1

Impact of Sustainability, Capital

Structure & Dividend Policy on
Firm Performance: A Cross Cultural
Study

Project Proposal

Supervisor
Dr Samreen Faheem Babar

Submitted by
Hassan Tariq
{01-397201-008}

Department of Management Sciences,

Bahria University, Islamabad.

[25th April, 2021]

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1. Introduction
The attraction of a lucrative dividend policy, optimal capital structure and
improved sustainability has increased in global capital markets in the past few
decades. Choosing an optimal capital structure and appropriate dividend policy are 2
of the 4 most important financial decisions made by firms in financial markets, while
the 2 other decisions being asset management and working capital decisions. The
increased trend towards sustainable investing in global countries like US and UK has
also risen in recent years. These decisions collectively help a business operate in
volatile financial markets with fluctuating interest rates and also external shareholders
and prospective investors in making informed decisions to invest in the business. The
ability to identify whether debt or equity will be satisfactory for the firm helps firms
prevent any chances of defaults and also prevents shareholder equity dilution.
Secondly, the ability of a firm to identify the appropriate dividend payout for
shareholders and retain a portion of income for future growth prospects is also
important as it satisfies the shareholders to make future investments in the firm and
helps firms grow in turbulent markets. Lastly, sustainable investing by any company
can help improve firm financial position, profitability and reputation of the
company as well as the industry in which the firm operates.
Evaluating the financial performance of the firm allows management to achieve
the results of business strategies and goals in economic terms. It is a basic measure
of how well a company uses its assets and equity to generate income. Many
stakeholders primarily linked to the business are concerned about tracking the
financial performance. The more efficiently the firm uses its assets and equity, the
more the income generated from it and hence, the better the financial performance of
the firm (Asurumuni Anne Shiranthi Indika Perera, 2020).
When determining the financing decision for the firm, it is important for firm to
use a combination of both debt and equity which maximizes firm wealth
(Jaisinghani and Kanjilal, 2017), (Ghayas and Akhter, 2018), (Odusanya et al.
2018). Wrong financing decisions of the firm may have an adverse impact on firm’s
operating, financial and strategic objectives. It may also lead to bankruptcy if it can’t
meet all the obligations of bondholders and shareholders. Some firms are designed to
not take any debt i.e they are 100% equity financed, such firms aren’t concerned
about the debt capacity and the capital structure as they seldom have leverage in their
capital structure. But most firms today are moving towards taking an ample portion of
both debt and equity to maintain an optimal capital structure which leads to fewest
problems and maximum value to the firm.
Dividend policy will decide how much funds to be given out to investors and how
much to be retained for growth and development. It is important for a firm to
determine an appropriate mix of dividend declaration and retaining some funds for
future needs. Better dividend payout sends positive signals to investors that the firm is
liquid and leads to better financial performance (Carolyne S. Musyoka, 2013). Better
retention ratios help keep up the image, reputation and financial performance of the
firm.
Sustainability initiatives and sustainable investing in terms of improved
environmental concerns such as reduced carbon emissions, better social-economic
policies such as conforming with local loopholes and better governance such as
improved systems of accountability, review and control are likely to benefit the firm
in the long run in a way similar to capital structure and dividend policy.
Sustainable investing improves firm performance which in turn leads to improved
dividend payouts (P. Matos , V. Barros and J. Sarmento, 2020)
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The Global Reporting Initiative's (GRI's) Sustainability Reporting Standards are the
most adopted structures for deliberate reporting around the world (Brown et al. 2009).
In 2018, the GRI along with the United Nations Global Compact (UNGC) gave
life to agglomerated activity pointed towards engaging corporate activities
towards accomplishing the United Nations Sustainable Development Goals
(SDGs). The SDGs have been presented in 2015 by the United Nations Procurement
Division (UNDP) as a feature of the 2030 Agenda for Sustainable Development
whose focus is to provide corporations with a platform to strive towards a more
sustainable world (United Nations General Assembly 2015). They comprise of 17
worldwide objectives organized into 169 aspiring targets to be reached by 2030.

2. Literature
Dividend payout and optimal capital structure are 2 of the main financial decisions
that help a firm generate profitability, improve their financials and also help them
thrive in a competitive environment. Sustainability on the other hand is a strategic
decision that not only improves firm financials but also improves firm reptation.
Sustainability covers 3 main categories namely environmental, social and governance
factors also called ESG.
Several studies have examined the relationship between financial leverage and firm
performance. For instance, the Malaysian firms show a positive and significant
relation between financial leverage ratios and the financial performance
indicators; they utilize external financing such as debt, rather than internal financing
to improve financial performance (N. Ramli, H. Latan, Grace T. Solovida, 2018).
Another study on Thailand’s non-financial firms also exhibited this trend that
financial leverage positively and significantly affect financial performance of listed
firms on SET (Detthamronga, 2017).
Other studies related to examining the relationship between dividend payout and firm
performance are also conducted. For instance, . For instance, a study on listed firms
in Sri-Lanka uncovered that there was a positive significant relationship between
dividend payout ratio and return on equity (Asurumuni Anne Shiranthi Indika
Perera, 2020).
Preliminary studies have been done to explain the impact of sustainability on equity
value in developed countries. For instance, a global MSCI study found positive
impact of sustainability benchmarks equity value (G. Giesz, Linda-Eling Lee, D.
Melas, Z. Nagy and L. Nishikawa, 2019). Other studies have been done to explain
the impact of sustainability on dividend policy. For instance, a study conducted in
Portugal found that sustainability initiatives has a positive impact of dividend policy
(P. Matos , V. Barros and J. Sarmento, 2020).

