Managerial Finance

Explanatory factors of bank dividend policy: revisited

John Theis Amitabh S. Dutta

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John Theis Amitabh S. Dutta, (2009),"Explanatory factors of bank dividend policy: revisited", Managerial
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Explanatory factors of bank

dividend policy: revisited

Bank dividend
policy

John Theis and Amitabh S. Dutta

D. Abbott Turner College of Business, Columbus State University,
Columbus, Georgia, USA

501

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Abstract
Purpose The purpose of this paper is to examine the Dickens et al. model of bank holding
company dividend policy. They identified five explanatory factors in a sample of bank holding
companies (BHCs). Banking companies typically pay larger dividends and more often than industrial
firms. Investors often look at the dividends as being important return variables.
Design/methodology/approach In this study, a sample of 99 firms with 2006 data from
governmental reports and Yahoo is used in regression equations to test the relationship of the five
identified variables with dividend yields. The analysis is extended to investigate non-linearities
between dividend yield and insider ownership.
Findings The paper finds that the original model is robust, but not all variables keep their
significance. Insider holdings have a non-linear relationship with dividend yields.
Practical implications The significant factors affecting bank dividend policy help dividend
seeking investors find BHCs that return higher dividend yields.
Originality/value This paper reveals a non-linear link between insider holdings and dividend
yields among BHCs.
Keywords Insider holdings, Dividends, Business policy, Banks, Holding companies
Paper type Research paper

1. Introduction
This study reexamines the factors explaining bank holding company (BHC) dividend
policy. In the initial paper, Dickens et al. (2003) identified five factors that helped explain
bank dividend policy for a sample of banks in 1998. The first model in this study
replicates the Dickens et al. (2003) study to verify whether their findings hold up for a
different sample of banks in another period. Other models use asset growth and other
independent variables to test whether they can add more explanatory power to the
model. The 99 bank holding companies (BHCs) located in Yahoo Finances Southeast and
Mid-Atlantic regions comprise the studys sample. Yahoo Finance not only provides
daily price and dividends per share, but also the insider holdings variable.
This study confirms and extends the Dickens et al. (2003) model by incorporating
the impact of non-linearity in insider holdings on bank dividend policy. There are two
reasons to extend the study into the effect of insider holding non-linearity. First,
research suggests insider holdings affect debt and dividend policy non-linearly, both in
industrial firms and banks (Morck et al., 1988; Wruck, 1989; Gorton and Rosen, 1995).
The second and more important reason is Dickens et al. (2003) performed decile
analysis which revealed the possibility of a non-linear relationship between the
independent variables and dividend yield. This studys conclusion offers a potential
explanation for the non-linear relationships between the variables.
2. Literature review
The association between insider holdings, as a measure to alleviate agency problems,
and agency costs is typically researched and explained on samples of industrial firms.
Rozeff (1982) and Easterbrook (1984) were among the earliest proponents of an existing

Managerial Finance
Vol. 35 No. 6, 2009
pp. 501-508
# Emerald Group Publishing Limited
0307-4358
DOI 10.1108/03074350910956963

