The Impact of Dividend Policy on Firm Performance under High or Low Leverage; Evidence from Pakistan
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Published:
2024-04-11
Keywords:
Firm Performance, LM Test, Dividend Policy, KSE, Debt,
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Abstract
This study aims to find out the impact of dividend policy on firm performance under high or low debt for all the non-financial sector companies listed on Karachi Stock Exchange. This study has utilized the secondary data published by State Bank of Pakistan in the shape of Balance Sheet Analysis of non-financial sector for the period of 2006 to 2001 with the sample size consisting of 122 companies. Panel data models have been applied to examine the impact of dividend policy on firm performance in the presence of high or low leverage. Mainly it has focused on using two performance measures i.e. Tobin’s Q and Return on Equity both as dependent variables while the control variable includes the firm size and growth with debt as the moderating variable. Breusch and Pagan Lagrangian multiplier test for random effects suggested that OLS is better than fixed effect. It is found that the dividend payout ratio has got significant positive relationship with Tobin’s Q and ROA when there is both less and high debt. In addition, there is no moderating effect of debt on the relationship between dividend payout ratio and firm performance of all the non-financial firms listed in KSE.
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Research Article
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How to Cite
The Impact of Dividend Policy on Firm Performance under High or Low Leverage; Evidence from Pakistan. (2024). Journal of Management Info, 2(4), 16-25. https://doi.org/10.31580/jmi.v8i1.48
References
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Amidu, M. and Abor, J. 2006. Determinants of dividend payout ratios in Ghana. J. of Risk Finance. 7 (2):136-145
Allen, F., A.E. Bernardo. and I. Welch. 2000. A theory of dividends based on tax clienteles. The J. of Finance. 55:2499–2536
Aghaee, M.A. and A. Shakeri. 2010. Using ratios of liquidity, cash flow and accrual accounting in predicting future, Conference on Noor Azad University
Amjed, S. 2011. Impact of financial structure on firm’s Performance: A study of Pakistan’s Chemical Sector. Society of Interdisciplinary Business Research (SIBR). Conference on Interdisciplinary Business Research
Ang, S.J., A. Fatemi. and A. Tourani-Rad. 1997. Capital structure and dividend policies of Indonesian firms Capital. Pacific-Basin Finance J. 5:87-103.
Areddy, J., L. Bai. and J. Leow. 2008. China seeks to lift market by raising stake in major banks. The Wall Street J. Eastern Edition. 68:252
Agrawal, A. and Jayaraman. N. 1994. The dividend policies of all- equity firms: a direct test of the free cash flow theory. Managerial and decision economics. 5(2): 139—148
Aggarwal, R. and A.N. Kyaw. 2010. Capital structure, dividend policy, and multinationality: Theory versus empirical evidence. International Review of Financial Analysis. 19:140–150
Baba, N. 2009. Increased presence of foreign investors and dividend policy of Japanese firms. Pacific-Basin Finance J. 17:163–174
Baker, K.H. and D.M. Smith. 2006. In search of a residual dividend policy. Review of Financial Economics. 15:1–18
Baker, M. and J. Wurgler. 2004. The catering theory of dividend. Journal of Finance. 3:1125-1165
Brav, A., R.J. Graham., R.C. Harvey. and R. Michaely. 2005. Payout policy in the 21st century. J. of Financial Economics. 77:483–527
Bhattacharya, S. 1979. Imperfect information, dividend policy, and the ‘bird in the hand fallacy. Bell J. of Economics. 10(1):259–270
Chen, Z., Y. Cheung., A. Stouraitis., and W.S.A. Wong. 2005. Ownership concentration, firm performance, and dividend policy in Hong Kong. Pacific-Basin Finance J. 13:431– 449
Choy, L.H., A.F. Gul. and Yao. 2011. Does political economy reduce agency costs? Some evidence from dividend policies around the world. J. of Empirical Finance. 18:16–35
Cyert, R., S. Kang. and Kmar. 1996. Managerial objectives and firm dividend policy: A behavioural theory and empirical evidence. J. of Economic Behavior and Organization. 31:157-174.
