Towards Extending Dividend Puzzle Debate: What Motivates Distribution of Corporate Earnings in Tanzania?

Josephat Lotto

doi:10.3390/ijfs8010018

Abstract

This paper investigates the determinants of dividend policy in Tanzania. The study employed a panel data of non-financial firms listed on the Dar es Salaam Stock Exchange (DSE) for the period 2008–2017. The paper reports profitability, liquidity, firm size, leverage, firm growth, previous dividend, and GDP as the major determinants of corporate dividend policy. According to the results, leverage, firm growth, and GDP are negatively related to dividend payout ratio while firm size, profitability, liquidity, and lagged dividend are positively related to dividend policy. More specifically, large-sized firms, highly profitable firms, and firms who paid dividend in previous years are more likely to consider paying dividend. However, payment of dividend will all depend on whether the firm is liquid enough to afford that. On the other hand, high-growth and leveraged firms would not probably consider paying dividend, and will, therefore, opt saving money to finance their expansion and honor their debt obligations. Following these results, corporate managers are advised to consider preferences of investors towards developing corporate dividend policy; to strive paying dividend whenever economically viable (as it signals the firm’s reputation), and to limit excessive borrowing to protect firms from getting into financial meltdown (although borrowing is considered a control tool for agency-related problems).

Highlights

Dividend policy is one of the most debated topics and a fundamental theory of corporate finance, which still reserves its prominent place
Black (1976) stated that “The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that don’t fit together”, and confirmed that dividend policy is one of the highly ranked unresolved problems in finance literature, and he further insists the lack of adequate explanation for the observed dividend behavior of the firms
This study aims at identifying factors that influence dividend policy of all non-financial firms listed on the Dar es Salaam Stock Exchange (DSE), while focusing on agency theory and signaling hypothesis

Summary

Introduction

Dividend policy is one of the most debated topics and a fundamental theory of corporate finance, which still reserves its prominent place. More than three decades ago, Black (1976) described dividend policy as a “puzzle”, and from there-on several authors engaged in attempting to solve the dividend puzzle. The question of why firms pay dividends from their earnings remains unexplained. This is known as the dividend puzzle in finance literature, as pronounced by Alam Khan and Rashid (2009). Allen et al (2000) confessed that, regardless of several theories put in place to explain their pervasive presence, dividends remain one of the persistent puzzles in corporate finance Many hypotheses have been drawn to shed some light on this puzzle, but the problem still exists. Allen et al (2000) confessed that, regardless of several theories put in place to explain their pervasive presence, dividends remain one of the persistent puzzles in corporate finance

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