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agency relationship. Casey et al. (1999), in a more recent application of the Rozeff model,
show dividends changed with the Tax Reform Act of 1986. Dickens et al. (2003)
explicitly study bank dividend policy and a set of factors explaining it. Five of their
models seven variables significantly impact bank dividend policy. The significant
variables are investment opportunities, size, insider holdings, dividend history and
risk.
The relationship between insider holdings and the market value of a firm is not
linear, as seen by Morck et al. (1988) in examining a sample of Fortune 500 industrial
firms. They report the market value of the firm first increases as insider holdings
increase from 0 to 5 per cent. As insider holdings increase from 5 to 25 per cent, the
market value of the firm decreases. As insider holdings increase beyond 25 per cent, the
market value of the firms again increases. They argue their results are evidence of
managerial entrenchment. While lower and higher levels of insider holdings support
the notion that insider holdings lead to lower agency costs, the middle level of
ownership is a range over which managerial control seems to be linked with a
significantly lower market price of equity.
The Morck et al. (1988) non-linearity results may be sample and/or time dependent.
However, Wruck (1989) confirms the range of entrenchment reported by Morck et al.
She finds in a sample of firms announcing a private equity sale firm value increases
significantly for firms with low and high levels of insider holdings. Her findings
confirm that, in a middle range of insider holdings, firm value decreases significantly.
In a study tracking the decline of banking in the USA, Gorton and Rosen (1995), find
a non-linear relation between insider shareholdings and risk-taking in lending activity.
Using a sample of 458 BHCs, they present a model illustrating how managerial
ownership of banks can lead to entrenchment, resulting in management activities that
reduce firm value. Gorton and Rosens findings support the non-linear effect of insider
holdings reported by Morck et al. (1988) for their sample.
Collins et al. (1995) report BHCs often have significant levels of insider holdings
especially among smaller, regional BHCs, like ones in this study. In an earlier paper,
Collins et al. (1994), find the level of managerial discretion within BHCs has increased
due to recent growth in the number of products offered, markets served and services
provided.
Dutta et al. (2007) recent study examines the debt and dividend policy of a sample of
65 BHCs and how the level of insider holdings impacts such policy. They find lower
levels of insider holdings are negatively related with dividend payout, but higher levels
of insider holdings are positively related. Their results support the non-linear
relationship between insider holdings and bank dividends.
Based on these research studies, the Dickens et al. (2003) model explaining bank
dividend policy would be enhanced by incorporating the non-linearity of insider
holdings and explicitly adding a growth variable. In the Dickens et al. model
investment opportunities evidenced by the market to book ratio acts as a prima facie
proxy for future growth.
3. Data and methodology
In total, 99 BHCs appearing in either the Yahoo! Finance Southeast or Mid-Atlantic
regional bank holding company index comprise the sample. Sample firms also filed
consolidated Uniform Bank Holding Company Performance Report (UPBR) for 2007
with bank regulators and had insider holding information available at Yahoo! Finance.
From an initial sample of 120 BHCs, only the 99 sample firms met all criteria.

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The consolidated UBPR for BHCs is a 27 page comprehensive report with wide
ranging financial information on the holding company and its subsidiaries.
Occasionally, the holding company only reports on the parent companys activities.
Because the holding company parent report does not give information about the
banking subsidiarys operations. The firms with such limited financial statements are
excluded from the sample. Yahoo! Finance uses Thompson for insider information and
when information is not available, the BHC is deleted from the study. The Dickens et al.
(2003) study uses information from Morningstar, while this study uses data from
reports made to banking regulators and captured from Yahoo! Finance. The difference
in data could affect the study.
The Dickens et al. (2003) model uses seven independent variables: market to book,
capital to assets, natural log of revenue, change in future earnings, percentage of
insider ownership, prior years dividend, and earnings volatility. This study initially
uses the same variables, but due to the difference in data sources the method of
computing, the particular variable may be slightly different. Table I gives the source
and formula for each variable as well as its descriptive statistics.
All variables except for capital to assets and earnings volatility are very similar to
the Dickens et al. (2003) variables. The UBPR provides data for three different types of
capital, equity from the standard balance sheet, Tier 1 capital, and risk capital. Risk
capital is basically Tier 1 capital plus Tier 2 capital. Equity is book value of equity
measured by normal accounting means. Each of the other measures differs from
standard accounting equity by the inclusion or exclusion of items in or from the equity
account. Volatility is the coefficient of variation for four years instead of five years.
Dickens et al. (2003) correctly points out regulators measure risk by a capital
adequacy ratio or book value of bank capital to book value of bank assets. The
regulators analyze bank capital in an exacting fashion. They view Tier 1 capital to
assets and a Tier 1 capital to risk weighted assets as being more critical to bank
Variable

Source

Mean

SD

High

Low

Div Yld 06
Dividend/price
Mkt/Bk
Market value/book value
LNRev
Natural log total revenue
CoeffVar
SD/Mean
Equity/assets
Total equity/total assets
Insidrs
Yahoo reported
Div 2005
Dividend paid in 2005
Future earnings
(Earnings 2006-2007)/Earn 2006
Tier 1/Total assets
Tier 1 capital/total assets

Yahoo!

