Conference Agenda

We develop a dynamic model of banks whose managers have superior information about
the impact of a pending shock to their cash holdings and can signal their type through
their payout policies. Credible signaling for unaffected banks requires an aggressive
payout policy to disincentives mimicking by affected banks. Signaling or mimicking
lowers the market value, increases the default risk of the average bank, and shifts
value between banks. The strategic distortion caused by asymmetric information
introduces another dimension to the trade-off between profitability and safety associated
with payout restrictions. In effect, payout restrictions can lead to a less safe banking
industry.

This paper investigates the behavior of stock prices around the ex-dividend date in Europe over the period 2018-2022. In the early months of the COVID-19 pandemic in 2020, an important fraction of firms cut, suspended or reduced their dividend payments, leading to a shortage. We find that the magnitude of abnormal returns is significantly larger during this period compared to regular times as dividend-seeking investors searched for the remaining payers. Our results are consistent with a price pressure explanation for the abnormal returns observed around the ex-date.

Using a comprehensive sample of every open market share buyback trade in the UK, where it is required to be reported daily and prior to the start of the next trading day, I find that stock prices adjust to the daily disclosure of share buybacks. Although the reaction to each buyback disclosure is only a few basis points (5-25), due to the thousands of buybacks this reaction becomes economically significant. Disclosures of buybacks that occur at least three trading days apart lead to 86.5% annualized excess stock returns. Daily buyback disclosures also improve liquidity. For instance, they reduce bid-ask spreads by 20-40 basis points. I also find that it is the disclosure itself that matters most for investors and to a lesser extent the price paid for these buybacks, but not the size of buybacks. Finally, daily disclosures of buyback trades have a transient market effect of only a few days.