Theories and Factors Followed for Setting Dividend Policy: Empirical Evidence from Pakistani Banks
Keywords:
Dividend policy, banking sector, Pakistan Stock Exchange (PSX), Bank Specific Actors, Macroeconomic FactorAbstract
Purpose: The main purpose of this study is to examine dividend theories and factors
followed by banks in Pakistan for setting dividend policy from 2005 to 2015.
Methodology/Design: Panel regression is used on annual data to check the impact of
different factors on dividend policy of 24 Pakistani banks.
Findings: The results of study reveal that banks in Pakistan follow the dividend
smoothing hypothesis, life cycle theory, signaling theory and pecking order theory
while setting dividend policies. The results also highlight that profitability; investment
opportunities, last year dividend, growth and loan deposit ratio have significant
influence on dividend policy of Pakistani banks.
Implications: In the light of these results, it is recommended that management of
banks needs to look into these factors while formulating dividend policy of their
respective banks. By catering these factors they are in a position to set optimal
dividend policy which not only fulfills banks’ growth and investment needs, but also
satisfy investors’ need of return.
Limitations: This study uses only listed commercial banks of Pakistan. All other i.e.
specialized banks are excluded in this study.
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