Shareholder protection, creditor rights and bank dividend policies

Journal article


Ashraf, B.N. and Zheng, C. (2015). Shareholder protection, creditor rights and bank dividend policies. China Finance Review International. 5 (2).
AuthorsAshraf, B.N. and Zheng, C.
Abstract

Purpose
The purpose of this paper is to examine the impact of legal protection of bank minority shareholders (noncontrolling shareholders) and bank creditors (e.g. depositors or debt-holders) on bank dividend payout policies using a panel data set of 5,918 banks from 52 countries over the period 1998-2007, after controlling for country-level deposit insurance coverage and bank- and country-level regulatory pressures.

Design/methodology/approach
Tobit panel regression models are used to examine the impact of legal protection of shareholders and creditors on bank dividend payout amounts. And, logit panel regression models are used to examine the impact of legal protection of shareholders and creditors on banks’ likelihood to pay dividends.

Findings
The authors support the outcome hypothesis by finding that banks pay higher amount of dividends and, are more likely to pay dividends in strong minority shareholder protection countries. However, the authors reject the substitute hypothesis by finding that banks pay higher dividends and are more likely to pay dividends in weak creditor rights countries, and banks do not substitute weak creditor rights with lower dividend payout amounts. Contrary, the authors support the literature which argues the importance of creditor rights for capital market development because one possible reason for low dividend payouts in strong creditor rights countries could be that the banks retain more profits for extending more loans.

Practical implications
By finding that creditor rights index has a negative relation with bank dividend policies in contrast to its positive relation with nonfinancial firms’ dividend policies, the authors support the literature which argues that managers of banks give less importance to factors such as current degree of financial leverage, the contractual constraints such as dividend restrictions in debt contracts, and the financing considerations such as the cost of raising external funds, while deciding about the dividend payments. The authors also suggest to keep financial and nonfinancial firms separate, to better understand the dividend puzzle.

Originality/value
Extant literature recognizes that legal institutions such as shareholder protection and creditor rights affect corporate firms’ dividend policies significantly but largely excludes banking sector. This paper, by examining the relations between legal protection of shareholders and creditors and bank dividend policies, fills this research gap.

Year2015
JournalChina Finance Review International
Journal citation5 (2)
PublisherEmerald
ISSN2044-1398
Web address (URL)http://dx.doi.org/10.1108/cfri-08-2014-0057
Publication dates
Online18 May 2015
Accepted author manuscript
License
File Access Level
Open
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