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Dividend policy and shareholders’
wealth. A comparative analysis of
Shariah-compliant and
noncompliant nonfinancial
firms in Pakistan
Saeed Akbar and Shehzad Khan
Dividend
policy and
shareholders’
wealth
Received 9 January 2023
Revised 4 August 2023
17 October 2023
Accepted 2 December 2023
Institute of Business Studies and Leadership,
Abdul Wali Khan University Mardan, Mardan, Pakistan
Zahoor Ul Haq
Pakhtunkhwa Economic Policy Research Institute,
Abdul Wali Khan University Mardan, Mardan, Pakistan, and
Muhammad Yusuf Amin
Institute of Business Studies and Leadership,
Abdul Wali Khan University Mardan, Mardan, Pakistan
Abstract
Purpose – The purpose of this study is to comparatively analyze the effect of dividend policy on
shareholders’ wealth in Shariah-compliant (SC) and noncompliant (NC) nonfinancial firms in
Pakistan.
Design/methodology/approach – All the nonfinancial firms listed on the Pakistan stock exchange have
been taken as a sample for 2016–2021. The Karachi Meezan index screening criteria were applied to screen SC
firms. Based on the BPLM and Hausman test results, the authors used the fixed-effect and pooled OLS model
for SC and NC firms, respectively. The F-test was used to compare the effect of each dividend policy variable
on shareholders’ wealth for both firm types.
Findings – The findings reveal that the dividend policy does affect the shareholders’ wealth in both firm
types. Dividend per share (DPS), dividend yield (DY) and earnings per share significantly affect the
shareholders’ wealth in SC firms. For NC firms, the dividend payout, DPS and DY are critical. Moreover, the
F-test results show that the DPS, DY and leverage effect on the shareholders’ wealth significantly differ for
both firm types.
Research limitations/implications – This study fills the research gap in the Pakistani context
specifically as well as globally by providing important insights into the relationship between a firm’s
dividend policy and shareholders’ wealth for SC and NC firms. In addition, this study
comprehensively compares the results for both firm types, which is also lacking in the existing
literature. Because this study is based in Pakistan, the generalizability of the results would be
limited.
Practical implications – The findings of this study are helpful for the management of SC and NC firms
in devising their dividend policies that can maximize their shareholders’ wealth. This study also provides
guidance and knowledge to investors in choosing companies for their investments that can maximize their
wealth.
Originality/value – To the best of the authors’ knowledge, this is the first study that analyzes the
relationship between dividend policy and shareholders’ wealth for SC firms in Pakistan. It is also the first
study that comprehensively compares the dividend policy relationship with shareholders’ wealth for SC and
Journal of Islamic Accounting and
Business Research
© Emerald Publishing Limited
1759-0817
DOI 10.1108/JIABR-01-2023-0007
JIABR
NC firms. In addition, using the F-test for joint hypotheses to compare the specific effect of each dividend
policy variable is a methodological contribution of the study.
Keywords Dividend policy, Shareholders’ wealth, Shariah-compliant, Noncompliant,
Dividend payout, Dividend yield, Dividend per share, Earnings per share
Paper type Research paper
1. Introduction
1.1 Background of the study
In financial management, the goal of a business firm is to maximize its shareholders’ wealth.
Therefore, all the decisions of firms, including the dividend decision, revolve around the
objective of maximizing the shareholders’ wealth. A dividend decision is one of the key
corporate finance decisions that affect firm value and shareholders’ wealth. According to
Gallagher (2003), investors do not like surprises, so firms must have a clear dividend policy.
However, not all shareholders have similar preferences. Some shareholders like to receive
consistent dividends, while others prefer their earnings to be reinvested in the business to
receive higher dividends in the future. Hence, given the objective of shareholders’ wealth
maximization, the question of whether to pay dividends or to retain them has been a matter
of extensive debate for the last few decades (David et al., 2022; Farrukh et al., 2017;
Ifeanyichukwu and Yusuf, 2021; Aminu and Salawudeen, 2019; Khan et al., 2018; Ogunseye
and Omoniyi, 2020; Ramcharran, 2001; Ramadan, 2013; Ullah et al., 2021).
