Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212207 
Authors: 
Year of Publication: 
2012
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 4/2012
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Bank managers often claim that equity is expensive relative to debt, which contradicts the Modigliani-Miller irrelevance theorem. This paper combines dividend signalling theories and the Diamond-Dybvig bank run model. An opaque bank must signal its solvency by paying high and stable dividends in order to keep depositors tranquil. This signalling may require costly liquidations if the return on assets has been poor, but not paying the dividend might cause panic and trigger a run on the bank. The more equity has been issued, the more liquidations are needed during bad times to pay the expected dividend to each share.
Subjects: 
Bank run
Capital adequacy
Signalling
Dividends
Irrelevance theorem
JEL: 
G21
G35
D82
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-787-0
Document Type: 
Working Paper

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