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14-01-2023

Shareholder Litigation Rights and Bank Dividends

Authors: Hiep Ngoc Luu, Tram-Anh Nguyen, Dung Thi Thuy Nguyen, Lan Thi Mai Nguyen, Edie Johari

Published in: Journal of Financial Services Research

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Abstract

We use the staggered adoption of Universal Demand (UD) laws, which significantly reduces the shareholder litigation rights of listed banks incorporated in 23 US states during the period from 1989 to 2005, as a quasi-natural experiment to examine the impact of shareholder litigation rights on bank dividends. The results of the difference-in-difference analysis show that weakened shareholder litigation rights lead to an increase in bank dividends. Further, we find that the impact of UD laws is only evident for banks with greater agency conflicts and higher information asymmetry. However, we find no evidence that litigation rights affect banks’ share repurchases.

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Footnotes
1
One may be concerned that some banks in our sample may be shielded from the UD laws in accordance with the preemption laws introduced by the OCC in 2003. However, the state UD laws are not subject to these preemption laws (OCC 2004). This exemption further ensures our identification strategy as our sampled banks are not shielded from the state UD laws. For details, please refer to: “Office of the Comptroller of the Currency (2004). OCC Issues Final Rules on National Bank Preemption and Visitorial Powers; Includes Strong Standard to Keep Predatory Lending out of National Banks.”
 
2
These events are: 1) director-liability-reduction laws; 2) Ninth Circuit Court Appeals; 3) Nevada’s 2001 legislation on managers’ liabilities; 4) Control Share Acquisition laws; 5) the Business Combination laws; 6) the Fair Price laws; and 7) the Directors’ Duties law; the Poison Pill laws.
 
3
Some other papers also use the dividend to earnings ratio as a measure of dividend payouts. However, we do not use this measure because a large number of studies (e.g., Curcio and Hasan 2013) have pointed out that banks are highly incentivized to manipulate earnings and they can easily do so via the use of discretionary loan loss provisions. Additionally, the use of earnings in the denominator could lead to the potential problem of negative dividend ratios when banks suffer losses. We do, however, also use several alternative measures of dividend payouts and present these results in subSect. 4.4 Robustness tests.
 
4
Data for the state-level adoption years of the director-liability-reduction laws were retrieved from Basu and Liang (2019).
 
5
See: Karpoff and Wittry (2018, Table 2) for the detailed timing when these anti-takeover laws became effective in different US states.
 
6
See: US Congress, 2002. The Sarbanes–Oxley Act of 2002. Public Law No. 107–204. Government Printing Office, Washington, D.C
 
7
For robustness checks, we also proxy for agency conflicts with the flotation costs of issuing common stocks (Flotation Costs). These are measured as a bank’s standard deviation from the average monthly stock returns. The regression results remain qualitatively unchanged and is available on request.
 
8
We require that a bank has to appear in all three years before the adoption of UD laws in each cohort to be classified as bank with high/low inefficiency. Thus, the total number of observations of the two subsamples is smaller than the size of our original sample.
 
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Metadata
Title
Shareholder Litigation Rights and Bank Dividends
Authors
Hiep Ngoc Luu
Tram-Anh Nguyen
Dung Thi Thuy Nguyen
Lan Thi Mai Nguyen
Edie Johari
Publication date
14-01-2023
Publisher
Springer US
Published in
Journal of Financial Services Research
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI
https://doi.org/10.1007/s10693-023-00397-4

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