Abstract
In many rapidly growing economies and emerging markets like Ethiopia, the insurance companies are expected to play a crucial role. The dividend decision is one of the critical financial managementdecisions for firms. Dividend decision is also among the widely addressed and controversial issue in field of finance. The inconclusiveness of dividend theories and empirical studies on the relationship between firm’s profitability and dividend payout decisions is one of the most debatable topics inresearches. Hence, the objective of this study is to examine the relationship between dividend policy and Ethiopianprivate insurance company’s profitability and to contribute to the ongoing debate. To achieve the objective of this study, secondary data were collected from the Audited annual financial statements of 8 private insurance companies in Ethiopia, from year 2006-2015. The study used purposive sampling technique to collect the necessary data. Descriptive statistics and Pearson correlation matrix were used for data analysis. Paneldata andPooled OLS regression model were also employed for empirical testing. Return on Asset (ROA) used as a measurement of insurance company’s profitability (dependent variable) while dividend payout ratio used as the main explanatory variable. The controlling variables were firm size, tangibility and leverage. The findings of this study indicated that there is positive and significant relationship between profitability and dividend pay-out policy decision of Ethiopian private insurance companies. This result is also consistent with the Bird-in –the hand theory. The result also shows that leverage, size of insurance company and tangibility has relationship with profitability of insurance companies.
Highlights
Since the last eight years, Ethiopia has continued to maintain the double digit growth
The main aim of this study is to examine the relationship between dividend policy and private insurance company’s profitability in Ethiopia
Dividend payout policy decision is one of the core decision in finance and it is all about how much of earning to be paid to investors and how much to retain for future expansion/investment need of the company
Summary
Since the last eight years, Ethiopia has continued to maintain the double digit growth. The main purpose of investors when investing their assets is to search for income or the rate of returndistribution of earnings in the form of dividend is one of the basic decisions in areas of finance. Companies view the dividend decision as critical because it defines what funds flow to investors and what funds are retained by the firm for investment [23]. In perfect capital market dividend policy has no impact on the value of firm [18]. Dividend policy determines financing and investing decisions of firm. Dividend payments decreases retained earnings for investments and increase the need for external financing. It influences capital structure, cost of capital of firm and the profitability of the firm. Dividend pay-out positively impacts the value of the stock
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