We provide evidence on optional stock dividends, a mechanism that allows shareholders to choose between cash dividends and the equivalent number of new shares in lieu of cash. We find that, in contrast to dividend cuts, shareholders do not view this option as bad news. When firms offer optional stock dividend in lieu of cash dividends, the market does not react negatively. Facing the choice between cash and stock dividend, shareholders choose 55% of the total dividend in the form of stock dividend. Our findings suggest that firms that are more committed to paying dividends are more likely to offer optional stock dividends to their shareholders.

ABSTRACT We analyze lender of last resort (LOLR) lending during the European sovereign debt crisis. Using a novel data set on all central bank lending and collateral, we show that weakly capitalized banks took out more LOLR loans and used riskier collateral than strongly capitalized banks. We also find that weakly capitalized banks used LOLR loans to buy risky assets such as distressed sovereign debt. This resulted in a reallocation of risky assets from strongly to weakly capitalized banks. Our findings cannot be explained by classical LOLR theory. Rather, they point to risk taking by banks, both independently and with the encouragement of governments, and highlight the benefit of unifying LOLR lending and bank supervision.