main reasons. First, this choice avoids the impact of the 2003 tax
cut on dividend payouts in the U.S. (see, among others, Brown et al., 2007). Second, a three-year period covers the time span of
the entire financial crisis (2007 to 2009). 11
Fama and French (2001) identified three common characteristics of dividend payers, which we test in our study: size,
profitability and growth opportunities. Large banks are expected to be more difficult to monitor, and more prone to raising capital
in equity markets; therefore a positive relationship between size and dividend payout is expected. We measured bank size (size)
through the natural log of the average of total assets for the reference period. Profitable banks are expected to pay out higher
dividends; therefore, a positive relationship between profitability and dividend payout is expected. We measured profitability
(profitability) by the average of the net-income-to-total-assets (return on assets) ratio. Banks with high growth opportunities are
expected to plowback their earnings to avoid costly equity and debt financing. We captured this effect through the annualized
rate of growth of total assets throughout the reference period (historical growth).
The signaling hypothesis states that banks with positive future growth opportunities (expected growth) are expected to pay
out higher dividends to signal their banks' prospects and increase their potential to attract debt and equity financing when
required; therefore a positive relationship between expected growth and dividend payout is expected. Conversely, just like
historical growth, banks with positive future growth opportunities (expected growth) will plowback their earnings to avoid costly
debt and equity financing; therefore a negative relationship is expected between expected growth and dividend payout. Thus, the
relationship between expected growth and dividend payout can be positive or negative. We measured expected growth through the
ratio of market-to-book value of equity at the end of the observation period. The signaling hypothesis cannot be rejected if the
coefficient associated with expected growth is positive and statistically significant.
The agency cost hypothesis states that dividends counterbalance the increased need for monitoring associated with banks
with dispersed shareholders. A high degree of independence is associated with severe conflicts of interest between shareholders
and managers, which exacerbate the agency costs and the consequent need for tighter monitoring; therefore a positive
relationship is expected between independence and dividend payouts. We used the commonly deployed Independence Indicator
(independence) developed by Bankscope to capture the effect of agency costs. This indicator classifies the degree of independence

8
Casey and Dickens (2000) and Dickens et al. (2002) also used the percentage of common stock held by insiders. Contrary to Casey and Dickens (2000),
Dickens et al. (2002) found support for the agency cost hypothesis.
9
In addition to the context of bank holding companies, Kroszner and Strahan (1996) and Carow et al. (2004) found a positive relationship between the level of
capital and dividend payouts, whereas Bessler and Nohel (1996) and Casey and Dickens (2000) found that the level of capital has no signicant impact on
dividend payouts.
10
There is no consensus in the literature on the averaging period. Previously, authors have used seven (Rozeff, 1982), three (Casey and Dickens, 2000) or even
two years (Dempsey and Laber, 1992). Depending on the information available for each bank, Kroszner and Strahan (1996) used averaging periods ranging from
two to ve years.
11
We used two years of information in the case of banks with incomplete information for the reference period, a procedure previously used by Kroszner and
Strahan (1996). We excluded observations with less than two years of information.

