Determinant Factors of Dividend Policy Using a Structural Equation Modeling Approach: A Study of the Banking Sector of Bangladesh

Abstract

One of the most controversial problems of modern corporate finance is the dividend policy, which can be described as a trade-off between the size of retained earnings and the amount of securities issued. When deciding on a dividend policy, firms take several aspects into account. The current study looks at the elements that influence banks’ dividend distribution decisions. A panel dataset of 22 banks listed on the Dhaka Stock Exchange (DSE) from FY 1999 to 2018 was used for the empirical analysis. The results are inferred using structural equation modeling (SEM). The findings show that retained earnings, leverage, and size are important factors in determining dividend payouts, whereas earnings per share, cash flow, sales growth, liquidity, institutional ownership, sponsor ownership, individual ownership, risk, age, relative tax, return on assets, investment opportunity, and retained earnings are insignificant while taking dividend decision. The findings also support the notion that dividend payouts have reduced the agency problem and that management utilizes them as a signaling device. Furthermore, the findings show that the majority of dividend policy theories that are traditionally based on developed markets can be applied to emerging market countries like Bangladesh, because the majority of the characteristics found to be important in determining dividend policies in Bangladesh are consistent with those established in developed economies. This study's findings can be used by financial managers and policymakers to make proper dividend decisions. They can also assist investors in making portfolio selections based on sectoral dividend payment patterns.