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Dividends and risk in European banks †

By Enrico Onali


Ceteris paribus, a large dividend payout ratio decreases the capital ratio of a bank. Under deposit insurance regulation, banks with a low capital ratio are encouraged to take on risk. I investigate the relation between dividends and risk in banking, using a sample of 335 banks for the period 2000-2007. Contrary to the extant literature about nonfinancial firms, I find evidence that dividends are positively related to default risk, and negatively related to retained earnings. Similar to nonfinancial firms, dividends are related to insider/outsider agency issues, profitability, and size

Topics: Dividend, Bank Risk, Monitoring, Agency Costs JEL classification, G21, G35
Year: 2013
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