Regulatory monitoring and the impact of bank holding company dividend changes on equity returns

The effect of dividend policies made and announced by bank holding companies (BHCs) on equity returns are examined. This study aims to test the signalling theory of dividend behavior, which has traditionally been applied and tested only to large dividend changes, in the context of BHC dividend policies. This theory suggests that unexpected changes in dividend payments are met with an unanticipated abnormal positive security returns. BHCs are used with the assumption that they may provide a model framework for assessing the impact of small dividend changes as a result of their regulatory environment. It was concluded that shareholders may treat a dividend raise as being validated by bank regulators because these regulators have access to publicly unavailable information and the power to limit dividend payments. Thus, the existing cash flow level is seen as sufficient to support any dividend increase. These results prove that small dividend changes lead to share price increases.