Economic policy uncertainty and bank dividend policy

Abstract

Does economic policy uncertainty affect bank dividend policy? Using a large sample of US bank holding companies from 2000:Q1 to 2015:Q4, this study documents banks’ decrease in dividend payouts, as well as stock repurchases due to increased precautionary behaviors during periods of high uncertainty. The majority of the explanatory power of the overall EPU is derived from its government spending EPU. Large banks seem to experience the largest impacts. However, in the presence of uncertainty, banks are more likely to increase their dividends during crisis times than during normal times, and this effect is strengthened with banks that are subject to higher agency problems and low franchise value. Our main findings are robust with a battery of robustness tests. The evidence has different implications for regulators and policy makers.