Corporate Governance Mechanisms and Dividend Policy: Does the Shariah Law work as Moderator?

Abstract

Purpose: This study investigates the impact of Corporate Governance (CG) mechanisms on Dividend Policy (DP) by focusing on the moderating role of Shariah compliance. Design/Methodology/Approach: This study examines the effect of specific CG mechanisms, namely board characteristics (size, duality, independence, and gender diversity), on DP in the context of Shariah-compliant firms. Data were collected from the Pakistan Stock Exchange (PSX) from 2014 to 2018. Panel regression analysis was performed using EViews and Stata software to analyze the data. Originality/Significance: This study makes a valuable contribution to the field by examining the alignment of Pakistan's internal governance structure with the Islamic CG standards established in 2018. It delves into the impact of both Shariah compliance and CG on DP in Pakistan's stock markets. Additionally, this study investigates how Shariah compliance moderates the relationship between CEO duality, gender diversity, and dividend policies. The incorporation of Islamic law as a significant factor influencing dividends in firms enhances the originality of this study. Research Limitations/Implications: One limitation of this study was the availability of CG data and the lack of an external mechanism, which were excluded due to the limited sample size. Future studies should address this limitation by incorporating a broader range of data. Additionally, the findings of this study may be specific to Pakistan's stock market and Shariah-compliant firms, which may limit their generalizability. Further research in different regions and sectors would help to expand the implications of this study. Practical and Social Implications: The findings of this study provide valuable insights for various stakeholders including policymakers, legislators, companies, and investors. The results can guide the development of more effective CG rules and practices, facilitating better governance in both Shariah-compliant and non-compliant firms. Moreover, this study's findings could create a favorable investment climate for Shariah-compliant firms in Pakistan and other developing sectors, thereby fostering their growth and development.