3. Gap Analysis
Therefore few studies have been conducted to explain the impact of sustainability
on firm performance in developing countries in the Asian region (P. Matos , V.
Barros and J. Sarmento, 2020). Further (T. Skevas, I. Skevas, Victor E. Cabrera,
2021) state that cross cultural analysis between developing countries is required
to examine sustainability and corporate financial performance. (Mahmoud
Abdul Aleem Elkholy, 2020) explained the impact of sustainability accounting on
firm performance, he argued that one must add other financial variables along
with sustainability to assess their combined impact on firm performance. Further
(A. Keskin, 2020) examined the impact of sustainability indicators in turkey on
corporate financial performance using discriminant analysis but left an important
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gap to examine the cross-cultural impact of sustainability on firm performance

in other developing countries. Lastly (Nguyen, T. H., Elmagrhi, M. H., Ntim, C.
G., & Wu, Y. 2021) have also explained the impact of ESG factors on financial
performance in China, but has clearly mentioned the use of doing cross-cultural
study to better explain the results.
Almost no study explains the combined effect of sustainability, capital structure
and dividend policy on firm performance in developing countries among Asia.
So, in this paper we aim to explain the combined effect of 2 main financial decisions
such as capital structure and dividend policy and 1 non-financial decision such as
sustainability on firm financial performance in developing countries of Asia. Which is
clearly a research in recent papers.

4. Problem Description
Although global trend states that an optimal capital structure, an appropriate dividend
policy and sustainability are positively and significantly linked to firm profitability for
developed countries. Nevertheless, most developing countries like Pakistan, Nepal,
Malaysia, Bangladesh and Sri-Lanka haven’t yet responded into these
developments. In a developing countries there are highly uncertain political and
economic conditions which make financial markets very volatile. To add to the
insult, many developing countries have no idea about ESG or sustainable
operations. These conditions may or may not show a negative or insignificant
trend of dividend policy, capital structure and sustainability on firm
performance. Hence, we determine whether leverage is a good thing for firms in
developing countries, or does it have significance on firm performance. Secondly, we
determine whether dividend payout has significance on firm performance. Lastly, we
determine whether sustainability in developing countries is lucrative. Because firms in
most developed countries like US, Canada and Australia benefit from debt tax shields
due to which they pay lower taxes and have more debt servicing capacity. European
firms on the other hand, benefit from better dividend payouts as they’re positively
linked to firm performance. All developed counties who are carrying out ESG
developments benefit firm performance. The second problem for this study is that
many global sustainability organizations such as UNDP and CFAI have elaborated on
the use of sales growth for measuring firm value. This doesn’t conform with our
literature as studies show that sales growth is a poor performance measure when
measuring it with sustainability (Rasmus Sjögren & Jacob Wickström, 2019).

5. Research Questions
1. What is the impact of Capital Structure on firm performance in developing
countries?
2. What is the effect of Dividend Policy on firm performance in developing
countries?
3. Does sustainability influence firm performance in developing countries?

6. Research Objectives
1. To examine whether solvency and financial leverage affects firm financial
performance and how it impacts firm performance in developing countries of
Asian region.
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2. To identify how dividend payout and dividend yield influences firm financial
performance and how it impacts firm performance in developing countries of
Asian region.
3. To assess whether sustainability indicators affect firm financial performance
and how they impact firm performance in developing countries of Asian
region.

7. Significance of the study

Our work will provide value to all those developing country firms who want to
take leverage as an essential lifeline for its business operations and to make
profits. It is also important for all these firms that want to decide an appropriate
dividend policy for its investors and making decisions regarding retaining cash for
future growth purposes. Emerging market firms can also gain an in-depth
knowledge of whether they should adopt sustainability initiatives and whether
these policies affect their firm’s financial performance.
This study can also help investors make informed decisions regarding investing
in companies that follow an optimal capital structure which in turn reflects
positively on their financial strength. Companies with better dividend payout
policies reflect a positive signal for prospective investors and attract new
investment, so investors can gain a better idea of whether high debt and high payout
policies positively impact firm performance so that they can make rational utility
maximizing decisions of whether to invest in the company. Lastly if a firm is
adopting sustainable practices which is improving firm profitability, it will
improve the perception of the company in the eyes of investors who will be more
than willing to invest in the company because it benefits them as well.
The study also adds value to government agencies in sense that if higher debt is
lucrative for the firm, government can provide private firms with debt to help
meet their obligations and finance their projects to help private firms grow which
will provide interest and principles in return to the government. The bigger the firm,
the more debt it requires and the higher return to government. Secondly, if
sustainable activities are lucrative for the firm, government can invest more in
sustainable practices to help firms meet their environmental, social and governance
obligations. This will reflect positively not only on the firms but the society as a
whole.