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59

of firms from their shareholders. 12 Based on the data for the end of the period under analysis, the dummy independence assumes a
value of unity for the most independent banks and zero for all the others (banks with block shareholders). The agency cost
hypothesis cannot be rejected if the coefficient associated with independence is positive and statistically significant.
Since banks are regulated, and major regulatory shifts occurred during our reference period 200409, it is necessary to control
for their influence in our model. The degree of regulatory pressure should capture the differences in the dividend payouts across
distinct degrees of capitalization and risk appetites. The assumption is that banks with (risk-weighted) capital ratios below or
close to the minimum requirements will be subject to closer monitoring by their supervisors (see Section 1). Previous studies
captured the effect of regulatory pressure by deploying the ratio of equity to total assets. However, because regulators closely
follow the regulatory definition of capital, we measured regulatory pressure (capitalization) as the average of the tier 1 leverage
ratio (tier 1 capital to assets) during the reference period. 13 Lower leverage (i.e., higher values for capitalization) signals stronger
financial health and is expected to be associated with higher dividend payouts. Therefore, a positive relationship is expected
between capitalization and dividend payout.
Additionally, we included a dummy variable for regulatory pressure based on the capital categories of the Federal Deposit
Insurance Corporation Improvement Act (FDICIA). 14 Section 131 of the FDICIA establishes a system of prompt corrective actions
derived from a classification system that divides banks into five categories: well capitalized, adequately capitalized,
undercapitalized, substantially undercapitalized and critically undercapitalized. Banks are classified according to thresholds
using risk-based capital and leverage ratios as the basis. The majority of the banks in our sample were classified as well capitalized.
We consider that regulators increase their pressure on banks when banks are approaching the minimum levels of capital and not only
when those levels are breached. Therefore, the banks considered to be subject to increased regulatory pressure are those not classified
as well capitalized and those currently classified as well capitalized but which may be downgraded (i.e., banks that present
leverage or risk-weighted capital ratios close to the limits of adequate capitalization). For the purpose of this variable, the following
thresholds were considered: 8% instead of 6% for the tier 1 risk-weighted capital ratio, and 7% instead of 5% for the tier 1 leverage ratio.
To capture this effect, we included a dummy PCA in our model. This variable assumes a value of unity if a bank does not meet at least
one of these thresholds. In total, the variable assumes a value of unity for 44 observations before the crisis and 73 observations during
the crisis. Undercapitalized banks (banks subject to regulatory pressure) are expected to be associated with lower dividend payouts.
Therefore, a negative relationship is expected between PCA and dividend payout.
In order to test the hypothesis that undercapitalized banks faced greater regulatory pressure to plowback their earnings than
well-capitalized banks, we considered the interaction of PCA with profitability. With this variable, the relevance of profitability as a
determinant of banks' dividend payout becomes dependent on the level of capital. That is, the impact of profitability on dividends
is determined for well-capitalized banks by the coefficient associated with the variable profitability and for undercapitalized banks
by the sum of the coefficients associated with the variable profitability and profitability PCA. Undercapitalized banks (banks
subject to regulatory pressure) are expected to pay out less of their earnings as dividends, instead using the earnings for recapitalization.
For that reason, a negative relationship is expected between profitability PCA and dividend payout, and the sum of the coefficients
associated with profitability and profitability PCA is expected to be lower than the coefficient associated with profitability.
As a result, the regulatory pressure hypothesis cannot be rejected if the coefficient associated with capitalization is statistically
significant and positive and/or the coefficient associated with PCA is statistically significant and negative and/or the coefficient
associated with profitability PCA is statistically significant and negative.
We present a summary of these variables in Table 2. Eq. (1) reflects all the considered variables with their respective
hypothesized signs and relationships with the dependent variable.
Dividend payout 0 1 size 2 profitability3 historical growth  4 expected growth
5 independence 8 capitalization9 regulatory pressure10 profitability

 regulatory pressure i;t

We present the sample summary statistics in Table 3 and the correlation matrix in Table 4. Certain impacts of the financial
crisis are well reflected in the data: namely, the deterioration of profitability, historical growth and expected growth. Although the
average capitalization level deteriorated only slightly (from a tier 1 leverage ratio of 8.9% to 8.7%), the number of banks facing
increased regulatory pressure rose sharply (from 44 to 73 banks). The dividend payouts also deteriorated during the financial crisis.
That is, the payouts decreased from an average of 0.36% of total assets before the crisis to 0.30% of total assets during the crisis.

12
The indicator can assume ve levels: A if no shareholder has more than 25% of the direct or total ownership; B if one or more shareholders have an
ownership percentage higher than 25%, but none have an ownership percentage (direct or total) higher than 50%; C if there is a shareholder with more than 50%
of the total ownership; D if there is a shareholder with more than 50% of the direct ownership; and U if there is an unknown degree of independence from the
shareholders. The 25% threshold for ownership concentration is used in other studies of corporate governance (see, for example, Andres, 2008).
13
We also performed a test with the ratio of equity to total assets. The ndings remained unaltered.
14
Federal Deposit Insurance Corporation Improvement Act of 1991 (P.L. 102-242, 105 STAT. 2236). Accessed at http://thomas.loc.gov/cgi-bin/query/F?c102:3:./
temp/~c102bLoNJT:e53844.

