Dividend payout strategies and bank survival likelihood: A cross-country analysis

Abstract

In this cross-country study, we examine whether dividend payout decisions affect the survival likelihood of banks. Using unique international banking data from 11 countries from 2010 to 2019, we find that higher levels of cash dividend payouts increase a bank's survival likelihood, as paying dividends lowers agency problems and cost of debt and facilitates greater public monitoring. Our extended analysis shows an inverted U-shaped relation between large dividends and survival likelihood. At higher levels, payout is related to a safer position of banks in terms of default; however, at very high levels of dividends, when the levels of payouts exceed a threshold, such payout lowers the likelihood of survival. We additionally investigate the effect of the bank type to assess whether differential effects could be realised under the constrained dividend model of Islamic banks compared to the conventional banking model. Our results, interestingly, show that the positive effect of dividend payouts on bank survival is more pronounced in conventional than Islamic banks. This finding is explained by the dominant liquidity management challenges pertaining to the Islamic banking business model in which banks retain more cash and pay lower dividends. Our findings offer important insights and policy implications for regulators, bankers and a broad set of stakeholders engaging with both banking sectors.