Raiders, Regulators, and the Risk-Shifting Value of Corporate Payout

Abstract

This paper uses a novel, quasi-natural experiment to revisit an important corporate finance topic: do investors prefer corporate payout over equivalent capital gains? I study abnormal stock returns around regulatory enforcement actions that restrict bank payout. Market reactions appear significantly worse for cash-distributing banks than for near-identical, non-distributing enforcement action recipients. After addressing alternative explanations, I interpret this as causal evidence that shareholders in my sample value payout. Further, inside ownership negatively explains abnormal returns – but only for cash-distributing banks. This result contradicts agency cost and signaling theories of payout in favor of a risk-shifting story reemerging in recent literature.