The Effect of Payout Restrictions in the Danish Banking Sector

Abstract

This thesis provides an extensive analysis of the payout policy of Danish banks from 2000-2022 leading to a thorough investigation of the impact of payouts in times of crisis. The latter is analysed by applying the event study methodology to the recommendation in 2020 not to pay dividends or buy back shares by The Danish FSA as well as the measures made during the financial crisis. The analysis shows that the Danish banks have increased their payouts substantially in the years after the financial crisis both through dividends and share buybacks with the vast majority of aggregate payouts stemming from the few largest banks. The findings of the impact of payout restrictions is that the Danish banks on average generated an abnormal return of 2.47% in contrast to studies of euro area banks. This is shown to be a result of high abnormal returns for the banks that did not follow the recommendations and those that had no initially planned payouts. Furthermore, the large banks who were under more pressure to follow the recommendations generated average abnormal returns of 0.76%, which is the main difference from euro area banks where the larger banks suffered substantial losses. In terms of the financial crisis the banks who entered bank package II, including the big banks, generated a similar small average abnormal return of 0.79% while those not participating generated an abnormal return of 3.38%. Further, the analysis indicates that size and ownership structure had the biggest negative impact on the size of abnormal returns during the pandemic while size also had a negative impact during the financial crisis and a higher return on equity resulted in a higher abnormal return