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J.F. Abreu, M.A. Gulamhussen / Journal of Corporate Finance 22 (2013) 5465

Table 2
Variables.
This table describes the selected dependent and explanatory variables.
Variable

Used in

Dividend payout (dependent variable)

Size

Boldin and Leggett (1995),

Theis and Dutta (2009)

Profitability
Historical growth
Expected growth

Boldin and Leggett (1995),

Theis and Dutta (2009)
Collins et al. (1994),
Theis and Dutta (2009)

Independence

Capitalization

Theis and Dutta (2009)

PCA

a
b

Definition (as in the present study)

Expected effect

The average of the dividends-to-total asset ratio for the

reference period (%)
The natural logarithm of the average of total assets for
the reference period
The average of the net income-to-total asset (returns on assets)
ratio for the reference period (%)
The annualized growth rate of total assets for the
reference period (%)
The ratio of the market-to-book value of equity at the end of
the reference period
Dummy that assumes the value of unity for the most
independent banks (classified as A in the Bankscope
Independent Indicator) and zero for all the others, using end
of the reference period data
The average of the tier 1 leverage ratio (tier 1 capital/total assets)
for the reference period (%)
Dummy that assumes the value of unity if the bank is not well
capitalized, considering thresholds of 8% for the tier 1
risk-weighted capital ratio (tier 1 capital/risk-weighted assets)
and 7% for the tier 1 leverage ratio (tier 1 capital/total assets)

n.a.
+
+

+/
+

Previous studies used the percentage of common stock held by insiders (Theis and Dutta, 2009) to test the agency cost hypothesis.
Previous studies considered the role of regulatory pressure only through the level of capitalization.

Table 3
Sample summary statistics.
This table presents the summary statistics for the selected dependent and independent variables. The variables are the same as those defined in Table 2.
Variables

Full sample: 20042009

Before the financial crisis:

20042006

During the financial crisis:

20072009

# of obs.

Mean

Std dev

# of obs.

Mean

Std dev

# of obs.

Mean

Std dev

Dividend payout (dependent variable)

Size
Profitability
Historical growth
Expected growth
Independence
Capitalization
PCA

876
876
876
876
876
876
876
876

0.329
7.570
0.541
9.768
1.305
0.898
8.787
0.134

0.298
1.444
1.263
14.073
0.927
0.302
2.920
0.340

435
435
435
435
435
435
435
435

0.358
7.425
1.106
12.996
1.904
0.901
8.901
0.101

0.296
1.436
0.686
14.670
0.780
0.299
2.492
0.302

441
441
441
441
441
441
441
441

0.300
7.713
0.016
6.584
0.714
0.896
8.676
0.166

0.298
1.440
1.443
12.694
0.635
0.306
3.287
0.372

4. Findings and discussion

We report all findings with robust standard errors because White's test indicated the presence of heteroskedasticity in the
data. 15 Because the dependent variable (dividend payout) does not assume negative values, the distribution can be considered
censored to the left, a situation in which OLS can produce inconsistent estimates (Wooldridge, 2002). While the issue in the
sample is not severe, Eq. (1) was estimated with a TOBIT regression. 16
4.1. Baseline
We present the baseline findings of our model in Table 5, considering only capitalization to capture the effect of regulatory
monitoring (column 1), and additionally PCA and its interaction with profitability (column 2) to capture the effect of regulatory
pressure on undercapitalized banks.
The findings indicate that the Fama and French (2001) characteristics of dividend payers can be applied to banks: size and
profitability are positively and significantly related and historical growth is negatively related to dividend payout, i.e. larger and
more profitable banks paid larger dividend payouts, and banks with low historical growth opportunities also paid more dividends.
These findings are consistent with the findings of previous studies (Casey and Dickens, 2000; Collins et al., 1994; Dickens et al., 2002).
Expected growth is positively and significantly related with dividend payout, which does not allow us to reject the signaling
hypothesis. Therefore, our findings support the signaling argument that dividends work as a signal of future growth
opportunities, consistent with the findings from Filbeck and Mullineaux (1993) and Bessler and Nohel (1996). Independence is
positively and significantly related to dividend payout, i.e. banks with dispersed shareholders pay out more dividends to balance
15
16

2-test statistics of 221.58 (p-value = 0.000) rejects the null hypothesis of homoscedasticity.
We also estimated our model with OLS and the ndings proved to be qualitatively similar. We do not report the tables for the sake of brevity.

