Determinants of Dividend Policy in Saudi Listed Companies

Nader Alber Ahmad Alhabtour

Professor of Finance, MSc in Business Administration,
Ain Shams University, Cairo, Egypt. Ain Shams University, Cairo, Egypt.

Abstract
This paper aims at investigating the factors affecting the dividend policy of companies
listed in Saudi stock exchange, as applied on a sample of 67 companies over the period of from
2006 to 2014 using linear and logistic regression models.
Regarding the non-financial companies, using linear regression, results indicate that
profitability, size, age and previous year’s dividend may have a significant positive effect on
dividend payment ratio, while leverage and investment opportunities may have a significant
negative effect. A robustness check using logistic regression supports the effect of profitability,
size, age, and previous year’s dividend on the dividend decision.
Regarding the financial companies, using linear regression, results indicate that size, age,
and previous year’s dividend may have a significant positive effect on dividend payment ratio,
while leverage may have a significant negative effect. A robustness check using logistic regression
supports the effect size on the dividend decision.
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Key words: dividend policy, panel data analysis, Saudi listed companies.

1. Introduction
Dividend policy is one of the most controversial issues in modern corporate finance as it
represents a difficult puzzle that has not been solved yet. According to (Black, 1976) “The harder
we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit
together”. Besides, according to (Brealey & Myers, 2003), dividends policy is considered as one
of the ten important unresolved problems in finance.
Dividend policy according to Lease, John, Kalay, Lowenstein & Sarig, (2000) refers to
the practice that management follows in making dividend payout decision or, in other words, the
size and pattern of cash distributions over time to shareholders. Corporate finance literature
assumes that the main goal of financial management is to maximize the wealth of shareholders, so
managers must seek to achieve this goal through their decisions. The investment and financing
decisions are the two main decision making in corporate finance. Baker & Powel (2008) shows
that there are interactions exist among investment, financing, and dividend decisions. When a firm
changes its dividend payment, it may also have to change one of these other policies. Many
conflicting theories have been argued the dividend policy to answer questions like “Why do
corporations pay dividends?” and “Why do investors pay attention to dividends”. Miller &
Modigliani (1961) provides the dividend irrelevance theory, which assumes that under the perfect
market conditions dividend policy does not affect the shareholders wealth. This viewpoint is

Electronic copy available at: https://ssrn.com/abstract=2909270

harmonious with perfect markets but according to the real world, there are many market
imperfections prevent the achievement perfect market.
This paper tries to investigate the determinants of dividend policy in Saudi Listed
Companies.
In brief, this study tries to answer the following eight main questions:
 Does profitability affect the dividend policy of Saudi listed companies?
 Does liquidity affect the dividend policy of Saudi listed companies?
 Does leverage affect the dividend policy of Saudi listed companies?
 Does growth rate affect the dividend policy of Saudi listed companies?
 Does investment opportunities affect the dividend policy of Saudi listed companies?
 Does size affect the dividend policy of Saudi listed companies?
 Does company age affect the dividend policy of Saudi listed companies?
 Does previous year’s dividend affect the dividend policy of Saudi listed companies?
The paper is arranged as follows: after this introduction, section 2 reviews research
literature that has concerned with dividend policy. Section 3 explains how to measure research
variables and illustrates how to test the hypotheses. Section 4 is for empirical work, presenting
results and discussing how these results answer research questions. Section 5 summarizes the paper
and provides remarks about conclusions.

