Bank Characteristics and Payout Policy

Abstract

This paper seeks to identify empirically the factors determining Korean banks’ dividend policy. Banking industry plays a pivotal role for the operation of a nation’s economy having a considerably lower probability of bankruptcy than other industries due to the assistance from deposit insurance system and possible injection of public funds at the time of financial adversity. Thus, the process of the banking industry’s dividend policy decision should be more transparent and efficient than the firms in other industries. The results of the empirical analyses in this paper suggest that the dividend policy of Korean banks bears a very consistent and close relation to the banks’ financial healthiness, growth opportunity and profitability. More specifically, the Korean banks with higher debt ratios, and therefore, weaker capital adequacy tend to pay less dividends. The banks with higher loan ratios tend to pay less dividends and retain more earnings to undertake the future growth opportunities. Also, the banks with higher profitability appear to pay more dividends. The estimation results for the partitioned sample based on bank characteristics show that the above-found results for the full sample are more significantly observed within the group of the banks with higher capital ratio, higher profitability, and lower nonperforming loans. Thus, the banks in riskier and inferior positions in terms of the bank’s financial adequacy, profitability and the soundness of asset portfolio composition appear not to have consistent and systematic decision-making mechanisms for dividend policy.