Assistant Professor Drew Peabody at Elon’s Business School explores how banks use dividends—a key form of shareholder payout—to convey strength to investors.
Banks, like other companies, often return value to their shareholders by paying them directly through dividends or by buying back their shares, known as share repurchases. But these actions are not just about rewarding investors. They also send important signals about a company’s financial health.
Drew Peabody, assistant professor of finance at the Martha and Spencer Love School of Business, co-authored research titled “Do dividends and share repurchases convey information about financial strength? An exploration of the disparities between banks and industrial firms,” published in the Journal of Financial Research. Peabody reveals how these payouts work differently for banks than other companies.
The study reveals that while both banks and industrial firms use shareholder payouts to signal financial health, this signal is more pronounced for banks. Additionally, it highlights an asymmetry in these signals: dividend cuts weigh more heavily on perceptions of financial strength for banks, whereas the opposite holds for industrial firms.
Other Key Insights from the Study:
- Dividends as a core signal of stability for banks: Unlike other types of companies, banks use consistent dividend payments as a crucial signal of their strength and reliability. Because a bank’s finances can be complex and hard to assess, steady dividends help reassure investors of its ability to navigate tough economic conditions.
- Buybacks: a secondary tool for banks: While industrial firms can use share buybacks interchangeably with dividends, buybacks don’t carry the same weight for banks. Instead, banks use them more as a fallback to maintain consistent dividends, reinforcing their distinctive approach to signaling stability.
The research was co-authored with Yi Zheng, assistant professor at the State University of New York, and Jinglin Jiang, associate professor at Sonoma State University.
Before joining Elon University in 2021, Peabody was a faculty member at the University of Texas Dallas. He currently teaches Advanced Managerial Finance, Venture Capital Financing, and Finance Foundations, and his research focuses on areas including corporate financing, valuation, financial technology, and venture capitalism.
In 2023, he received the Love School of Business Dean’s Award for Excellence in Scholarship and also co-advised Elon’s student team for the Venture Capital Investment Competition.