Nevertheless, the existing literature and theories hold contradictory views about the
relationship between dividend policy and shareholders’ wealth. The dividend irrelevance
theory says the dividend policy is irrelevant and does not affect shareholders’ wealth (Black
and Scholes, 1974; Miller, 1986; Miller and Modigliani, 1961). On the other hand, the bird-inhand (Gordon, 1959), signaling (Battacharya, 1979; Miller and Rock, 1985) and clientele
(Elton and Gruber, 1970; Miller, 1977) theories postulate that dividend policy does affect
shareholders’ wealth. However, the bird-in-hand and signaling theories predict a positive
relationship, while the clientele theory predicts a negative relationship between dividend
policy and shareholders’ wealth. All the theories have been supported and refuted by
empirical researchers. Hence, the question of why firms pay dividends and how it affects
shareholders’ wealth remains unanswered, and the dividend decision and its effect on
shareholders’ wealth are still a puzzle.
However, the available literature and theories of dividend decisions pertain to
conventional firms. Little attention has been given to the Islamic finance sector, which has
become an attractive alternative sector in the last few years. According to Biancone et al.
(2020), literary interest in the Islamic finance sector is growing because it is a relatively new
issue. Moreover, according to Farooq and Tbeur (2013), companies may attract religiously
driven Muslim investors to their stocks only if they follow Shariah principles. As a result,
more companies are now becoming Shariah-complaint, and dedicated stock market indices
have been constructed to fulfill the needs of religiously motivated investors (Akbar et al.,
2023; Yildirim et al., 2018).
Shariah-compliant (SC) firms operate under the Shariah guidelines that limit interest-bearing
debt financing, cash, accounts receivable and interest-bearing income. These restrictions affect
the dividend-paying behavior of SC firms and make it different than that of noncompliant (NC)
firms (Anwer et al., 2021). It is a unique opportunity to investigate how SC firms adjust their
dividend policies while adhering to Shariah principles. Empirical studies have confirmed that SC
firms are more likely to pay dividends, and their dividend payout (DPO) is higher than that of NC
firms (Anwer et al., 2021; Bakri and Yong, 2023; Ben-Nasr and Ghouma, 2022). However, it is also
worthwhile to study how the different dividend-paying behavior of SC firms affect their
shareholders’ wealth. Given the objective of shareholders’ wealth maximization, the issue of how
the dividend policies of SC firms affect their shareholders’ wealth has been neglected in the
literature. Therefore, the present study examines the effect of the dividend policy on shareholders’
wealth for SC as well as NC firms in Pakistan. There are several motivations for this study.
First, the amount of literature that examines the dividend policy of SC firms is quite
limited, given the importance of the dividend decision (see Anwer et al., 2021; Bakri and
Yong, 2023; Ben-Nasr and Ghouma, 2022; Farooq and Tbeur, 2013; Naz et al., 2017; Nor et al.,
2020). Second, another issue is that the existing studies focus on dividend-paying behavior
and likelihood, while our focus is on the relationship between dividend policy and
shareholders’ wealth. Third, even fewer studies are available that comparatively examine
the dividend policy of SC and NC firms (see Bakri and Yong, 2023; Farooq and Tbeur, 2013;
Naz et al., 2017). However, most of these studies also focus on dividend-paying behavior and
not on how the dividend policy affects the shareholders’ wealth.
Fourth, Pakistan is a sizable Muslim-majority country where Shariah principles guide the
investment decisions of most of the investors. It is the eighth most developed Islamic finance
market, according to the Global Islamic Economy Report 2021. According to the KSE Meezan30 index 2021 re-composition list, over 60% of firms are SC. In addition, the Pakistan Stock
Exchange received the best Islamic stock exchange award in 2021 from the Global Islamic
Finance Awards (GIFA). All these facts make it an interesting Islamic market to study.
