Abstract
PurposeThe paper aims to test the stability of dividend policy, test the effect of cash flow on the company's dividend policy, identify the factors that determine a firm's cash dividend payments, and examine the characteristics of dividend‐paying and non‐paying firms.Design/methodology/approachThe hypotheses are tested using unbalance panel data for a sample of 54 Saudi‐listed firms during 1990‐2006.FindingsSaudi firms pay out a lower proportion of their cash flows compared to the proportion of dividends of reported earnings. Firms have more flexible dividend policies since they are willing to cut or skip dividends when profit declines and pay no dividends when losses are reported. Lagged dividend payments, profitability, cash flows, and life cycle are determinants of dividend payments. Agency costs are not a critical driver of dividend policy of Saudi firms. Zakat is found to play a role in explaining firm's dividend decisions.Originality/valueThis paper is the first to study the determinants of dividend policy in a country where companies are required to pay Islamic zakat.
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