My Corporate Finance class and I will begin looking at dividend policy tomorrow. Today, Aviva, the insurance giant, announced that it was cutting its dividend by more than a quarter. Subsequent to this announcement its shares fell 12.5% (story here). Why did Aviva shares fall so much? After all, the classic Miller and Modigliani irrelevance theorem suggests that a firm's dividend policy has no effect on the value of the firm. One explanation is that Aviva's managers were signalling to its shareholders that the future prospects of the company are not as good as was once thought. In a paper with Qing Ye and Wenwen Zhan, I find that dividends also played a very important information communication role is early capital markets.
As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of