Economic Policy Uncertainty and Dividend Policy: Evidence from Commercial Banks in Nepal

Abstract

We examined the effects of Economic Policy Uncertainty (EPU) on dividend distribution strategy to provide some evidence from developing country prospect. Using a sample of 19 commercial banks for 2009–2020 and the Baker, Bloom, and Davis Index as a proxy of EPU, our key finding demonstrates EPU has no significant direct relationship with the dividend decision of the banking firm. The empirical results reveal that the banking firm in Nepal neither terminate nor initiate dividends during EPU. Further, we found evidence of no precautionary incentive of banking executives as a reaction to policy distress. The dividend payment decision is intuitive for the banking firm in Nepal rather than uncertainty prone by the change in economic policy. If the precautionary motive dominates the firms, banks are supposed to distribute lower cash dividend once there is a more considerable degree of policy uncertainty as a buffer against adversity. Other firm-specific variables, such as corporate earnings, past year dividend, ownership structure, and bank size, affect the dividend decision of banking firms in Nepal. As our results contradict the previous major studies conducted in developed market settings, we suggest that the banking firms should consider, analyze, and adjust their dividend policy based on the opportunities and threats posit by the country's economic policy.