Dividend Payout, Earnings and Size in Banking Sector: Evidence from Kuwait

Abstract

Researchers have been puzzled by the distribution of cash and stock dividends, the puzzle stems from the fact that effective tax on cash dividends is higher than that on capital gains, while stock dividends will not affect shareholders wealth as it is merely a capitalization of reserves. Several theories have been introduced to resolve this puzzle. The current study differs from those done on tax based economies due to the fact that in Kuwait there is no tax on dividends or capital gains, thus the tax related issue does not apply and accordingly a clearer insight on the determinants of cash dividends might be reached. The results of this study show a significant impact of profitability, stock dividends, size, and lagged cash dividends, where profitability, size, and lagged cash dividends have positive effect, while stock dividends, has a negative effect. However, the results indicate that the variation in cash dividends is mainly determined by variation in profitability and last year cash dividends. The introduction of stock dividends did not significantly increase the explanatory power of the model, nor did the introduction of size implying that despite their statistical significance, these variables have a limited effect on dividend policy by the sample banks. Accordingly, it might be argued that these results are in support of Lintner’s smoothing hypothesis. 78