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The Role of Banks in Dividend Policy


  • Linda Allen,

  • Aron Gottesman,

  • Anthony Saunders,

  • Yi Tang

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    • Linda Allen is a Professor of Economics and Finance at the Zicklin School of Business, Baruch College, at CUNY in New York, NY. Aron Gottesman is an Associate Professor of Finance at the Lubin School of Business at Pace University in New York, NY. Anthony Saunders is a Professor of Finance at the Stern School of Business at New York University in New York, NY. Yi Tang is an Assistant Professor of Finance at Fordham University Graduate School of Business Administration in New York, NY.

  • We thank Anzhela Knyazeva, Diana Knyazeva, David Becher, Jay Dahya, and the participants at the Mid-Atlantic Research Conference in Finance for helpful comments and suggestions. All errors remain our responsibility.


We use loan-specific data to document a significant inverse relation between a firm's dividend payouts and the intensity of a firm's reliance on bank loan financing. Banks limit dividend payouts to protect the integrity of their senior claims on the firm's assets. Moreover, dividend payouts decline in the presence of monitoring by relationship banks, which acts as an effective governance mechanism, thereby reducing the gains from precommitting to costly dividend payouts. Bank monitoring and corporate governance (insider stake and institutional block holdings) are complementary mechanisms to resolve firm agency problems, both reducing the firm's reliance on dividend policy.