Determinants of Dividend Policy in Banking Sector of Pakistan: An Empirical Study

Abstract

 This paper explores the determinants of dividend policy of firms in the banking industry of Pakistan. Dividend decisions of a bank basically depend on its profitability, retained earnings, cash and cash equivalents, earnings per share, corporate taxes and leverage. Present study is an attempt to find out the key determinant predictors and their impact on cash dividend payout and Total Payout ratio and test the significance of financial theories on banking sector of Pakistan during the period between “2006-2010”. We applied the Balanced Panel Data Regression with Fixed Effects Model to verify the Null hypothesis. Among all of the independent variables PAT, SLACK, EPS, CTA and TDA reported significant results and the determinants of dividend policy. We found the support of Profitability theory, Packing order theory, free Cash flow theory and Agency cost theory and we found no support of Tax effect in banking sector of Pakistan.