Dividends and financial health: Evidence from US bank holding companies

Using a large sample of U.S. bank holding companies from 1986 to 2020, we show that there is a positive relationship between banks? dividends lagged by one quarter and their financial health in the current quarter. We also find that this positive relationship is more pronounced for banks with lower capital adequacy and during the 2007?2009 financial crisis, indicating that it is more necessary for banks with these characteristics to use dividends to convey information regarding their financial health. Our additional analyses suggest that total payout is also positively associated with bank financial health, and that the positive relationship between dividends and financial health applies to private banks as well, but that the magnitude is weaker for them than for public banks. Our overall findings primarily complement a risk reduction hypothesis in corporate finance and bank payout policies.