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Moral Hazard, Dividends, and Risk in Banks


  • Enrico Onali

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    • Address for correspondence: Bangor Business School, Bangor University, LL57 2DG. e-mail:

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    • The author is from the Bangor Business School, Bangor University. The author wishes to thank Andrew Stark (the Editor), an anonymous referee, John Goddard, Klaus Schaeck, Bob DeYoung, David Roodman, Clovis Rugemintwari, André Güttler, Balasingham Balachandran, Andrea Sironi, Iftekhar Hasan, Jane Ihrig, Alberto Cybo-Ottone, Philip Molyneux, Jonathan Williams, Owain ap Gwilym, Lynn Hodgkinson, Graham Partington, Tim Zhou, Angelo Zago, Sven Bornemann, Giuseppe Torluccio, Andi Duqi, Brunella Bruno, and participants at the AIDEA Bicentenary Conference, XX Tor Vergata Conference in Money Banking and Finance, the 8th annual meeting of Eurofidai, the 37th annual meeting of the European Finance Association, the 22nd Australasian Finance and Banking Conference, the UKEPAN Conference, and seminars at the University of Bologna and at Bangor University. A previous version of the paper was awarded the Young Economist Session prize at the XX Tor Vergata Conference in Money Banking and Finance. This paper was previously circulated under the titles: ‘Dividends and Risk in European Banks' and ‘Dividend Policy and Risk in Banks' (Paper received February, 2012, revised version accepted October, 2013).


In non-financial firms, higher risk taking results in lower dividend payout ratios. In banking, public guarantees may result in a positive relationship between dividend payout ratios and risk taking. I investigate the interplay between dividend payout ratios and bank risk-taking allowing for the effect of charter values and capital adequacy regulation. I find a positive relationship between bank risk-taking and dividend payout ratios. Proximity to the required capital ratio and a high charter value reduce the impact of bank risk-taking on the dividend payout ratio. My results are robust to different proxies for the dividend payout ratio and bank risk-taking.