2. Literature Review
Capastaaf, Klaevoe & Marshal (2004) tests the signaling theory of dividends by
investigating the stock price reaction to dividend announcements on the Oslo Stock Exchange
(OSE), and subsequent changes in the cash flows of the firms involved. The sample consists of 64
firms over the period (1993:1998). The results show that abnormal stock returns are associated
with announcements of dividend changes. The results are robust to alternative models of dividend
expectations, after controlling for the impact of earnings announcements, and are consistent across
sub-periods in the sample. The stock market reaction seems to be pronounced for large, positive
dividend announcements that are followed by permanent cash flow increases.
Fracassi (2008) investigates the price sensitivity to announcement of dividend changes in
companies listed in NYSE, AMEX and NASDAQ stock exchanges from 1963 to 2005. The
Dividend Signaling, the Free-Cash-Flow, the Maturity and the Catering Hypotheses are tested by
performing a multiplicative interaction cross-sectional regression of cumulative abnormal returns
over the characteristics of the companies. The results indicate that increases in dividends may have
a positive impact on stock price as agency problem is reduced with expectations of earning growth.
Anil & Kapoor (2008) examines the determinants of dividend payout ratio of the Indian
Information Technology sector using pooled data for seven years (2000-2006). Results show that
profitability, corporate tax, sales growth and market-to book value ratio do not explain the dividend
payment pattern that existed in the information technology industry. However, cash from operation
and beta have a significant impact on the dividend payment.
Ling, Abdulmutalip, Shahrin & Otman (2008) conducts a study on the dividend policy
of 100 Malaysian public listed companies. The characteristics of the dividend-paying companies

Electronic copy available at: https://ssrn.com/abstract=2909270

include profitability, growth opportunities, firm risk, size, leverage and share distribution. Using
coefficient of correlation, dividend-paying companies are found to be relatively more profitable,
less risky, matured and stable as compared to non dividend-paying companies. Dividend policy of
Malaysian public listed companies is rigid and sticky as managers are reluctant to cut or avoid
omitting dividend even when the performance of the companies is deteriorating.
Hussainy, Mgbama & Chijoke (2010) examines the relationship between dividend policy
and share price changes in the UK stock market between 1998 and 2007. Using regression analysis,
the results indicate a positive relationship between dividend yield and stock price changes and a
negative relationship between dividend payout and stock price changes.
Afza & Hassan (2010) investigates the impact of firm specific characteristics on corporate
dividend behavior in emerging economy of Pakistan. Three years data (2005-2007) of 100
companies listed at Karachi Stock Exchange (KSE) has been analyzed using Ordinary Least
Square (OLS) regression. The results show that managerial and individual ownership, cash flow
sensitivity, size and leverage are negatively whereas, operating cash-flow and profitability are
positively related to cash dividend. Managerial ownership, individual ownership, operating cash
flow and size are the most significant determinants of dividend behavior whereas, leverage and
cash flow sensitivity do not contribute significantly in determining the level of corporate dividend
payment in the firms studied in the sample.
Gill, Biger& Tibrewala (2010) investigates the determinants of dividend policy of 277
American service and manufacturing firms. The results show that for the entire sample the
dividend payout ratio is a function of profit margin, sales growth, debt-to-equity ratio, and tax. For
firms in the services industry, the dividend payout ratio is a function of profit margin, sales growth,
and debt-to-equity ratio. For manufacturing firms, dividend payout ratio is a function of profit
margin, tax, and market-to-book ratio. Besides, the results are different when the dividend payout
ratio is defined as the ratio between the cash dividend that the after-tax cash flow, not the after tax
earnings of the companies.
Thanatawee (2011) examines dividend policy of Thai listed companies over the period
2002-2008. The results show that larger and more profitable firms with higher free cash flows and
retained earnings to equity tend to pay higher dividends. In addition, findings indicate that firms
with higher growth opportunities, measured by market-to-book ratio, tend to pay lower dividend
payout ratio but higher dividend yield. Collectively, the findings provide much support for the free
cash flow and life-cycle hypotheses. Further, it is found that financial leverage is positively related
to dividend payouts, a finding which casts doubt whether Thai firms rely on debt to pay dividends.
Mehta (2012) addresses the determinants of dividend payout for firms listed on Abu Dhabi
Stock exchange for a period of 4 years from 2005-2009. The study examines the effect of
Profitability, Risk, Growth, Liquidity, Size and the Leverage of the firm. Using correlation and the
multiple regression technique, results indicate that profitability and size were the most important
considerations of Dividend Payout decision by UAE firms.
Al-Shubiri, Al Taleb & Al-Zoued (2012) examines the possible association between
ownership structure and dividend payout policy in Jordanian industrial firms over period 2005-
2009. The results indicate that there is a significant negative correlation between the institutional
ownership and dividend per share, and a significantly negative relationship between the state
ownership and the level of dividend distributed to shareholders. The results also show that the