J.F. Abreu, M.A. Gulamhussen / Journal of Corporate Finance 22 (2013) 5465

61

Table 4
Correlation matrix.
This table presents the correlations between the selected variables. The variables are the same as those defined in Table 2.
Size

Profitability

Historical growth

Expected growth

Independence

Capitalization

PCA

1
0.032
0.090
0.012
0.011
0.138
0.274
0.163
0.192

1
0.268
0.588
0.044
0.501
0.269
0.534
0.570

1
0.158
0.065
0.113
0.170
0.216
0.112

1
0.025
0.118
0.094
0.293
0.360

1
0.038
0.057
0.086
0.066

1
0.358
0.101
0.466

1
0.173
0.087

Panel B: Before the financial crisis (20042006)

Size
1
Profitability
0.185
1
Historical growth
0.109
0.011
Expected growth
0.131
0.395
Independence
0.002
0.044
Capitalization
0.223
0.627
PCA
0.409 0.020
Profitability regulatory pressure
0.451
0.077
Dividend payout
0.247
0.609

1
0.041
0.055
0.076
0.064
0.034
0.305

1
0.027
0.014
0.060
0.182
0.272

1
0.034
0.009
0.040
0.087

1
0.345
0.325
0.314

1
0.903
0.009

Panel C: During the financial crisis (20072009)

Size
1
Profitability
0.047
1
Historical growth
0.024
0.316
Expected growth
0.064
0.541
Independence
0.026
0.049
Capitalization
0.072
0.526
PCA
0.157 0.353
Profitability regulatory pressure
0.098
0.581
Dividend payout
0.162
0.634

1
0.093
0.076
0.139
0.239
0.303
0.050

1
0.121
0.228
0.146
0.228
0.537

1
0.042
0.108
0.114
0.044

1
0.363
0.238
0.584

Panel A: Full sample (20042009)

Size
Profitability
Historical growth
Expected growth
Independence
Capitalization
PCA
Profitability regulatory pressure
Dividend payout

1
0.54
0.15

Dividend
payout

the increased need for monitoring, which does not allow us to reject the agency cost hypothesis. As a result, and despite the
presence of external regulators in the financial industry, the findings still support the agency argument that dividends
compensate for the need for monitoring, as also observed by Casey and Dickens (2000) and Dickens et al. (2002).
In terms of the variables used to capture the effect of regulatory pressure, as expected capitalization is positively and
significantly related with dividend payout, i.e. the more levered banks retained their earnings to rebuild their capital buffers, a
finding that is consistent with the findings of Kroszner and Strahan (1996), Carow et al. (2004) and Theis and Dutta (2009); but in
contradiction with the findings of Bessler and Nohel (1996) and Casey and Dickens (2000). The variable deployed to capture PCA
is not significant when considered in isolation (column 2), but its interaction with profitability, profitability PCA, is negatively
and significantly related to dividend payout, i.e. undercapitalized banks (banks subject to regulatory pressure) are expected to
plowback the earnings to build their capital buffers; a result also consistent with the regulatory pressure hypothesis.
4.2. Sample split
The Chow test 17 for the periods before and during the financial crisis allows us to reject the null hypothesis that the
regression coefficients were equal before and during the financial crisis. This finding supports the decision to analyze the two
periods separately due to the distinct macroeconomic conditions and the major regulatory shifts in the industry (see also Erkens
et al., 2012; Fuller and Goldstein, 2011). We present the findings in Table 6.
4.2.1. Evidence before the nancial crisis
We present the findings for the period before the financial crisis in columns 1 and 2 of Table 6. The evidence supports the
applicability of the Fama and French (2001) characteristics of dividend payers to banks: size and profitability are positively related
to dividend payout, while historical growth is negatively related to dividend payout. The coefficient associated with independence is
positive and significant at the 10% level, which does not allow us to reject the agency cost hypothesis. Expected growth is not

17

2-test statistic of 65.76 (p-value = 0.000) rejects the null hypothesis of equal coefcients between the two regressions.

