Agency Conflicts and Dividend Persistence
Journal of Financial Services Research, March 17, 2021
In his article “Agency Conflicts and Dividend Persistence,” published in the Journal of Financial Services Research, Vice President Benoit d’Udekem examines two theories that could explain why bank dividends remain persistent during crises, making banking systems more fragile at the worst of times. One theory holds that elevated dividends reassure dispersed shareholders and substitute for their need to monitor bank managers. A competing theory proposes that persistent dividends attract institutional shareholders, who have a disproportionate interest in monitoring bank managers and protecting long-term value. After testing both theories using a large US bank sample over a period spanning the 2007–2009 financial crisis, Dr. d’Udekem finds that dividend persistence decreases in the presence of institutional shareholders with large, concentrated shareholdings, supporting the second theory. By contrast, dispersed shareholders are associated with more likely stock repurchase programs outside of crisis periods, with less problematic systemic implications.