Bank holding company dividend policy, regulatory guidance and the Great Recession

Dividend policy has long reflected a ‘puzzle’ to academic research. Are dividends irrelevant or do dividends signal future performance and/or regulatory restrictions? We evaluate the dividend policy of systemically important US bank holding companies before, during and after the Great Recession and Panic of 2008. The majority of companies sharply reduced dividends to conserve liquidity and retain capital during the crisis. Those companies that quickly and forcefully slashed dividend payout ratios are better regarded by the market than those who repeatedly reduced dividend payments by small increments. The market does not distinguish between the companies that suspend dividends relative to those that in substance suspend dividends by paying one cent per share per quarter to retain recognition within trustee ‘hold lists’ of acceptable investments. Based on price/book valuation subsequent to the crisis, the market best rewarded those companies with the highest payout ratio and the highest dividend paid relative to that provided before the crisis. Banks failing regulatory stress tests were unable to pay sizable dividends and suffered in terms of valuation. Although dividends are important, return on equity and price/earnings multiples are more important drivers of value because they provide the basis for dividends payments.