62

J.F. Abreu, M.A. Gulamhussen / Journal of Corporate Finance 22 (2013) 5465

Table 5
Baseline.
This table presents the findings for the baseline specification. Column (1) considers only capitalization as a proxy for regulatory pressure and column (2)
additionally considers PCA and profitability PCA. The variables are the same as those defined in Table 2. The heteroskedasticity-consistent standard errors are
presented in brackets.
Variables

(1)

(2)

Intercept

0.394
(0.006)
0.044

0.406
(0.079)
0.045

(0.015)
0.113
(0.001)
0.006
(0.013)
0.037

(0.006)
0.136
(0.018)
0.006
(0.001)
0.033

(0.029)
0.081
(0.006)
0.029
(0.085)

(0.013)
0.086
(0.029)
0.027
(0.005)
0.030
0.027
0.070

Size
Profitability
Historical growth
Expected growth
Independence
Capitalization
PCA
Profitability PCA

(0.018)
876
462
45.27

876
462
42.15

Number of observations
Number of banks
F test
Denotes significance at the 1% level.
Denotes significance at the 5% level.
Denotes significance at the 10% level.

significantly related to dividend payout, i.e. we do not find supporting evidence for the signaling hypothesis. Capitalization is either
not significantly (column 1) related, or it is significantly related at the 10% level (column 2) but with a sign contrary to the one
expected. PCA and its interaction with profitability are not related to dividend payout at a statistically significant meaningful level.
Therefore, we do not find supporting evidence for the regulatory pressure hypothesis.
Table 6
Sample split.
This table presents the findings considering separately the period before the financial crisis and the period during the financial crisis. Columns (1) and (3)
consider only capitalization as a proxy for regulatory pressure and columns (2) and (4) additionally consider PCA and profitability PCA. The variables are the
same as those defined in Table 2. The heteroskedasticity-consistent standard errors are presented in brackets.
Variables

Intercept
Size
Profitability
Historical growth
Expected growth
Independence
Capitalization

Before the financial crisis: 20042006

(1)

(2)

(3)

(4)

0.034
(0.008)
0.022
(0.029)
0.284
(0.001)
0.008
(0.019)
0.002
(0.042)
0.074
(0.007)
0.008
(0.107)

0.042
(0.104)
0.028
(0.008)
0.298
(0.030)
0.008
(0.001)
0.005
(0.018)
0.075
(0.043)
0.014
(0.008)
0.026
(0.085)
0.102
(0.078)
435
435
42.54

0.448
(0.007)
0.034
(0.017)
0.071
(0.002)
0.003
(0.023)
0.147
(0.034)
0.094
(0.009)
0.035
(0.116)

0.469
(0.105)
0.035
(0.007)
0.095
(0.021)
0.003
(0.001)
0.137
(0.025)
0.105
(0.034)
0.034
(0.008)
0.035
(0.036)
0.063
(0.024)
441
441
25.43

PCA
Profitability PCA
Number of observations
Number of banks
F test
Denotes significance at the 1% level.
Denotes significance at the 5% level.
Denotes significance at the 10% level.

During the financial crisis: 20072009

435
435
48.12

441
441
23.16

J.F. Abreu, M.A. Gulamhussen / Journal of Corporate Finance 22 (2013) 5465

63

4.2.2. Evidence during the nancial crisis

We present the findings for the period before the financial crisis in columns 3 and 4 of Table 6. As in the period before the
crisis, the evidence supports the applicability of the Fama and French (2001) characteristics of dividend payers to banks: size and
profitability are positively related to dividend payout, while historical growth is negatively related to dividend payout (although the
evidence is weaker for historical growth). The coefficient associated with independence is also positive and now it is significant at
the 1% level which does not allow us to reject the agency cost hypothesis.
Unlike the period before the crisis, expected growth is positively related to dividend payout, a finding that does not allow us to
reject the signaling hypothesis. Additionally, we also do not reject the regulatory pressure hypothesis: capitalization is positively
related to dividend payout, and profitability PCA is negatively related to dividend payout.

