An analysis of the relationship between dividend policies and performance of banking firms post-IPOs

The use of dividends by first time publicly traded firms has dramatically decreased over the past few decades. Firms participating in Initial Public Offerings (IPOs) have no pressure to issue dividends since these firms are considered to be growth-oriented institutions. Financial institutions, however, tend to initiate a dividend soon after the completion of the initial offering. Over 80% of financial institutions participating in an initial public share offering go on to announce a dividend, this is compared to 3.7% for the general market of newly publicly traded firms. Additionally, over 54% of the financial firms are acquired following their IPOs. This paper examines why (unlike industrial IPOs) a large percentage of banking firms offer a dividend soon after the initial stock offering. The paper builds on previous findings which show that bank IPOs which initiate dividends outperform non-initiating bank IPO counterparts. Buy and hold stock returns are used in the previous research as a measure of performance. In this study, comprehensive financial ratio analysis is utilized to measure various aspects of a financial institution's performance in order to more specifically identify those factors that drive the operational outperformance and underperformance of financial institutions in years following the initial equity offering. Additionally, this research examines the relationship between factors that influence the probability of a dividend initiation and factors influencing the probability of a firm becoming an acquisition target. The analysis allows for identification of the strongest firms at the time of the IPO in a risky initial public equity offering market. Furthermore, the financial ratio analysis reveals which measures of financial performance are associated with a bank offering a dividend soon after the IPO and a bank becoming an acquisition candidate.