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higher the ownership of the five largest shareholders, the higher the dividend payment. The
regression results conducted on five models show a strong effect of the free cash flow on dividend
policy. The empirical evidence about the effect of firm size on the level of dividend shows a
negative and significant effect. Larger firms are less likely to pay out dividends. Moreover, those
firms with better investment opportunities are more likely to pay dividends and firms with high
leverage tend to distribute a lower level of dividends.
Parta, Poshakwale & Ow-Yong (2012) examines the determinants of corporate dividend
policy of listed firms in Greece as a case study of an emerging market country as applied on 945
firm year observations of 63 non-financial firms which paid dividends annually from 1993 to 2007.
Using Generalized Method of Moments (GMM), results indicate that size, profitability and
liquidity factors increase the probability to pay dividends. However, investment opportunities,
financial leverage and business risk decrease the likelihood to pay dividends.
Ranti (2013) aims to examine the effects of financial performance of firms, firm size,
financial leverage and board independence on the dividend payout decisions of listed firms
operating in the Nigerian stock exchange market using the regression analysis method for the
period of 2006 to 2011. Findings indicate that there is a significant positive relationship between
firms’ financial performance, size of firms and board independence on the dividend payouts
decisions.
Ehsan, Tabassum, Akram & Nasir (2013) investigates the relationship between insider
ownership and individual ownership with dividend payout policy of 100 non-financial firms listed
at Karachi Stock Exchange (KSE 100 index) for the period of 2007 to 2011. Ordinary Least Square
regression technique has been used to reveal empirical results. The results indicate that insider
ownership and individual ownership both have a significant negative influence on dividend
payments. Profitability is significant and positively related with dividend payouts. Moreover, size
and leverage are negatively related to corporate dividend policy.
Sanjari & Zarei (2014) investigates factors influencing corporate dividend policy of 70
financial and non-financial firms listed in Tehran stock exchange from 2009 to 2013. Using
multiple regressions technique, results indicate that the variable leverage, size and liquidity have
a significant positive impact on the dividend payment ratio while growth and profitability have a
significant negative impact.
Kim & Sio (2014) analyzed the determinants of dividend policies of information
technology (IT) firms listed on the Korean stock market and used a logit regression model to
examine Korean IT firms' propensity to pay dividends based on the life-cycle hypothesis over the
period of (2002-2009). The analysis yielded several findings: first, the firms pay relatively small
dividends in the growth stage, which increase over time as their businesses mature. Second,
profitability shows a positive correlation with propensity to pay dividends. Third, firms that paid
out more dividends in the past continue to pay relatively more dividends. Meanwhile, dividend
policies do not show a significant correlation with firm size or growth opportunities.
Maladjian & El Khoury (2014) aims at investigating the factors determining the dividend
payout policy in the Lebanese banks listed on the Beirut Stock Exchange. The study addresses the
impact of seven variables, namely, profitability, liquidity, leverage, firm size, growth, firm risk
and previous year’s dividend payout on the dividend payout ratios by using an unbalanced panel
dataset of listed banks between the years of 2005 and 2011. Two models are tested using the OLS

4
and the dynamic panel regressions. Empirical results show that the dividend payout policies are
positively affected by the firm size, risk and previous year’s dividends, but are negatively affected
by the opportunity growth and profitability. The results obtained might indicate that firms pay
dividends with the intention of reducing the agency conflicts. Furthermore, managers take into
consideration the stability of dividends while determining the dividend policy. Moreover, the
results suggest that the Lebanese listed firms prefer to invest their earnings to grow rather than to
pay more dividends.
Nuhu, Musah & Senyo (2014) examines the consistence of the determinants of dividend
payout in financial and non-financial firms in Ghana. Stock Exchange from 2000 to 2009. Using
ordinary least squares panel regression model to estimate the determinants of dividend payout,
results reveal that profitability and leverage have a significant positive impact on dividend payment
for the financial firms, and a significant negative impact for the non-financial firms. The tax has a
significant negative impact for the financial firms without any significant effect on non-financial
firms. Only board size shows consistence of having a positive significant impact of the dividend
payment ratio of both financial and non-financial firms.
Comparing with previous work, the current study tries to investigate the effect of eight
determinants: profitability, liquidity, leverage, growth rate, investment opportunities, size, company age
and previous year’s dividend on the dividend policy of Saudi listed companies?, while previous work tends
to address them separately without this framework. Besides, to our knowledge, no other study has been
conducted to investigate these effects as applied on Saudi listed companies.