However, there is a lack of literary evidence in Pakistan on the dividend issue of SC firms. Naz
et al. (2017) explored the dividend decisions of SC and NC firms in Pakistan. However, they
aimed to study the effect of firm-specific factors on the dividend policy while we examined the
effect of the dividend policy on shareholders’ wealth.
The study contributes to the scarce literature globally and in Pakistan in particular. To
the best of the authors’ knowledge, this is the first study that analyzes the effect of the
dividend policy on shareholders’ wealth in SC firms. In addition, we estimate and compare
the results for both SC and NC firms that are lacking in the existing literature. Moreover, we
investigate which theories better explain the dividend decisions of both firm types. As an
addition to the literature, we use the F-test to compare the specific effect of each dividend
policy variable on shareholders’ wealth for both firm types.
2. Literature review
2.1 Dividend theories
2.1.1 Irrelevance theory. Miller and Modigliani’s irrelevance thesis, introduced in 1961, is the
foundation of modern corporate finance theory. Miller and Modigliani contended that
dividend policy does not affect the cost of capital or business value in a world without taxes
or transaction costs. They established that when investors can generate any income pattern
by selling and buying shares, the expected return required to persuade investors to hold a
firm’s shares is independent of how it structures its dividend payments and new share
issuances. As a result, dividend policy has no bearing on company value, determined purely
by its basic earning potential and business risk. Subsequent studies by Black and Scholes
(1974) and Miller (1986) also support the dividend irrelevance proposition.
2.1.2 Clientele effect. The clientele theory hypothesizes that investors are attracted to a
firm because its dividend policy suits their needs. For example, young investors interested
in their portfolio’s growth prefer retained earnings to be reinvested rather than paid out as
dividends. On the other hand, old investors would like to receive dividends now rather than
in future growth (Gallagher, 2003). The shareholders’ preferences also depend on the tax
Dividend
policy and
shareholders’
wealth
JIABR
bracket and the transaction costs (Hussainey et al., 2011). Shareholders in high tax brackets
will prefer low dividends and vice versa (Battacharya, 1979; Miller and Rock, 1985).
2.1.3 Bird-in-hand theory. The bird-in-hand theory was proposed by Gordon (1959). The
theory is based on the notion that “A bird in the hand is worth two in the bushes.” In a world of
uncertainty and information asymmetry, investors prefer to receive dividends today rather
than increased future earnings because of the reinvestment of retained earnings (Al-Malkawi,
2007). Though reinvestment of retained earnings will send a positive signal to the market, and
the share prices may increase in the future, there is uncertainty about whether the benefits will
actually be received. Therefore, the shareholders would like to receive the dividends today and
can invest where they want. If this notion is true, the stock prices of the companies that pay
regular and full dividends should be higher than those that retain the earnings for reinvestment
purposes (Gallagher, 2003).
2.1.4 Signaling theory. The signaling theory is based on the asymmetric information
notion, where the management of a firm has more information than the investors or
shareholders. Therefore, it uses dividends as a tool to convey private information to
investors (Al-Malkawi, 2007). If the management starts paying dividends higher than
expected, the investors perceive it as a positive prospect and vice versa. It implies that a
firm’s dividend policy sends a signal to the market. Therefore, the management must be
aware of this and devise their dividend policy accordingly.
2.2 Prior literature on noncompliant firms
The issue of dividend policy has remained a central focus of the researchers, among other
corporate finance decisions. However, there is a lack of consensus over how firm-specific
factors affect the shareholders’ wealth; therefore, research is still being carried out on this
particular issue. Starting from the work of Miller and Modigliani (1961), ample literature is
available on dividend policy and its effect on shareholders’ wealth. For example, Black and
Scholes (1974) and Miller (1986) found empirical evidence that a firm’s dividend policy has
no permanent effect on its share price. On the other hand, Asquith and Mullins (1983)
analyzed the effect of dividends on the share price of 168 firms over ten years and found
strong support that dividends positively affect the share price. Hence, they argue that
dividend policy does affect the shareholders’ wealth.
