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Deposit insurance and bank dividend policy

Che Johari, Edie Erman and Chronopoulos, Dimitris K. and Scholtens, Bert and Sobiech, Anna L. and Wilson, John O.S. (2020) Deposit insurance and bank dividend policy. Journal of Financial Stability, 48. pp. 1-12. ISSN 15723089

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Abstract

This study investigates whether deposit insurance affects bank payout policy. To overcome identification concerns, we use the US Emergency Economic Stabilization Act of 2008, which increased the maximum limit of deposit insurance coverage, leading to significant changes in the proportion of insured deposits to assets of some banks, while leaving others relatively unaffected. In line with the view that dividends convey information regarding financial health, we find that banks, which experience a substantial increase in insured deposits reduce dividends relative to others with a smaller increase in insured deposits. An extensive battery of further tests confirm that our results are not driven by events (such as capital injections due to participation in the Trouble Asset Relief Program, peer effects, state tax changes, deposit insurance pricing changes) that took place around the time of the increase in the maximum limit of deposit insurance coverage. Overall, the results of our empirical analysis suggest that banks holding fewer uninsured deposits pay less dividends.

Item Type: Article
Uncontrolled Keywords: Banking Dividends Difference-in-differences Deposit insurance Share repurchases
Subjects: H Social Sciences > HG Finance
Divisions: School of Economics, Finance & Banking
Depositing User: Mrs. Norazmilah Yaakub
Date Deposited: 05 Jul 2020 01:26
Last Modified: 05 Jul 2020 01:26
URI: https://repo.uum.edu.my/id/eprint/27166

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