Reducing Agency Conflict through Bank Dividend Payout Decisions: The Role of Opacity and Ownership Structure

Abstract

We empirically examine whether banks’ dividend decisions are influenced by their degree of opacity and ownership structure. We find that banks with concentrated ownership structure pay lower dividends when they have high degrees of opacity, in line with the hypothesis that majority shareholders pay lower dividends to extract higher levels of private benefits. We do not observe such opportunist behavior for widely held banks. These results suggest that there exist other corporate mechanisms in widely held banks that can induce insiders to select payout policies that reduce agency conflict in a context of high degrees of opacity. Nevertheless, the effectiveness of these mechanisms is reduced in banks with controlling shareholders. Further analysis shows that higher levels of shareholder protection and stronger supervisory regimes help to constrain opportunistic behavior of majority shareholders. Our findings have critical policy implications for the Basel 3 implementation of restrictions on dividend payouts.