On the other hand, Gordon (1959, 1962) argues that dividend policy affects a firm’s share
price, and the current share price reflects the current and future dividend payments. Later
on, Walter (1956) studied the relationship between dividend policy and stock price from the
internal rate of return perspective. The author argues that as far as the internal rate of return
is higher than the market rate, retaining the dividends will increase the share price, and
dividend payments will decrease the share price. Elton and Gruber (1970) found a significant
but weak effect of DPOs on the share price. Similarly, Horne and McDonald (1971) found in
their study that share prices decrease because of dividend payments through excessive
financing from equity. Lamont (1998) found that dividends convey information to investors
about their future expected returns.
Later down the line, Azhagaiah and Priya (2008) studied the effect of the dividend policy
on shareholders’ wealth in India from 1996 to 2006. They found that firms’ DPOs positively
affect shareholders’ wealth. Other key determinants of the shareholders’ wealth are sales
growth, investment decisions, capital structure decisions, profit margin improvement, and
the cost of capital. Likewise, Bawa and Kaur (2013) analyzed the effect of the dividend policy
on shareholders’ wealth in Indian IT firms. They concluded that shareholders’ wealth
increased in the long run for dividend-paying firms compared to nonpaying firms.
Okafor et al. (2011) found that the DPO ratio of Nigerian firms has a strong positive effect
on share price during some periods and a weak effect in others. Ojeme et al. (2015) also found
empirical evidence that the dividend policy of Nigerian banks significantly affects their
shareholders’ wealth. In another study by Ifeanyichukwu and Yusuf (2021), it was found
that there is a significant positive effect of cash dividends and price–earnings ratio on
the share price of the listed industrial goods companies in Nigeria. In addition, they could
not find any significant relationship between the share dividend and the share price. In a
recent study, David et al. (2022) found that dividend per share (DPS) and firm size positively
affect shareholders’ wealth in Nigerian banks. However, DPOs and leverage proved
insignificant for shareholders’ wealth.
Likewise, Hussainey et al. (2011) examined the relationship between dividend policy and
the share price of firms in the United Kingdom. By using multiple regressions, they found a
positive relationship between dividend yield (DY) and stock price changes and a negative
relationship between DPO and stock price. In another study on Malaysian construction and
material companies, Zakaria et al. (2012) found that DPO, leverage and firm size
significantly explain the share price volatility. However, growth, earnings volatility and DY
were insignificant. Similarly, Hashemijoo et al. (2012) examined 142 Malaysian companies
for the period 2005–2010 and found an inverse relationship between DY, DPO, firm size, and
stock returns. In another study on Korean firms, Kim (2021) argues that the relationship
between DY and shareholders’ stock returns depends on firms’ dividend reputation. The
author also found no relationship between DY and stock return for firms with no dividend
reputation.
Sijol and Basit (2016) examined the literature on the relationship between dividend policy
and shareholders’ wealth and found mixed results. In their study in Bangladesh, Al-Hasan
et al. (2013) found that paying dividends affects the shareholders’ wealth more than
retaining them. Balagobei and Selvaratnam (2015), in a study on 12 manufacturing firms in
Sri Lanka, confirmed a significant relationship between dividend policy and shareholders’
wealth. The authors found that DPS and profitability positively affect shareholders’ wealth.
Besides international literature, considerable literature is available that studies the effect
of dividend policy on shareholders’ wealth in Pakistan. For example, Akbar and Baig (2010)
examined the effect of dividend announcements on the share price of 79 companies during
the period 2004–2007. They found that there are no abnormal returns because of dividend
announcements. In another study, Asghar et al. (2011) studied the effect of dividend policy
on the stock price risk of companies from five sectors. The authors found that the DY
significantly affects share price volatility.
