Corporate payout policy: are financial firms different?

Summary

Focus

Financial firms show a higher propensity for corporate payouts (via dividends and share buybacks) than non-financial firms. The predominant explanation for this in corporate finance literature is that financial firms are intrinsically different from other firms, making them not directly comparable. Another view is that the difference is because not all determinants of firms' propensity to pay out dividends are adequately considered.

Contribution

This paper examines the factors that explain the difference in the decision to pay out dividends between financial and non-financial firms. We first develop a theoretical model to analyse the role in payout decisions of firm characteristics that traditional models do not cover together: (i) capital structure, (ii) firms' stock market liquidity and (iii) the proportion of shareholders with short- vs long-term objectives. We then test the predictions of the model using an international sample of large, listed firms headquartered in 31 advanced economies.

Findings

We find that, after properly accounting for different characteristics among firms in terms of leverage, liquidity and share ownership by institutional investors, the difference between financial and non-financial firms vanishes. One policy implication of our findings is that regulatory policies aimed at increasing the capital base of financial firms can structurally reduce their higher payout propensity. In addition, policy recommendations encouraging financial firms to refrain from making dividend distributions could have a stronger impact if the firms exhibit low price-to-book ratios and reduced stock market liquidity.

Abstract

It is well documented that financial firms display a larger corporate pay-out propensity than non-financial firms. By using an international sample of listed firms from advanced economies, we show that this difference vanishes after accounting for heterogeneity among corporations in their financial leverage, stock market liquidity and share-ownership by institutional investors. A theoretical model that builds on Acharya et al. (2017) provides a framework to analyze the effect of corporate structure on payout decisions and rationalizes the economic mechanisms behind our empirical results.

JEL classification: G21, G35

Keywords: corporate payout policy, dividends, financial firms, risk-shifting