Dzinkowski, R. 2000. The measurement and management of intellectual capital: an
Introduction. Management Accounting (British). 78(2):32
Deni, J. D. and Osobov. 2008. Why do firms pay dividends? International evidence on the determinants of dividend policy. J. of Financial Economics. 89:62– 82
DeAngelo, H. and L. DeAngelo. 2008. The irrelevance of the MM theory dividend irrelevance theorem. J. of Financial Economics. 79:293-316
DeAngelo, H., L. DeAngelo. and Wruck. 2002. Asset liquidity, debt covenants, and managerial discretion in financial distress: the collapse of L.A. Gear. J. of Financial Economics. 64:3-34
Easterbrook, H.F. 1984. Two agency cost explanations of dividends. American Economic Review. 74:650–659
Eriotis, N. 2005. The effect of distributed earnings and size of the firm to its dividend policy: some Greek data. International Business and Economics J. 4(1):67–74
Fama, F.E. and K.P. French. 2000. Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Studies. 15:1-33
Fama, F.E. and K.P. French. 2001. Disappearing dividends: changing from characteristics or lower propensity to pay? J. of Financial Economics. 60:3–43
Frank, Z.M. and V.K. Goyal. 2000. Testing the pecking order theory of capital structure. 11th Annual Financial Economics and Accounting Conference, Hong Kong University
Glen, J.D., Y. Karmokolias., R.R. Miller. and S. Shah. 1995. Dividend policy and behavior in emerging markets, discussion paper no. 26. (International Financial Corporation)
Grullon, G., R. Michaely. and B. Swaminathan. 2002. Are dividends changes a sign of firm maturity? J. of Business.75: 87–424
Gugler, K. 2003. Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment. J. of Banking and Finance. 27(7):1297–1321
Grossman, S. J. and O.D. Hart. 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. J. of Political Economy. 94(4):691-719
Himmelberg, P.C., R.G. Hubbard. and Palia. 1999. Understanding the determinants of managerial ownership and the link between ownership and performance.
Imran, K. 2011. Determinants of dividend payout policy: A case of Pakistan engineering sector. The Romanian Economic J. 14(41):47–60
Imran, K., M. Usman. and Nishat. 2013. Banks dividend policy: Evidence from Pakistan. Economic Modelling. 32:88–90
Javid, A.Y. and Ahmed. 2009. The determinants of dividend policy in Pakistan. International Research J. of Finance and Economics. 29:110–125
Jensen, C.M. and W. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. J. of Financial Economics. 3(4):305–360
Jensen, C.M. (1986). Agency Cost of Free Cash Flow. American Economic Review. 76, 323-329
Kim, J. and S. Jang. 2010. Dividend behavior of lodging firms: Heckman’s two-step approach. International J. of Hospitality Management. 29:413–420
Khan, G.A. 2012. The relationship of capital structure decisions with firm performance: a study of engineering sector of Pakistan. International J. of Accounting and Financial Reporting. 2:2162-3082
Khan, F., Yusoff, R. M., & Khan, A. (2014a). Job Demands, Burnout and Resources in Teaching a Conceptual Review. World Applied Sciences Journal, 30(1), 20-28.
Khan, F., Rasli, A. M., Khan, S., Yasir, M., & Malik, M. F. (2014b). Job Burnout and Professional Development among Universities Academicians. Science International Lahore, 26(4), 1693-1696.
La Porta, R., F. Lopez-de-Silanes., A. Shleifer. and R. Vishny. 2000. Agency problems and dividend policies around the world. J. of Finance. 55:1−33
Lien, Y. and S. Li. 2013. Does diversification add firm value in emerging economies? Effect of corporate governance. J. of Business Research. 66, 2425–2430
Menga, H., K.T. Siu. and H. Yangd. 2013. Optimal dividends with debts and nonlinear insurance risk processes Insurance. Mathematics and Economics.53:110–121
Memon. F., N.A. Bhutto. and G. Abbas. (2012). Capital structure and firm performance: A Case of Textile Sector of Pakistan. Asian J. of Business and Management Sciences. 1(9): 09-15
Modigliani, F. and M. Miller. 1958. The cost of capital, corporate finance and the theory of investment. American Economic Review. 48:261-97
Modigliani, F. and M. Miller. 1963. Corporate income taxes and the cost of capital: a correction. American Economic Review. 53:443-53.
Morck, R., A. Shleifer, and R.W. Vishny. 1988. Management ownership and market valuation: An empirical analysis. J. of financial Economics. 20, 293–315
Pandey, I.M. (2003). Corporate dividend policy and behaviour the Malaysian evidence. Asian Academy of Management J. 8(1):17 – 32
Qureshi, M., Khan, N., Rasli, A., & Zaman, K. (2015). The battle of health with environmental evils of Asian countries: promises to keep. Environmental Science and Pollution Research, 1-8.
Siddiqui, A.M. and A. Shoaib. 2011. Measuring performance through capital structure: Evidence from banking sector of Pakistan. African J. of Business Management. 5(5): 1871-1879
Shleifer, A. and Vishny R.W. 1986. Large Shareholders and Corporate Control. J. Political Economics. 94:464-488
Stewart, T.A. 1997. Intellectual capital: the new wealth of organizations. (1isted) newyork double day/currency
Stultz, R. 1990. Managerial discretion and optimal financing policies. The J. of Financial Economics. 26:3-27
Tobin, J. 1969. A general equilibrium approach to monetary theory. Journal of Money, Credit, and Banking. 1:15-29
Wang, X., D. Manry. and S. Wandler. 2011. The impact of government ownership on dividend policy in China. Advances in Accounting, incorporating Advances in International Accounting. 27:366–372
Zoppa, A. and G.P.R. McMahon. 2002. Pecking order theory and the financial structure of manufacturing SMEs: From Australia’s Business Longitudinal Survey, Adelaide, South Australia: School of Commerce, Flinders University of South Australia.