Similarly, Gul et al. (2012) investigated the relationship between dividend policy and
shareholders’ wealth in 75 listed firms from 2005 to 2010. They found a significant
association between dividend policy and shareholders’ wealth for dividend-paying firms. In
another study, Ansar et al. (2015) analyzed the effect of dividend policy on shareholders’
wealth for 30 listed firms. The authors found a significant positive effect of DPS, return on
equity, lagged share price and retained earnings on shareholders’ wealth as measured by the
market share price. Iqbal et al. (2014) also found a significant positive effect of dividend
policy on shareholders’ wealth in 35 firms from three sectors.
In another study, Arslan and Zaman (2014) examined 111 manufacturing firms listed on the
Karachi Stock Exchange for the period 1998–2009. The authors found a significant effect of
DY, firm size, and price-to-earnings ratio on stock returns. Similarly, Hunjra et al. (2014) studied
63 manufacturing firms from Pakistan for the period 2006–2011 and found a significant
relationship between DPO, DY and stock price. In another study by Farrukh et al. (2017), a
significant positive relationship was found between DPS, DY and share price. Khan et al. (2018)
Dividend
policy and
shareholders’
wealth
JIABR
found empirical evidence that dividend payments positively affect shareholders’ wealth. In a
recent study, Ullah et al. (2021) found a significant relationship between dividend policy and
shareholders’ wealth for selected sectors in Pakistan. The authors found a positive effect of DPS
and price-to-earnings ratio while a negative effect of profitability on the stock price.
Similarly, Ansar et al. (2015) examined 30 manufacturing firms from Pakistan and found
a significant positive effect of DPS, retained earnings, and return on equity on shareholders’
wealth. Alim et al. (2014) also found empirical evidence in favor of the positive effect of
dividend policy on shareholders’ wealth in the textile sector of Pakistan.
2.3 Prior literature on Shariah-compliant firms
Besides the empirical studies on conventional firms, a few recent studies also examine the
dividend policy of SC firms. However, these studies focus on dividend-paying behavior and
likelihood. For instance, Farooq and Tbeur (2013) found in their research on firms in the
MENA region that Sharia-compliant firms have higher payout ratios and more likelihood of
paying dividends than NC ones. Anwer et al. (2021) studied the effect of Shariah compliance
on the dividend decisions of firms in the United States. The findings reveal that the
likelihood of dividend payment is positively related to free cash flow, profitability, and
retention ratio. Moreover, it is negatively related to financial constraints, governance quality
and the market-to-book asset ratio. Ben-Nasr and Ghouma (2022) also found that Shariacompliant firms pay more dividends than NC firms. Their study was based on firms from 17
Islamic countries. Haron and Siraj (2021) investigated the effect of SC firms’ investment,
debt and dividend policies on their stock returns in Indonesia. The authors found that the
dividend policy significantly influences stock returns. In a most recent study, Bakri and
Yong (2023) examined the determinants of the dividend policy of SC and NC firms. The
authors found significant differences in the DPOs of both firm types. The results revealed
that growth opportunities, firm size, free cash flow, and profitability were the significant
determinants of dividends for SC firms. On the contrary, the significant determinants of
dividends for NC firms were profitability, firm size, growth opportunities and risk.
From the literature review, it is evident that there is an ample amount of empirical
literature on the issue of dividend policy and shareholders’ wealth for conventional firms.
However, little or no attention has been given to SC firms. Moreover, the available studies on
SC firms focus on the determinants of the dividend policy and dividend-paying likelihood
(Farooq and Tbeur, 2013; Yousef et al., 2021) and not on how the dividend policy affects the
shareholders’ wealth. The present study fills this gap by not only studying the effect of
dividend policy on shareholders’ wealth in SC and NC firms but also making a comparison
of both.
We test the following hypotheses for both firm types to achieve our objective. The
hypotheses have been formulated based on the previous literature:
H1. The dividend payout ratio positively relates to the market share price.
H2. The dividend yield ratio positively relates to the market share price.
H3. The dividend per share ratio positively relates to the market share price.
H4. The earnings per share ratio positively relates to the market share price.