0.022

0.015

0.061

Yahoo!

1.94

0.69

5.91

0.97

UBPR

11.62

1.93

15.87

9.81

Yahoo!

34.25

53.59

400.04

1.52

UPBR
Yahoo!

0.0945
17.86

0.0205
15.23

0.1534
77.6

Yahoo!

0.558

0.415

1.72

UPBR

0.2097

0.7836

6.23

UPBR

0.0921

0.0157

0.1482

Bank dividend
policy

503

0.0361
0.65
0
1.388
0.0653

Table I.
Notes: The UPBR is available at www.ffiec.gov/nicpubweb/nicweb/nichome.aspx Yahoo! Finance
is the source for the Yahoo! cited figures

Variables sources and

descriptive statistics

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504

solvency than accounting capital to assets. This study includes several capital
adequacy ratios for testing. All capital to asset ratios should have a positive
relationship to dividend yield because all measure the regulator perceived risk in the
holding companys operation. While BHCs can file for bankruptcy, normally they do
not file unless the subsidiary bank or banks are closed by regulators. The regulators
perception of the banks capitalization should be highly important to management.
In the Dickens et al. (2003) model, the book to market ratio is a proxy for investment
opportunities. Investors perceive the market value of the BHCs assets less its liabilities
to be greater than the book value of its common stock. A large market to book ratio
means management makes good investment decisions. The UBPR includes a variable
measuring annual asset growth. This study uses the asset growth variable to further
investigate the investment opportunities available for management as a determinant of
dividend policy. The expected sign of both investment opportunity variables is
negative.
Insider holdings may have a non-linear relationship with dividends. In Dutta et al.
(2007) low levels of insider ownership are consistent with low dividends. In general,
dividends increased with the level of ownership. Both Dickens et al. (2003) and Dutta
et al. found the relationship to be non-linear. Extended models test the non-linear
relationship of dividends with insider ownership squared and the square root of insider
ownership. The anticipated sign of this variable is negative.
Prior dividends should have a positive and strong relationship with future
dividends. Fama and Babiak (1968) argue for a simple explanation. Firms set a
dividend level and tend to let it remain. Later research including Bhattacharya (1979)
and Miller and Rock (1985), look at dividends as a signaling device to tell outsiders the
firm has strong cash flows and that it is valuable. Goyal and Welch (2003) point out
that dividend yields are highly autocorrelated. Their finding lends evidence to Fama
and Babiaks argument. Once a dividend is set, firms are loath to reduce it. The
anticipated sign of the prior dividend variable is positive.
Barclay et al. (1995) use abnormal earnings for a signaling variable. This study uses
the same future earnings variable as Dickens et al. (2003) to model managements
signaling. The percentage change in income from 2006 to 2007 acts as an additional
signaling parameter in the model. The anticipated sign is positive for future earnings.
Firms with stable earnings tend to pay dividends while firms with fluctuating
earnings do not. Dickens et al. (2003) investigated variability of earnings using the
coefficient of variation for five years. This study uses the coefficient of variation for
four years ending with 2006. The higher the coefficient of variation, the lower
dividends yield.
4. Results
Like Dickens et al. (2003), this study uses ordinary least squares to test the model.
Tables II-VI summarize the regression results. The replication model in Table II uses
variables almost identical to the Dickens et al. model. This studys results differ in the
adjusted R2 for the basic model and for its individual parameters. The time frame and
data sources differ, leading to differences in the results, but not in the models
implications.
In the full model regression, only the intercept, volatility, and dividend 2005 are
significant at better than p < 0.05. The capital to asset ratio and log of revenue are
significant at the p < 0.1 level. Dividend 2005 is significant with a p < 0.0001. Future
earnings, market to book and insiders are not significant, although insiders t-ratio

