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Abstract:
Previous research has found that bank holding company (BHC) stocks experience more severe price declines around the announcement dates of dividend cuts or omissions than do stocks of other corporations. ... Using a market-and-risk adjusted excess returns approach, it was found that while the market reaction to BHC dividend cuts in the first period is greater than that for nonfinancial corporations, there is little difference in market reaction in the subsequent time period. ... Post-1978, excess returns are related to the magnitude of the dividend cut, the firms equity cushion, the amount of the subordinate debt and whether or not a stock dividend was announced contemporaneously.
Full Text:
Previous research has found that bank holding company (BHC) stocks experience more severe price declines around the announcement dates of dividend cuts or omissions than do stocks of other corporations. ... Using a market-and-risk-adjusted excess returns approach, we find that while the market reaction to BHC dividend cuts in the first period is greater than that for nonfinancial corporations, there is little difference in market reaction in the subsequent time period. ... Post-1978, excess returns are related to the magnitude of the dividend cut, the firms equity cushion, the amount of subordinate debt and whether or not a stock dividend was announced contemporaneously. ...
Research on the reaction of stock prices to announcements of dividend cuts or omissions has shown that bank holding company stocks experience larger price declines than the stocks of other corporations. Keen (1983) examines the post-cut stock price behavior of 21 bank holding companies (BHCs) for the period 1974-77 and finds that these companies experienced excess returns of -15 percent in the week following the announcement of the cut. ...
The purpose of this paper is to study the recent behavior of BHC stock prices given a dividend cut or omission and to compare their behavior with that during the period of initial cuts and omissions analyzed by Keen (1983). First, stock price behavior is studied using standard event methodology. ... It is of interest to determine if the precipitous change in stock prices noted by Keen (1983) is endemic to BHCs or if the change reflects the time period studied. ... Indeed, a noted bank analyst has stated that "a bank that cuts its dividend is signalling the entire financial community that it has trouble that will not go away soon" (Nadler, 1977). ... Bank management must decide whether issue new equity, to retain earnings to increase capital, or to declare dividends. Mayne (1980) notes that retained earnings are the major source of growth in bank equity capital and that dividends reduce the banks ability to generate capital internally (Mayne, 1980). ...
Moreover, as Cates points out, the holders of holding company debt often demand that the holding company demonstrate internal servicing ability as opposed to a 100 percent reliance on refunding (Cates, 1975, p. ... Thus, compared with BHCs with little debt, a holding company with long-term debt outstanding is pressured by its debt holders to be thrifty in its dividend policy.
As a consequence, the direction of a change in stock prices, given a reduction in dividends, may be ambiguous. Instead of the reaction always being negative, a dividend cut may not have an adverse effect on stock prices. Indeed, Robertson states that if a firm makes the cut for the avowed purpose of retaining profits in order to strengthen its capital structure, then the reaction from the market should be positive (Robertson, 1975, p. ... Graddy and Karna find that bank investors are, under certain conditions, indifferent to the receipt of returns as dividends or prospective capital gains (Graddy & Karna, 1987, p. ... Indeed, what triggered the concern over the banks capital positions was the dividend cut announcement by Franklin National Bank on May 10, 1974. This was the first such announcement by a major money center bank (Sinkey, 1975, p. ... Consequently, this may have effected the perception of investors and other observers about the relation between dividend cuts and bank solvency. ...
DATA AND METHODOLOGY
All firms identified as holding companies by 4 digit SIC code on the CRSP NYSE/AMEX, or NASDAQ tapes were possible candidates for inclusion in the sample. These firms were further screened to ensure that they were bank holding companies and that they had paid regular quarterly dividends over the time period. The complete dividend record for each firm was adjusted for stock splits and dividends and scanned to find dividend cuts.
Approximate Word count = 3702
Approximate Pages = 14.8
(250 words per page double spaced)
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