International Journal of Economics and Finance; Vol. 4, No. 9; 2012 ISSN 1916-971X E-ISSN 1916-9728 Published by Canadian Center of Science and Education 130 Propensity to Pay Dividends: Evidence from US Banking Sector Jamal Al-Khasawneh 1 , Mohammad Shariff 1 & Khalid Al-Zubi 2 1 Department of Economics and Finance, College of Business Administration, Gulf University for Science and Technology (GUST), Hawally, Kuwait 2 Department of Finance and Banking, Faculty of Economics and Administrative Sciences, The Hashemite University, Zarqa, Jordan Correspondence: Jamal Al-Khasawneh, Department of Economics and Finance, College of Business Administration, Gulf University for Science and Technology (GUST), Hawally, Kuwait. Tel: 965-2530-7440. E-mail: Alkhasawneh.j@gust.edu Received: June 12, 2012 Accepted: July 23, 2012 Online Published: September 1, 2012 doi:10.5539/ijef.v4n9p130 URL: http://dx.doi.org/10.5539/ijef.v4n9p130 Abstract Using Fama and French’s (2001) methodology, this paper attempts to shed light on dividend policy and propensity to pay cash dividends implemented by U.S. commercial banks as a possible alternative choice for dividend-seeking investors. The results show that most banks pay dividends at increasing rates, more banks have started paying dividends, while a few have stopped paying dividends. The findings also indicate that the main explanatory variables in predicting cash dividends are: the total assets, return on equity, and equity to liability ratio. Keywords: dividends, dividend policy, propensity to pay, banking/financial institutions 1. Introduction Since the publication of the seminal paper on the irrelevance of dividend policy by Modigliani and Miller (1961), the dividend policy of firms has been one of the most important classical research topics in the finance literature. Fama and French (2001) provided empirical evidence that the relative number of dividend-paying firms has been decreasing over the last few decades. This is in part due to the changing characteristics of publicly traded firms. Start-up firms with low profitability and strong growth opportunities have developed a tendency to avoid initiating dividend payments. Regardless of this changing characteristic, a tendency has also been found for firms to be less likely to pay dividends. DeAngelo, DeAngelo, and Skinner (2004) stated that the evidence of decline in the number of dividend payers is confined to industrial firms and is not applicable to financial/utility firms. They also show that the number of dividend payers from financial/utility (industrial) firms has increased (declined) by 9.5% (58.9%) and that the banking industry accounts for 11.20% of the total market capitalization of all dividend-paying firms, and the dividends paid by them account for 14.64% of the total dividends paid by all public firms. Acharya, Gujral, and Shin (2011) have pointed out that banks continued to pay large dividends to their stockholders even after the 2008 economic crisis, “despite expecting large credit losses, breaching the principle of priority of debt over equity. This type of behavior can lead to default, and should therefore be avoided by banks”. Empirical evidence indicates that the dividend policy for banks is quite crucial. It signals quality in a banking environment that is best characterized by significant information asymmetry (Miller and Rock, 1985; Bessler and Nohel, 1996; 2000; Boldin and Leggett, 1995; Slovin, Sushka and Polonchek, 1999; Cornett, Fayman, Marcus, and Tehranian, 2011). Onali (2012) discusses the multidimensional aspect of the asymmetric information problems faced by banks and bank customers, shareholders, and examiners. This problem is an important aspect in hypothesizing that banks are different. Banks’ shareholders usually expect regular dividends from these financial institutions as these institutions are perceived to be highly liquid. Frequent announcements of stable or growing dividends may therefore be utilized by banks as a means for providing positive information about the bank’s solvency to all stakeholders. Hence, dividends provide some positive information about the bank’s current success and about the future viability of the bank and vice versa. Despite the extended literature on the overall issue of dividend policy, most studies exclude regulated firms from their analyses. High financial leverage and tight financial sector regulation implied that financial institutions are