Dividend Policy and Bank Opacity

Does dividend policy increase or decrease the bank opaqueness? Under Dividend-Transparency Channel, paying dividends involves banks to greater discipline from the markets due to external financing, and reduces private benefits of control, leading to lower earnings management concerns. Under Dividend-Opacity Channel, due to the hesitancy of changing dividend policy, banks have high vocations to engage earnings management to circumvent payout policy restrictions in debt covenants, or to keep their dividend target unchanged. Employing a large sample of 2,483 U.S bank holding companies from 2001:Q1-2013:Q4, the study documents the double-edged sword of dividends on the discretionary behaviors of banks. Paying dividends makes banks less opaque to compare with non-payers, consistent with Dividend-Transparency Channel, however, among dividend paying banks, excessive dividends involves banks to manage more their numbers, consistent with Dividend-Opacity Channel. The findings are robust under different specifications. Since incentives for earnings management are more relevant within specific context, we identify different conditions that motivate different discretionary behaviors, which allows us to better observe specific managerial motives. Under high information asymmetry context, there is valuably additional information conveyed by paying dividends, and it follows that the role of divi-dends as a means of conveying information is more pronounced. For banks subject to high agency problems, paying dividends make them to be less opaque through reducing the discretionary behaviors. The results are of important interest to bank regulators