Besides the above hypotheses, we also test some joint hypotheses to see whether the effect of
each dividend policy variable is the same on shareholders’ wealth for SC and NC firms. We
test the following joint hypothesis for each explanatory variable:
H5. The effect of the dividend payout ratio on the market share price is the same for SC
and NC firms.
3. Methodology
3.1 Data and sample
The study uses all the dividend-paying SC- and NC-listed firms as a sample. The data for
sample firms have been extracted from the Eikon DataStream for 2016–2021. Financial
firms, firms that did not remain listed throughout the study period, and firms with negative
equity were excluded. The final sample constitutes a panel of 66 SC and 50 NC firms.
Following previous studies (Akbar et al., 2023; Yildirim et al., 2018), all the variables were
winsorized at 1% and 99% to remove the effect of the outliers.
Dividend
policy and
shareholders’
wealth
3.2 Variables
The dependent variable is the shareholders’ wealth, measured by the market price per share
(MPS), while the independent variables are the DPO, DPS, DY and earnings per share (EPS).
In addition to the main variables, we have also taken three control variables frequently used
in the previous literature. The control variables include firm profitability (PROF), firm size
(FS) and leverage (LEV). The list of variables, their measurements and reference studies are
given in Table 1.
3.3 Model specification
The study examines dividend policy’s effect on shareholders’ wealth in SC and NC firms in
Pakistan. For this purpose, we use the following model for both firm types:
MPSit ¼ a þ b1 DPOit þ b2 DYit þ b3 DPSit þ b4 EPSit þ b5 PROFit þ b6 FSit
þ b7 LEVit «it
Variables
Dependent
Market price per share (MPS)
Independent
Dividend payout ratio (DPO)
Dividend per share (DPS)
Dividend yield (DY)
Earnings per share (EPS)
Control
Profitability (PROF)
Firm size (FS)
Leverage (LEV)
Source: Authors’ own work
(1)
Measurement
References
The current market price per
share
Ansar et al. (2015)
Dividends paid/net income
Dividends paid/no. of common
shares outstanding
Dividend per share/price per
share
Net income/no. of common
shares outstanding
Anwer et al. (2021)
Iqbal et al. (2014)
Earnings available to common
shareholders/total assets
Natural logarithm of total
assets
Total debt/total equity
Nor et al. (2020)
Nor et al. (2020)
Bakri and Yong (2023)
David et al. (2022)
Sukmawardini and Ardiansari (2018)
Table 1.
List of variables,
their measurement
and reference studies
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where MPSit is the dependent variable and represents the market price per share while
DPOit, DYit, DPSit, EPSit, PROFit, FSit and LEVit are the independent variables representing
the dividend payout ratio, dividend yield, dividend per share, earnings per share,
profitability, firm size and leverage, respectively.
3.4 Joint hypotheses test
We test some joint hypotheses on whether the effect of dividend policy variables is the same
on the shareholders’ wealth in SC and NC firms, following Akbar et al. (2023) and Amin et al.
(2019). For this purpose, we generate dummies for Shariah (SH) and non-Shariah (NS) firms
and interact them with each explanatory variable. Afterward, we fit the interaction terms
into our base model to test our joint hypotheses. The base model takes the following form:
MPSit ¼ a þ b1 SHDPOit þ b2 NSDPOit þ b3 SHDYit þ b4 NSDYit þ b5 SHDPSit
þ b6 NSDPSit þ b7 SHEPSit þ b8 NSEPSit þ b9 SHPROFit þ b10 NSPROFit
þ b11 SHFSit þ b12 NSFSit þ b13 SHLEVit þ b14 NSLEVit þ «it
(2)
Then we use the F test for testing the null hypothesis of the same coefficient of the
explanatory variables such as b1 ¼ b2, b3 ¼ b4 and so on, for SC and NC firms.
4. Results and discussion
4.1 Descriptive statistics
Table 2 summarizes the descriptive statistics for both firm types and the result of the twosample t-test for mean comparison. The two-sample t-test results show that SC firms have
higher share prices than NC firms. Moreover, SC firms pay significantly higher dividends
than NC firms. Similarly, SC firms’ DYs and EPS ratios are significantly higher than their
NC peers.