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is 1.64, or a p value of 0.1051. The results differ from Dickens et al. (2003) in which all
but capital to asset ratio and volatility were significant.
Dividend 2005s relationship with 2006 dividend yields is positive and the most
significant of all independent variables. In a regression containing the two dividend
variables yields and dividend 2005 as the independent variable, the adjusted R2 is 0.49
with its significance at better than the p < 0.0001 level. BHCs paying dividends in 2005
likely paid a similar dividend in 2006. BHCs in the sample show a strong connection
between prior dividends and todays dividends. Another model may discern whether
the connection arises from Fama and Babiak (1968) with its premise or of the signaling
hypothesis proposed by Bhattacharya (1979) and Miller and Rock (1985).
Capital to assets is positive and significant at p < 0.1. Tier 1 capital to total assets is
also positive and with the same significance as capital to assets. Table III summarizes
these results. Dividing Tier 1 capital by risk weighted assets yielded insignificant
results in the full model. The risk component in the dividend decision appears
identified with a basic capital ratio among the sample firms.
The market to book ratio did not perform as well as the annual asset growth
variable in the main model regression. It was almost significant at p < 0.1051. Neither
market to book nor annual asset growth are strong indicators of investment
opportunities in the sample BHCs. Additional study may provide more insight into a
better measure for investment opportunities. The addition of an explicit annual growth
variable did not enhance the trade-offs between paying dividends and reinvesting in
the banks total assets. The variable used was growth in assets over the previous year.
As this variable was not significant and did not improve the model, the results are not
shown. The results are available from the authors on request.
This studys model provides a vehicle to examine the non-linear relationship
between insider holdings and dividend yield. Replacing insider holdings with the
square and the square root of insider holdings in the basic model gives a sense of
existing non-linearities. Each insider variable enters the model in turn and provides
Intercept Mkt to Bk
0.029
(2.09)*

0.0022
(1.34)

LNRev

CoeffVar Equity/assets

0.0020 0.0005
(1.86)** (2.09)*

0.1133
(1.97)**

Insidrs

Bank dividend
policy

505

Div 2005 Future earnings

0.00012 0.024
(1.64)
(7.21)***

0.00087
(0.64)

Table II.
Notes: The regression coefficients are under the relevant variable name. Underneath each
coefficient value is its t-ratio. Superscripts denote the parameters significance. The superscript
*, ** and *** indicate significance at p < 0.05, p < 0.1 and p < 0.0001, respectively

Intercept Mkt to Bk
0.019
(1.03)

0.003
(2.00)*

LNRev

CoeffVar

0.0011 0.00003
(0.89)
(1.84)**

Tier 1/assets
0.1373
(1.79)**

Insidrs

Results for the basic

model adjusted
R2 0.5443

Div 2005 Future earnings

0.00014 0.024
(1.98)*
(7.29)***

0.00109
(0.81)

Table III.
Notes: The regression coefficients are under the relevant variable name. Underneath each
coefficient value is its t-ratio. Superscripts denote the parameters significance. The superscript
*, ** and *** indicate significance at p < 0.05, p < 0.1 and p < 0.0001, respectively

Results for Tier 1/total

assets adjusted
R2 0.5408

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506

Table IV.
Results for insiders
squared model
adjusted R2 0.5454

insight into non-linearities through an examination of changes in other variables and

the models fit as demonstrated by its adjusted R2.
Tables II-VI present the step-by-step development of the enhanced model. Table IV
shows the regression of the model with insiders squared substituting for insider
holdings used in the basic model shown in Table II. The essential signs and levels of
significance remain practically unchanged, except for each significant variable in
Table II having slightly higher t ratios. The insiders squared variable itself is
significant and negative at the p 0.10 level as compared to insiders which is
insignificant [p 0.1051]. There is little change in adjusted R2 between Table II, 0.5443
and Table IV, 0.5454.
In Table V, the insiders square-root variable enters the basic model in place of the
insiders. The relationships across all variables are almost identical with Table IV.
Square root insiders is significant and negative at the p 0.10 level and the adjusted
R2 is also practically unchanged at 0.5467.
In Table VI, all three insider holdings are in the model. Each insider variable is
relevant in explaining bank dividend yield. Prior research supports the proposition
that the insider holdings is positive and significant and both insiders squared and