4.3. Robustness checks

A key feature of our study is the consideration of the macroeconomic setting and the regulatory shifts which, according to
Erkens et al. (2012), occurred during the financial crisis. We consider that banks with levels of capital close to the minimum
requirement or below that minimum faced additional regulatory pressure, which we define using add-ons on the PCA thresholds.
To take into account the subjectivity of this measure, we redefined the variable PCA considering both the actual PCA thresholds
and an add-on of 1 percentage point on those thresholds. In both cases and for the 3 scenarios (full sample, period before the
financial crisis, period during the financial crisis), the findings remained similar to the baseline. 18
In order to further test the robustness of our findings, we considered an alternative specification for capitalization. We used the
tier 1 risk-weighted capital ratio (tier 1 capital ratio) instead of the tier 1 leverage ratio (capitalization). The tier 1 capital ratio
keeps the tier 1 capital in the numerator and considers the risk-adjusted assets (RWA) instead of the total assets in the
denominator. We measure tier 1 as the average of the tier 1 capital ratio throughout the reference period, with higher values for
tier 1 reflecting a better position in terms of risk-adjusted capital. Therefore, a positive relationship between tier 1 and dividend
payout is expected. For the period during the financial crisis, we also considered another specification for regulatory pressure.
Using the data relating to the participation of banks in the U.S. Troubled Assets Relief Program (TARP), 19 we replaced the variable
PCA with a dummy (TARP) that assumes a value of unity if the bank received public funds from the TARP. 20 As for PCA, we also
considered the interaction of TARP with profitability, expecting a negative relationship between both TARP and profitability TARP,
and dividend payout. We present the findings in Table 7.
For the 3 scenarios considered (full sample, period before the financial crisis, period during the financial crisis), the findings
are consistent with the previous results when we consider tier 1 capital ratio to capture the effect of regulatory monitoring, and
also when we consider PCA and its interaction with profitability. Interestingly, the evidence for the regulatory pressure hypothesis
is stronger when using the variable TARP (Table 7, column 7) relatively to the baseline. Both TARP and profitability TARP are
negatively and significantly related to dividend payout. In the previous definition of regulatory pressure, only the interaction
variable profitability PCA was significant. This finding indicates the robustness of the support for the regulatory pressure
hypothesis during the financial crisis to differing specifications of regulatory pressure.

5. Conclusions
Researchers in corporate finance have often found interest in studying financial firms due to their amplified agency and
governance problems, and their critical importance for the good functioning of the modern financial system. The 200709
financial crisis has further enhanced the interest as a result of the unique macroeconomic setting and the regulatory shifts that
occurred during this period.
We construct a new dataset on 462 U.S. bank holding companies to study the dividend policy in the context of the 200709
financial crisis. We test the signaling and agency hypotheses alongside the Fama and French (2001) characteristics of dividend
payers controlling for the regulatory shifts during the period under analysis.
Our main findings indicate that dividend payouts depend on the macroeconomic context (before and during the financial
crisis). The Fama and French (2001) characteristics larger, more profitable and low growth banks tend to pay more dividends
hold for both periods. Interestingly, despite the presence of external regulators in the financial industry, the findings still support
the agency argument that dividends compensate for the need for monitoring. Our findings also support the signaling argument
that dividends work as a signal of future growth opportunities, although only during the financial crisis. A possible interpretation
is that bank holding companies have little need to signal unless the whole industry is under strain and it is important to be
identified as a better than average bank. 21 The controlling regulatory pressure hypothesis that undercapitalized banks plowback
earnings to recapitalize themselves only holds during the financial crisis, a period during in which regulators exerted more
pressure on banks with low capital buffers.
18

We do not report the tables for the sake of brevity.

