CEO Power, Government Monitoring, and Bank Dividends

In September 2007, Northern Rock, a British bank, sought and received liquidity support from the Bank of England because of financial difficulties resulting from the global financial crisis. As a result of mounting political pressure that Northern Rock was exploiting taxpayers’ money to pay its shareholders, the bank decided to scrap a £59m interim dividend payout, which had been announced before the beginning of the crisis (Financial Times, 2007).

Recent academic literature (Acharya et al., 2011; Onali, 2014) shows that banks in financial distress pay dividends to exploit government support, and this results in a transfer of bank default risk from   shareholders to taxpayers. Such risk-shifting incentives for banks in financial distress have led to new international regulations that impose restrictions on dividends for undercapitalized banks (Caruana, 2010), similar to Prompt Corrective Actions (PCA) in the U.S.

Because of the risk-shifting problem described above, the governments are incentivized to monitor bank dividend policy. However, imposing restrictions on dividends can reduce the ability of shareholders to monitor under-performing CEOs: dividends reduce the likelihood that CEOs waste cash for personal benefits instead of maximizing shareholder value (John and Knyazeva, 2006). This problem is particularly acute in banks where the CEO is “entrenched”, because an under-performing but powerful (entrenched) CEO is unlikely to be fired, and dividends become even more important to discipline the CEO. In the absence of dividend restrictions, CEO entrenchment generally leads to higher dividend payout ratios (Hu and Kumar, 2004)

The considerations above suggest that because of government monitoring, banks with entrenched CEOs may have lower payout ratios because government monitoring prioritises creditor (and taxpayer) welfare, rather than the welfare of minority shareholders.

In our paper (Onali et al. 2015), we explore the impact of CEO entrenchment and government monitoring on bank dividend policy in 15 countries in the EU. Contrary to the findings of the academic literature on non-financial firms, we provide evidence that CEO entrenchment has a negative impact on bank dividend payout ratios and on bank performance. This finding is consistent with the view that under-performing powerful bank CEOs are incentivized to reduce payout ratios. Government monitoring, which we proxy using a unique dataset on government ownership stakes and the presence of a government officials on the board of directors of the bank, also reduces payout ratios, consistent with the hypothesis that the government puts the interest of bank creditors before the interest of minority shareholders. In other words, our findings support the view that the focus of the government on protecting depositors and taxpayers allows powerful CEOs to distribute low payouts, at the expense of minority shareholders. We also find that higher director ownership leads to better performance but lower payout ratios.

We provide a battery of robustness tests which show that our inferences remain unchanged when we employ different proxies for CEO entrenchment (CEO ownership, CEO tenure, and CEO turnovers unrelated to CEO forced dismissals), and when we consider the impact of taxes or share repurchases.

Our findings are important because they highlight that in banking the level of dividend payout ratios reflects monitoring incentives of different types of stakeholders. Monitoring from minority shareholders tends to have a smaller impact on bank dividend policy than monitoring from the government or the board of directors.


V. V. Acharya, I. Gujral, N. Kulkarni and H. S. Shin, Dividends and bank capital in the financial crisis of 2007-2009 NBER Working Paper (2011).

J. Caruana, ‘Basel III: towards a safer financial system’, Speech at the 3rd Santander International Banking Conference, 15 September 2010, Madrid.

Financial Times, Northern Rock scraps £60m dividend payout, (September 26 2007), available at

A. Hu and P. Kumar, Managerial entrenchment and payout policy, 39 Journal of Financial and Quantitative Analysis 759–790 (2004).

K. John and A. Knyazeva, Payout policy, agency conflicts, and corporate governance, New York University Working Paper (2006).

E. Onali, Moral hazard, dividends, and risk in banks, 41 Journal of Business Finance & Accounting 128–155 (2014).

E. Onali, R. Galiakhmetova, P. Molyneux, and G. Torluccio, CEO power, government monitoring, and bank dividends, Journal of Financial Intermediation, forthcoming (2015).

This post comes to us from Enrico Onali, Senior Lecturer in Finance at the Aston Business School at Aston University, Ramilya Galiakhmetova, PhD candidate in Financial Markets and Intermediaries at the Department of Managementat the University of Bologna, Philip Molyneux, Dean of the College of Business, Law, Education and Social Sciences at Bangor University, and Giuseppe Torluccio, Associate Professor at the Department of Management at the University of Bologna. This post is based on their article, which is entitled “CEO power, government monitoring, and bank dividends” and available here.