Determinants of the Dividend Policy of Companies Listed on Emerging Stock Exchanges: The Case of the Gulf Cooperation Council (GCC) Countries

Abstract

This paper investigates the determinants of dividend policies for firms listed on Gulf Co-operation Council (GCC) country stock exchanges. This is a case study of emerging stock exchanges, where the determinants of dividend policy have received little attention. This study used a panel dataset of non-financial firms listed on the GCC country stock exchanges between the years of 1999 and 2003. Seven hypotheses pertaining to agency cost theory were investigated using a series of random effect Tobit models. The models considered the impact of government ownership, free cash flow, firm size, growth rate, growth opportunity, business risk, and firm profitability on dividend payout ratios. The results suggest that the main characteristics of firm dividend payout policy were that dividend payments related strongly and directly to government ownership, firm size and firm profitability, but negatively to the leverage ratio. These results, taken as a whole, indicate that firms pay dividends with the intention of reducing the agency problem and maintaining firm reputation, since the legal protection for outside shareholders was limited. In addition, and as a result of the significant agency conflicts interacting with the need to built firm reputation, a firm’s dividend policy was found to depend heavily on firm profitability. This may indicate that listed firms in GCC countries alter their dividend policy frequently and do not adopt a long-run target dividend policy.

Keywords: Dividend payout policy, Emerging market, Random effects tobit model, Panel data

JEL Classification: G35