3. Data Description and Hypotheses Developing

Required data regarding dependent and independent variables could be shown as follows:
Table (1): Variables description
Variable Symbol Description
Dividend Payment DPR Cash Dividend / Net Profit
Ratio
Dividend Decision DD 1 if the firm pay cash dividend, 0 if not.
Profitability ROA Net Profit / Total Assets
Liquidity LIQ Current assets / Current liabilities (for the non-financial companies)
Cash and Cash Equivalents / Deposits (for the financial companies)
Leverage LEV Debit / Total Equity
Assets Growth Rate GRO1 (Current total assets – previous total assets) / previous total assets
Earning Growth Rate GRO2 (current net profit – previous net profit) / previous net profit
Investment MB Market Value / Book Value
Opportunities
Size SIZ Natural Logarithm of Total Assets
Age AGE Establishment Year – Current Year
Previous year’s PYD Previous Year’s Dividend Payment
dividend
This paper aim at testing the following hypotheses:
 There is no significant impact of profitability on the dividend policy of Saudi listed
companies.

5
  There is no significant impact of liquidity on the dividend policy of Saudi listed companies.
 There is no significant impact of leverage on the dividend policy of Saudi listed companies.
 There is no significant impact of growth rate on the dividend policy of Saudi listed
companies.
 There is no significant impact of investment opportunities on the dividend policy of Saudi
listed companies.
 There is no significant impact of size on the dividend policy of Saudi listed companies.
 There is no significant impact of age on the dividend policy of Saudi listed companies.
 There is no significant impact of previous year’s dividend on the dividend policy of Saudi
listed companies.

4. Results of Empirical Study

4.1 For the non-financial companies
The following table illustrates the determinants of dividend payment ratio (for the non-
financial companies) using linear regression:
Table (2): Determinants of dividend payment ratio (for the non-financial companies)
Variable Coefficient t-Statistic Prob.
C -0,578762 -2,427237 0,0156
ROA 0,787267 4,165150 0,0000**
LIQ -0,001761 -0,298828 0,7652
LEV -0,075749 -3,463928 0,0006**
GRO1 0,036521 0,570460 0,5686
GRO2 -0,000299 -0,555757 0,5786
MB -0,020534 -2,323119 0,0206*
SIZ 0,038561 3,417401 0,0007**
AGE 0,003009 2,361945 0,0186*
PYD 0,435370 10,80834 0,0000**
R2 0,428434
Adjusted R2 0,418207
F-statistic 41,89318
Prob. (F-statistic) 0,000000
* and ** represent levels of significance 5% and 1%

Table (2) shows that adjusted R2 value is 0.4182, which means that 41.82% of the dividend
payment ration in the non-financial companies was explained by this model. Results show a
positive and significant impact of profitability, size, age, and previous year’s dividend on the
dividend payment ratio. Besides, leverage and investment opportunities have a significant negative
impact on the dividend payment ratio. Liquidity, assets growth rate and earnings growth rate seem
to have insignificant impact on dividend payment ratio.
The following table illustrates the determinants of dividend payment ratio (for the non-
financial companies) using logistic regression:

6
Table (3): Determinants of dividend decision (for the non-financial companies)
Variable Coefficient Z-Statistic Prob.
C -24,31183 -6,227372 0,0000**
ROA 22,50762 5,980563 0,0000**
LIQ 0,037179 0,507362 0,6119
LEV -0,412639 -1,815642 0,0694
GRO1 -0,522149 -0,730462 0,4651
GRO2 -0,004135 -0,629896 0,5288
MB -0,105601 -0,872587 0,3829
SIZ 1,055538 5,883044 0,0000**
AGE 0,056814 3,281721 0,0010**
PYD 2,817022 5,916887 0,0000**
McFadden R2 0,587766
LR-statistic 365,4458
Prob. (LR-statistic) 0,000000
* and ** represent levels of significance 5% and 1%