Intercept

Mkt to Bk

LNRev

CoeffVar

Equity/assets

Insidrs
squared

Div
2005

Future
earnings

0.0258
(1.93)**

0.0021
(1.31)

0.0018
(1.74)**

0.000047
(2.14)*

0.1184
(2.08)*

0.000002
(1.71)**

0.024
(7.37)***

0.00093
(0.68)

Notes: The regression coefficients are under the relevant variable name. Underneath each
coefficient value is its t-ratio. Superscripts denote the parameters significance. The superscript
*, ** and *** indicate significance at p < 0.05, p < 0.1 and p < 0.0001, respectively

Intercept
0.035
(2.29)*
Table V.
Results for square root
of insiders adjusted
R2 0.5467

LNRev

CoeffVar

Equity/assets

Sq Rt
insidrs

Div
2005

Future
earnings

0.0022
(1.38)

0.0022
(2.02)*

0.000045
(2.08)*

0.1092
(1.89)**

0.00122
(1.78)**

0.0232
(7.06)***

0.00087
(0.65)

Notes: The regression coefficients are under the relevant variable name. Underneath each
coefficient value is its t-ratio. Superscripts denote the parameters significance. The superscript
*, ** and *** indicate significance at p < 0.05, p < 0.1 and p < 0.0001, respectively

Intercept

Table VI.
Results for square
root and squares of
insiders adjusted
R2 0.5663

Mkt to BK

0.062
(2.99)*

Mkt
to Bk

LNRev

Sq Rt
CoeffVar Equity/assets insidrs Insidrs

0.0024 0.0029 0.00005

(1.52) (2.56)* (2.32)*

0.1188
(2.09)*

Insidrs
Sq

Div
2005

Future
earnings

0.015 0.0024 0.000016 0.023

0.001
(2.52)* (2.45)* (2.44)*
(6.80)** (0.96)

Notes: The regression coefficients are under the relevant variable name. Underneath each
coefficient value is its t-ratio. Superscripts denote the parameters significance. The superscript
*, ** and *** indicate significance at p < 0.05, p < 0.1 and p < 0.0001, respectively

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square root insiders are negative and significant. The one drawback to this approach is
the problem of multicollinearity. One indicator of multicollinearity is a large increase in
coefficients of other explanatory variables between Table VI and previous ones. The
results of Table VI are very interesting, but not exactly as anticipated. All three insider
variables are significant at less than p 0.02 level. The insider holdings variable is
significant and positive, the insider squared and square root insiders are both
significant and negative. This analysis is clearly indicative of non-linear relationships
between the level of insider holdings and dividend yield in the sample. The signs are
contrary to prior expectations, but they are significant. In order to delve more deeply
and accurately into these relationships requires further examination on a larger
sample. The overall fit of Table VI is slightly better relative to the basic model, with an
Adjusted R2 of 0.5663, as compared to 0.5443.
5. Conclusion
This study proposed to execute two primary objectives. First, to test the Dickens et al.
(2003) model on explanatory factors for bank dividend policy by using a different
sample, different data sources, and a different time frame from their study. The earlier
model is quite robust and this studys results support several of the explanatory factors
proposed by Dickens et al. Using the BHCs dividends as the dependent variable, this
study finds four of the seven variables in the 2003 model are significant. Earnings
volatility and natural log of revenue are significant and negative and past dividends
paid and equity-to-assets are both significant and positive. The Dickens et al (2003)
model found five of the seven variables significant. It must be acknowledged that this
studys basic model and the Dickens et al one differ in the significance of individual
variables. Summary statistics for the samples used in the 2003 and 2008 models
(Tables II to VI and I, respectively) show size and scale variations in explanatory
variables across the studies which could account for differences in the results. Overall,
based on this studys results, the Dickens et al. model appears robust.
This studys second objective is to determine whether insider holdings of BHCs
have a non-linear relationship with bank dividend yields and if that relationship might
explain observed anomalies. The results from several models lead us to conclude a nonlinear relationship exists between insider holdings and bank dividend yield. Further
research on the exact nature of the relationship is necessary to achieve generalizable
results.
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Corresponding author
John Theis can be contacted at: theis_john@colstate.edu

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