Academic journal article International Journal of Business

Factors Influencing Corporate Dividend Decision: Evidence from Jordanian Panel Data

Academic journal article International Journal of Business

Factors Influencing Corporate Dividend Decision: Evidence from Jordanian Panel Data

Article excerpt


This paper examines the determinants of corporate dividend decisions of publicly quoted companies in Jordan as a case study of an emerging market. The analysis is based on 15-year unbalanced panel data with 1137 firm-year observations covering the period between 1989 and 2003. The study develops five research hypotheses and used the general-to-specific modelling approach to choose between the competing hypotheses. We estimate the determinants for a given firm to pay dividends to its shareholders through Probit specifications. The factors that affect dividend policy in developed stock markets seem to apply for this emerging market. For example, factors such as size, profitability, and age increase the likelihood to pay dividends. Financial leverage decreases the probability to pay dividends. Taken together, the findings provide support for the agency costs hypothesis and are broadly consistent with the pecking order hypothesis.

JEL Classification: G35, C23

Keywords: Dividend policy; Agency costs; Panel data; Probit; Amman Stock Exchange


While the argument of the irrelevance of corporate dividend policy in perfect capital markets has been very important in financial theory, there is also much controversy about dividend policy in the real world where market imperfections exist. The presence of information asymmetry, agency problems, taxes, and transaction costs all seem to make dividend policy matter. A large body of theoretical and empirical research has attempted to identify the determinants of corporate dividend policy. To date, however, there is no consensus about what factors affect corporate payout policy. The issue gets even more complicated when it comes to emerging markets. This study attempts to provide an insight into dividend policy in one emerging market, namely the Amman Stock Exchange (ASE), where there is a lack of evidence about the determinants of corporate dividend decisions.

Following Miller and Modigliani's (1961) pioneering dividend irrelevance hypothesis, financial economists have advanced a number of contradicting theories in an attempt to explain why corporate dividend policy does seem to matter in practice. Some theories have developed around the proposition that dividend policy is relevant due to the existence of (differential) taxes (see, for example, Litzenberger and Ramaswamy, 1979, Poterba and Summers, 1984, and Barclay, 1987). Others argue that clientele effects matter in dividend policy (see, for example, Pettit, 1977, Scholz, 1992, and Allen et al., 2000). Another dividend policy hypothesis suggests that dividend policy is affected by other market imperfections such as information asymmetries and agency costs. The former, known as signalling theory, predicts that firms can convey information to the market by paying dividends (see, for example, Bhattacharya, 1979, Miller and Rock, 1985, and Bali, 2003). The latter, known as agency theory, argues that dividends can reduce the costs of shareholder-manager (or controlling-minority shareholder) conflict (see, for example, Rozeff, 1982, Easterbrook, 1984, Jensen, 1986, and Alli et al., 1993) (1). Debate between these theoretical models remains unresolved. An important observation to emerge from this literature, however, is that once dividend policy is not irrelevant, there are many possible factors that may act as a determinant of dividend policy. Importantly also, the literature has concentrated mostly on dividend policy in developed capital markets. Both the unresolved nature of the theoretical debate, and relative neglect of dividend policy in developing capital markets motivated a consideration of the potential factors that may affect dividend policy in the case of Jordan.

The patterns of corporate payout policies not only vary over time but also across countries, especially between developed and emerging capital markets. Glen et al. (1995) found that dividend policies in emerging markets differed from those in developed markets. …

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