How Capital Structure influences the Dividend Policy? An Empirical Investigation of Banking Sector

Abstract

The dividend payment policy of the banking sector is slightly different from other
organizations where dividends are paid and future investment needs are met by capturing
more deposits from outside lenders. Therefore, the risk is taken in the money of the
lenders, while the dividends are distributed to the owners. The present study has achieved
two main objectives with respect to the capital structure and dividend payments of the
Pakistani banks. The first objective illustrates that banks with higher financial leverage
pay higher dividends than others. While the second objective envisages that banks that
are not able to obtain external public deposits and that have a greater portion of
institutional loans in their capital structure tend to pay less dividends. In order to
understand these relations between the capital structure and the dividend payments of the
banks, the technique of panel data analysis was used. The annual data of thirty-one of the
banks listed in the charter of the state-owned bank of Pakistan who is continuously
paying dividends for the nine-year period from 2008 to 2016 was used in our analysis.
The results showed that greater financial leverage positively influences the distribution of
dividends. Meanwhile, institutional lending by banks to meet their short-term needs
negatively affects dividends. On the other hand, earnings per share and size also
significantly influence the distribution of dividends. This study will help policymakers and
managers understand the relationship between capital structure and dividend policy
decisions and discover the important determinants of the distribution of dividends from
banks.