8. Theoretical Reflection
Capital structure, dividend policy and sustainability are significant to company value
and financial outcomes. Capital structure theories as defined by Modigliani &
Miller define that a firm should choose an optimal capital structure which is
lucrative for the company internal growth and adds to the its profitability.
Dividend payout theory such as dividend relevance theory suggests that an
appropriate dividend policy adds to the firm’s share value and reduces its
WACC. Sustainability leads a firm to carry out environmentally and socially
friendly business operations and internal compliance which adds firm value
internally and externally. Firm performance on the other hand explains how well
a company can use its assets and equity to generate its profits for its investors.
The better the financial performance, the more profitable and attractive the firm is in
the eyes of investors and prospects.
We will assess the impact of sustainability, capital structure and dividend policy on
firm performance. So capital structure, dividend policy and sustainability will be
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treated as independent variables and assess their impact on firm financial performance
treated as dependent variable. We will control the firm size and firm growth.

9. Theoretical Framework

Independent variables
Capital Structure
Control variables Dependent variables

Dividend Policy Firm Size

Firm Growth Firm Performance

Sustainability

10. Econometric Model

Firm Performance = β0 + β1Capital Structure + β2Dividend Policy +
β3Sustainability + µ

11. Hypothesis
H1: There is a positive impact of Capital Structure on Firm Performance
H2: There is a positive impact of Dividend Payout on Firm Performance
H3: There is a significant impact of Capital Structure on Firm Performance
H4: There is a significant impact of Dividend Payout on Firm Performance
H5: There is a positive impact of Sustainability on Firm Performance
H6: There is a significant impact of Sustainability on Firm Performance

12. Methodology
The target population of this study consists of all major developing countries in
the Asian region including Pakistan. Our sample will consist of top 5-10 countries
in the Asian region and form each country we will include 10-20 companies for
which the ESG data is readily available. Sample period for our research is 10-20
years. The data for this research will be collected from Thomson Reuters Eikon
for a period of 10-20 years and is mainly is balanced panel. The limitation for data
collection is that sustainability data for developing countries companies is limited so
we will only consider those companies in countries that have the largest free float
market cap and have readily available sustainability data. The number of years will
also be adjusted to the availability of ESG data. The countries included will be
similar to Pakistan in terms of economy, GDP and level of wealth to maintain
homogeneity in results.
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13. Proposed Analysis

We will use panel data analysis for this study and apply random/fixed effect
regression analysis based on Hausman test. Eviews 11 software will be used for
analysis of the balanced panel secondary data obtained from Thomson Reuters Eikon.
The following econometric techniques will used for checking data normality and
correlation between 2 different time series.
• Descriptive statistics
• Correlation analysis
• Cointegration tests

11. References
Giese, G., Lee, L. E., Melas, D., Nagy, Z., & Nishikawa, L. (2019). Foundations of
ESG investing: How ESG affects equity valuation, risk, and performance. The
Journal of Portfolio Management, 45(5), 69-83.
Keskin, A. İ., Dincer, B., & Dincer, C. (2020). Exploring the impact of sustainability
on corporate financial performance using discriminant analysis. Sustainability, 12(6),
2346.
Elkholy, M. A. A. The Impact of Sustainability Accounting on Corporate Financial
Performance, Evidence from Oil and Gas Company Sector in Egypt.
Skevas, T., Skevas, I., & Cabrera, V. E. (2021). Examining the Relationship between
Social Inefficiency and Financial Performance. Evidence from Wisconsin Dairy
Farms. Sustainability, 13(7), 3635.
Velte, P. (2017). Does ESG performance have an impact on financial performance?
Evidence from Germany. Journal of Global Responsibility.
Verga Matos, P., Barros, V., & Miranda Sarmento, J. (2020). Does ESG Affect the
Stability of Dividend Policies in Europe? Sustainability, 12(21), 8804.
Nguyen, T. H., Elmagrhi, M. H., Ntim, C. G., & Wu, Y. (2021). Environmental
performance, sustainability, governance and financial performance: Evidence from
heavily polluting industries in China. Business Strategy and the Environment.
Ramli, N. A., Latan, H., & Solovida, G. T. (2019). Determinants of capital structure
and firm financial performance—A PLS-SEM approach: Evidence from Malaysia and
Indonesia. The Quarterly Review of Economics and Finance, 71, 148-160.
Zahid, M. (2020). The Impact of Capital Structure and Dividend Policy on Firm
Performance: A Cross Cultural Study. Available at SSRN 3638251.
Detthamrong, U., Chancharat, N., & Vithessonthi, C. (2017). Corporate governance,
capital structure and firm performance: Evidence from Thailand. Research in
International Business and Finance, 42, 689-709.
Perera, A. A. S. I. (2020). Impact of Dividend Policy on Firm Financial Performance.
Sjögren, R., & Wickström, J. (2019). A study of ESG's contribution to firm
performance: Evidence from the European region.