We collected data from ProPublica, an independent non-prot organization. ProPublica maintains a list of TARP recipients on the following website: http://
projects.propublica.org/bailout/list.
20
Because TARP was implemented in October 2008, the variable could only be constructed for the nancial crisis period.
21
We acknowledge one anonymous referee for this comment.
19

64

J.F. Abreu, M.A. Gulamhussen / Journal of Corporate Finance 22 (2013) 5465

Table 7
Robustness tests.
This table presents the findings for the robustness tests on the definition of regulatory pressure considering the full sample, the period before the financial crisis
and the period during the financial crisis. The tier 1 risk-weight capital ratio (tier 1 capital ratio) is used instead of the tier 1 leverage ratio (capitalization). In
column (7), regulatory pressure is considered through the dummy variable TARP, which assumes a value of unity if the bank has received public funds from the
U.S. Troubled Assets Relief Program (TARP). The variables are the same as those defined in Table 2. The heteroskedasticity-consistent standard errors are
presented in brackets.
Variables

Full sample: 20042009

(1)

(2)

(3)

(4)

(5)

(6)

(7)

Intercept

0.382
(0.075)
0.041
(0.006)
0.094
(0.014)
0.006
(0.001)
0.041
(0.012)
0.091
(0.030)
0.021
(0.003)

0.403
(0.073)
0.045
(0.006)
0.115
(0.017)
0.005
(0.001)
0.038
(0.012)
0.095
(0.029)
0.019
(0.003)
0.002
(0.024)
0.066
(0.017)

0.187
(0.100)
0.029
(0.008)
0.239
(0.029)
0.007
(0.001)
0.015
(0.019)
0.083
(0.043)
0.003
(0.004)

0.226
(0.099)
0.035
(0.008)
0.242
(0.030)
0.007
(0.001)
0.018
(0.018)
0.085
(0.043)
0.003
(0.004)
0.021
(0.083)
0.072
(0.076)

0.430
(0.092)
0.031
(0.007)
0.055
(0.014)
0.003
(0.001)
0.127
(0.024)
0.100
(0.035)
0.027
(0.005)

0.445
(0.083)
0.033
(0.007)
0.078
(0.017)
0.002
(0.001)
0.119
(0.025)
0.107
(0.034)
0.026
(0.004)
0.001
(0.033)
0.064
(0.021)

0.407
(0.091)
0.034
(0.007)
0.073
(0.018)
0.002
(0.001)
0.118
(0.024)
0.110
(0.036)
0.025
(0.004)

Size
Profitability
Historical growth
Expected growth
Independence
Tier 1 capital ratio
PCA
Profitability * PCA

Before the financial crisis:

20042006

During the financial crisis: 20072009

TARP
Profitability * TARP
Number of observations
Number of banks
F test

876
462
45.89

876
462
46.96

435
435
35.01

435
435
28.62

441
441
34.17

441
441
38.06

0.042
(0.021)
0.042
(0.018)
441
441
28.77

Denotes significance at the 1% level.

Denotes significance at the 5% level.
Denotes significance at the 10% level.

Governance problems are often considered to be more severe and complex in financial firms. The 200709 financial crisis
further exposed the governance issues in financial firms creating the pathway for increased regulatory pressure, and their
consequent implications for performance. Our findings shed light on the dividend payout of bank holding companies in a unique
macroeconomic setting that spans a period before and during the 200709 financial crisis and in which the banking industry
foresaw major shifts in the regulatory landscape.
The recent regulatory focus on dividend policy contrasts with the limited attention paid to the issue in past empirical studies. The
regulatory reforms currently being put into place impose a capital conservation mechanism by constraining dividend payouts for
banks whose capital buffers fall within a range close to the minimum requirements. The ineffectiveness of regulatory pressure in
limiting dividend payouts by undercapitalized banks before the financial crisis a period during which banks were supposed to build
capital buffers supports the Federal Reserve and the Basel Committee's initiatives to limit dividend payouts by undercapitalized
banks. Because our findings provide robust empirical support for the signaling and agency cost hypotheses, the reforms may have an
unintended impact on the use of dividends as both signaling and agency cost reduction mechanisms. Inability to use these governance
mechanisms may reduce the potential to attract external financing, both debt and equity. The level up to which regulators may want
to allow signaling and agency mechanisms to function is an issue that deserves serious attention from academics and regulators alike.
Acknowledgments
We are grateful to the Managing Editor, Jeffry Netter, and the anonymous reviewer, for their comments and suggestions. We
acknowledge the financial support from Fundao para a Cincia e Tecnologia (PTDC/EGE-ECO/114977/2009). The views and
opinions expressed in this paper are those of the authors and do not necessarily represent those of the institutions with which the
authors are affiliated. Any errors are the responsibility of the authors.
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