Dividend Policy and Capital Structure: Testing Endogeneity

Abstract

The study is aimed at exploring the relationship between dividend payout and capital structure, and to explore the determinants of dividend policy and capital structure of manufacturing sector of Pakistan. Penal data ranging from 2006 to 2011 of selected 100 manufacturing firms of Pakistan is used in this study. Dividend policy and capital structure have their own determinants. Firm’s size, profitability, liquidity, growth opportunities, tangibility and capital structure are used as determinants of dividend policy, while determinants of capital structure which are used in this study are firm’s size, profitability, liquidity, growth opportunities, tangibility, tax saving other than debt and income variability and dividend payout. Two stages least square is used for estimation. Size, profitability, liquidity and leverage are found to have a positive significant impact on dividend policy whereas growth opportunities is found to have a negative significant impact on dividend policy and tangibility has no impact. On the other hand growth opportunities, tangibility and income variability are found to have positive significant relationship with leverage (capital structure), whereas firm’s Size, profitability, liquidity and tax saving other than debt are found to have negative significant relationship with leverage. This study concludes that dividend policy and capital structure are positively correlated with each other.

Keywords: Dividend Payout Policy, leverage, profitability, growth opportunities, tangibility, liquidity, size, tax saving other than debt, income variability

JEL Classification: C33, G32, G35