Table (3) shows that McFadden R2 value is 0.5878, which means that 58.78% of dividend
decision in the non-financial companies can be explained by the model. Results show that there is
a significant positive impact of profitability, size, age and previous year’s dividend on the dividend
decision. Liquidity, leverage, assets growth rate, earning growth rate and investment opportunities
seem to have insignificant impact on the dividend decisions.
4.2 For the financial companies
The following table illustrates the determinants of dividend payment ratio (for the financial
companies) using linear regression:
Table (4): Determinants of dividend payment ratio (for the financial companies)
Variable Coefficient t-Statistic Prob.
C -2,139928 -2,899746 0,0048**
ROA -2,074283 -1,487901 0,1407
LIQ 0,311184 1,518798 0,1328
LEV -0,037120 -3,350865 0,0012**
GRO1 0,191303 1,640107 0,1049
GRO2 0,018536 1,675148 0,0978
MB 0,030811 1,953214 0,0543
SIZ 0,090001 2,980220 0,0038**
AGE 0,005734 2,713013 0,0082**
PYD 0,374439 3,695759 0,0004**
R2 0,616179
2 0,573000
Adjusted R
F-statistic 14,27008
Prob. (F-statistic) 0,000000
* and ** represent levels of significance 5% and 1%

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 Table (4) indicates that adjusted R2 is 0.5730, which means that the model explains 57.30%
of dividend payment ratio in the financial companies. The results show a significant positive
impact of size, age and previous year’s dividend on the dividend payment ratio. Besides, leverage
has a significant negative impact on the dividend payment ratio. Profitability, liquidity, assets
growth rate, earning growth rate and investment opportunities seem to have insignificant impact
on the dividend payment ratio.
The following table illustrates the determinants of dividend payment ratio (for the financial
companies) using logistic regression:
Table (5): Determinants of dividend decision (for the financial companies)
Variable Coefficient Z-Statistic Prob.
C -106,8431 3,015476 0,0026**
ROA 59,01291 1,016235 0,3095
LIQ 9,757937 1,189886 0,2341
LEV -0,319435 -0,912683 0,3614
GRO1 6,579100 1,645821 0,0998
GRO2 0,202760 1,026448 0,3047
MB -0,212864 -0,364675 0,7154
SIZ 4,225302 2,930707 0,0034**
AGE 0,041474 0,670877 0,5023
PYD 4,428320 1,713647 0,0866
McFadden R2 0,632570
LR-statistic 61,85841
Prob(LR-statistic) 0,000000
* and ** represent levels of significance 5% and 1%

Table (5) shows that the McFadden R2 value is 0.6326, which means that 63.26% of
dividend decision in the financial companies can be explained by the model. The results show that
size has a significant positive impact on the dividend decision. Profitability, liquidity, assets
growth rate, earning growth rate age, previous year’s dividend, leverage and investment
opportunities seem to have insignificant positive impact on the dividend decision.

5. Summary and Concluding Remarks

This paper aims at investigating the factors affecting the dividend policy of companies
listed in Saudi stock exchange, as applied on a sample of 67 companies over the period of from
2006 to 2014 using linear and logistic regression models. Regarding the non-financial companies,
using linear regression, results indicate that profitability, size, age and previous year’s dividend
may have a significant positive effect on dividend payment ratio, while leverage and investment
opportunities may have a significant negative effect. A robustness check using logistic regression
supports the effect of profitability, size, age, and previous year’s dividend on the dividend decision.
Regarding the financial companies, using linear regression, results indicate that size, age,
and previous year’s dividend may have a significant positive effect on dividend payment ratio,
while leverage may have a significant negative effect. A robustness check using logistic regression
supports the effect size on the dividend decision.

8
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