Abor, J. 2005. The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana, J. of Risk Finance. 6:438-47
Ahmad, J.A.H. 2008. The impact of financing decision, dividend policy, corporate ownership on firm performance at presence or absence of growth opportunity: a panel data approach, evidence from Kuala Lumpur Stock Exchange. 21st Australasian Finance and Banking Conference
Amidu, M. and Abor, J. 2006. Determinants of dividend payout ratios in Ghana. J. of Risk Finance. 7 (2):136-145
Allen, F., A.E. Bernardo. and I. Welch. 2000. A theory of dividends based on tax clienteles. The J. of Finance. 55:2499–2536
Aghaee, M.A. and A. Shakeri. 2010. Using ratios of liquidity, cash flow and accrual accounting in predicting future, Conference on Noor Azad University
Amjed, S. 2011. Impact of financial structure on firm’s Performance: A study of Pakistan’s Chemical Sector. Society of Interdisciplinary Business Research (SIBR). Conference on Interdisciplinary Business Research
Ang, S.J., A. Fatemi. and A. Tourani-Rad. 1997. Capital structure and dividend policies of Indonesian firms Capital. Pacific-Basin Finance J. 5:87-103.
Areddy, J., L. Bai. and J. Leow. 2008. China seeks to lift market by raising stake in major banks. The Wall Street J. Eastern Edition. 68:252
Agrawal, A. and Jayaraman. N. 1994. The dividend policies of all- equity firms: a direct test of the free cash flow theory. Managerial and decision economics. 5(2): 139—148
Aggarwal, R. and A.N. Kyaw. 2010. Capital structure, dividend policy, and multinationality: Theory versus empirical evidence. International Review of Financial Analysis. 19:140–150
Baba, N. 2009. Increased presence of foreign investors and dividend policy of Japanese firms. Pacific-Basin Finance J. 17:163–174
Baker, K.H. and D.M. Smith. 2006. In search of a residual dividend policy. Review of Financial Economics. 15:1–18
Baker, M. and J. Wurgler. 2004. The catering theory of dividend. Journal of Finance. 3:1125-1165
Brav, A., R.J. Graham., R.C. Harvey. and R. Michaely. 2005. Payout policy in the 21st century. J. of Financial Economics. 77:483–527
Bhattacharya, S. 1979. Imperfect information, dividend policy, and the ‘bird in the hand fallacy. Bell J. of Economics. 10(1):259–270
Chen, Z., Y. Cheung., A. Stouraitis., and W.S.A. Wong. 2005. Ownership concentration, firm performance, and dividend policy in Hong Kong. Pacific-Basin Finance J. 13:431– 449
Choy, L.H., A.F. Gul. and Yao. 2011. Does political economy reduce agency costs? Some evidence from dividend policies around the world. J. of Empirical Finance. 18:16–35
Cyert, R., S. Kang. and Kmar. 1996. Managerial objectives and firm dividend policy: A behavioural theory and empirical evidence. J. of Economic Behavior and Organization. 31:157-174.
Dzinkowski, R. 2000. The measurement and management of intellectual capital: an
Introduction. Management Accounting (British). 78(2):32
Deni, J. D. and Osobov. 2008. Why do firms pay dividends? International evidence on the determinants of dividend policy. J. of Financial Economics. 89:62– 82
DeAngelo, H. and L. DeAngelo. 2008. The irrelevance of the MM theory dividend irrelevance theorem. J. of Financial Economics. 79:293-316
DeAngelo, H., L. DeAngelo. and Wruck. 2002. Asset liquidity, debt covenants, and managerial discretion in financial distress: the collapse of L.A. Gear. J. of Financial Economics. 64:3-34
Easterbrook, H.F. 1984. Two agency cost explanations of dividends. American Economic Review. 74:650–659
Eriotis, N. 2005. The effect of distributed earnings and size of the firm to its dividend policy: some Greek data. International Business and Economics J. 4(1):67–74
Fama, F.E. and K.P. French. 2000. Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Studies. 15:1-33
Fama, F.E. and K.P. French. 2001. Disappearing dividends: changing from characteristics or lower propensity to pay? J. of Financial Economics. 60:3–43
Frank, Z.M. and V.K. Goyal. 2000. Testing the pecking order theory of capital structure. 11th Annual Financial Economics and Accounting Conference, Hong Kong University
Glen, J.D., Y. Karmokolias., R.R. Miller. and S. Shah. 1995. Dividend policy and behavior in emerging markets, discussion paper no. 26. (International Financial Corporation)
Grullon, G., R. Michaely. and B. Swaminathan. 2002. Are dividends changes a sign of firm maturity? J. of Business.75: 87–424
Gugler, K. 2003. Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment. J. of Banking and Finance. 27(7):1297–1321
Grossman, S. J. and O.D. Hart. 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. J. of Political Economy. 94(4):691-719
Himmelberg, P.C., R.G. Hubbard. and Palia. 1999. Understanding the determinants of managerial ownership and the link between ownership and performance.
