A Hand in Glove Theorem of Dividends and Earnings: Evidence from the Financial Sector of Pakistan

Abstract

Purpose: The available literature on various sectors to examine the impact of earnings on dividend payments, indicates that still, extensive research lacks in the financial sector of Pakistan. The rationale behind paying higher dividends has been observed in emerging countries like Pakistan to maintain a strong financial footing. This study aims to investigate various factors that can influence dividend payouts. Design/Methodology/Approach: ARDL approach has been used to establish a long-term impact of selected variables on dividend payouts. Data of 50 financial listed firms for 2000-2021 has been used to subsume the impact of earnings-related variables on the dividend payouts of the financial companies of Pakistan. Findings: Results indicate that market capitalization, ROA, EPS, and firm size have a significant and positive impact on dividend decisions, while leverage generates a significant inverse impact on dividend declarations. The study also indicates discretionary accruals (a factor in earnings management under IAS) do not impact dividends significantly. ROE has no impact on the volume of dividends due to the specific nature of the firms under study. Implications/Originality/Value: The study demonstrates a conjecture that the financial sector must maintain its dividends not only to retain its old stakeholders but also to recruit new ones.