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Payout Restrictions and Bank Risk-Shifting
What are the effects of payout restrictions on bank risk-shifting? To answer this question, we exploit the restriction policies imposed during the Covid-crisis on US banks as a natural experiment. Using a high-frequency differences-in-differences empirical strategy, we show that, when share buybacks are banned and dividends restricted, banks’ equity prices fall while their CDS spreads and bond yields decline. These results indicate that payout restrictions shift risk from debtholders into equityholders. Consistent with a risk-shifting channel, we find that these effects revert once ...