Imran, K. 2011. Determinants of dividend payout policy: A case of Pakistan engineering sector. The Romanian Economic J. 14(41):47–60
Imran, K., M. Usman. and Nishat. 2013. Banks dividend policy: Evidence from Pakistan. Economic Modelling. 32:88–90
Javid, A.Y. and Ahmed. 2009. The determinants of dividend policy in Pakistan. International Research J. of Finance and Economics. 29:110–125
Jensen, C.M. and W. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. J. of Financial Economics. 3(4):305–360
Jensen, C.M. (1986). Agency Cost of Free Cash Flow. American Economic Review. 76, 323-329
Kim, J. and S. Jang. 2010. Dividend behavior of lodging firms: Heckman’s two-step approach. International J. of Hospitality Management. 29:413–420
Khan, G.A. 2012. The relationship of capital structure decisions with firm performance: a study of engineering sector of Pakistan. International J. of Accounting and Financial Reporting. 2:2162-3082
Khan, F., Yusoff, R. M., & Khan, A. (2014a). Job Demands, Burnout and Resources in Teaching a Conceptual Review. World Applied Sciences Journal, 30(1), 20-28.
Khan, F., Rasli, A. M., Khan, S., Yasir, M., & Malik, M. F. (2014b). Job Burnout and Professional Development among Universities Academicians. Science International Lahore, 26(4), 1693-1696.
La Porta, R., F. Lopez-de-Silanes., A. Shleifer. and R. Vishny. 2000. Agency problems and dividend policies around the world. J. of Finance. 55:1−33
Lien, Y. and S. Li. 2013. Does diversification add firm value in emerging economies? Effect of corporate governance. J. of Business Research. 66, 2425–2430
Menga, H., K.T. Siu. and H. Yangd. 2013. Optimal dividends with debts and nonlinear insurance risk processes Insurance. Mathematics and Economics.53:110–121
Memon. F., N.A. Bhutto. and G. Abbas. (2012). Capital structure and firm performance: A Case of Textile Sector of Pakistan. Asian J. of Business and Management Sciences. 1(9): 09-15
Modigliani, F. and M. Miller. 1958. The cost of capital, corporate finance and the theory of investment. American Economic Review. 48:261-97
Modigliani, F. and M. Miller. 1963. Corporate income taxes and the cost of capital: a correction. American Economic Review. 53:443-53.
Morck, R., A. Shleifer, and R.W. Vishny. 1988. Management ownership and market valuation: An empirical analysis. J. of financial Economics. 20, 293–315
Pandey, I.M. (2003). Corporate dividend policy and behaviour the Malaysian evidence. Asian Academy of Management J. 8(1):17 – 32
Qureshi, M., Khan, N., Rasli, A., & Zaman, K. (2015). The battle of health with environmental evils of Asian countries: promises to keep. Environmental Science and Pollution Research, 1-8.
Siddiqui, A.M. and A. Shoaib. 2011. Measuring performance through capital structure: Evidence from banking sector of Pakistan. African J. of Business Management. 5(5): 1871-1879
Shleifer, A. and Vishny R.W. 1986. Large Shareholders and Corporate Control. J. Political Economics. 94:464-488
Stewart, T.A. 1997. Intellectual capital: the new wealth of organizations. (1isted) newyork double day/currency
Stultz, R. 1990. Managerial discretion and optimal financing policies. The J. of Financial Economics. 26:3-27
Tobin, J. 1969. A general equilibrium approach to monetary theory. Journal of Money, Credit, and Banking. 1:15-29
Wang, X., D. Manry. and S. Wandler. 2011. The impact of government ownership on dividend policy in China. Advances in Accounting, incorporating Advances in International Accounting. 27:366–372
Zoppa, A. and G.P.R. McMahon. 2002. Pecking order theory and the financial structure of manufacturing SMEs: From Australia’s Business Longitudinal Survey, Adelaide, South Australia: School of Commerce, Flinders University of South Australia.