Why European Banks Adjust their Dividend Payouts?

IMF Working Papers, September 23, 2022

Source details

Using a panel data approach for two samples of listed and unlisted European banks, the paper provides evidence that, over a decade and a half preceding the pandemic, bank dividend payouts were adjusted in line with the motivations found in the literature.
Banks change their dividend payouts because they:
- would like to signal good profitability to shareholders to address information asymmetry,
- use dividends to mitigate the agency costs, or
- could come under pressure from prudential supervisors and regulators to retain earnings.
Banks are found not to discount expectations about future economic conditions or their own profitability when making payouts.
Simulations show that, in the absence of supervisory sector-wide recommendations to suspend dividend payouts, banks would likely have reduced the payouts only slightly in the first year of the pandemic.

Empirical approach: panel data analysis applied to two samples (listed and unlisted European banks).
Time coverage: "a decade and a half preceding the pandemic" (phrase preserved as in source).

Dividend policy reflects signaling motives, agency-cost mitigation, and regulatory/supervisory pressure to retain earnings.
Supervisory sector-wide recommendations to suspend dividend payouts materially affected actual payout behavior during the pandemic; without such recommendations, the simulated reduction in payouts in the first pandemic year would likely have been small.
Findings suggest supervisors can influence bank payout behavior through sector-wide guidance, while banks do not appear to proactively adjust payouts based on forecasts of future economic conditions or profitability.

Summary derived from IMF Working Papers entry "Why European Banks Adjust their Dividend Payouts?"