Interestingly, Shariah-complaint firms earn more profits on their assets compared to NC
firms. In addition, SC firms are larger in size than NC firms. Lastly, SC firms’ leverage ratio
is substantially lower than that of NC firms, with a mean value of 44.285. This is because of
the 37% debt threshold, which Shariah-complaint firms cannot exceed.
Variable
Obs
MPS
DPO
DPS
DY
EPS
PROF
FS
LEV
396
396
396
396
396
396
396
396
Shariah-compliant
mean
SD
528.862
35.347
21.092
3.544
33.844
9.813
16.018
44.285
1,285.165
28.487
60.902
3.713
79.462
8.929
1.642
100.801
Two-sample t-test
p-value
Noncompliant
Mean
SD
Obs
4.3220
6.8680
4.2954
2.2925
4.7173
6.2624
3.6324
6.1094
0.000
0.000
0.000
0.022
0.000
0.000
0.0002
0.001
225.108
24.616
6.81
3.598
15.878
6.775
16.145
223.118
300
300
300
300
300
300
300
300
923.273
26.104
29.028
3.603
36.705
6.103
1.199
659.738
Notes: This table shows the descriptive statistics and the results of the two-sample t-test for mean
Table 2.
comparison of SC and NC firms. The descriptive statistics include mean, standard deviation and number of
Descriptive statistics observations
and two-sample t-test Source: Authors’ own work
4.2 Correlation
The correlation matrix for SC and NC firms is shown in Table 3, Panels A and Panel B,
respectively. For SC firms, all the variables positively correlate with the MPS. DPS shows a
very high correlation of 0.910 with the dependent variable MPS. Similarly, the correlation
between the EPS and the MPS is also high. On the other hand, we do not see a very high
correlation among the independent variables except between EPS and DPS. However, this is
because of the nature of the variables, i.e. the higher the EPS, the higher the dividends per
share.
Similarly, all the explanatory variables show a positive correlation with the dependent
variable MPS for NC firms, except for DY. In addition, a high correlation was recorded for
DPS, EPS, and ROE. We also observe a high correlation between the DPS and ROE.
The high correlations among the independent variables may also indicate the problem of
multicollinearity, which may distort our results. For this purpose, we estimate the variance
inflation factor to see whether our model has a multicollinearity problem. The results of the
variance inflation factor are given in Table 4 Panel A and Panel B.
We see that all the values of VIF for both firm types are below 10. According to Gujarati
and Porter (2009), if the value of VIF is less than 10, there is no multicollinearity issue.
Therefore, we conclude that our data has no multicollinearity issue.
Dividend
policy and
shareholders’
wealth
4.3 Selection of the appropriate estimator
The validity of the results depends on choosing the appropriate estimator based on the
nature of the data. For this purpose, we have used two tests: the Breusch and Pagan
Lagrangian multiplier test to choose between pooled OLS and the random/fixed-effects
Variables
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Panel A: matrix of correlations (Shariah-compliant firms)
(1) MPS
1.000
(2) DPO
0.399
(3) DPS
0.910
0.402
1.000
(4) DY
0.050
0.306
0.238
1.000
(5) EPS
0.842
0.356
0.865
0.151
(6) PROF
0.357
0.517
0.344
0.186
(7) FS
0.232
0.241
0.204
0.120
(8) LEV
0.271
0.000
0.182
0.143
1.000
0.384
0.264
0.076
1.000
0.152
0.177
1.000
0.004
1.000
Panel B: matrix of correlations (noncompliant firms)
(1) MPS
1.000
(2) DPO
0.407
1.000
(3) DPS
0.969
0.437
1.000
(4) DY
0.041
0.441
0.057
1.000
(5) EPS
0.821
0.317
0.856
0.095
(6) PROF
0.335
0.319
0.355
0.298
(7) FS
0.212
0.261
0.240
0.280
(8) LEV
0.077
0.060
0.060
0.122
1.000
0.470
0.259
0.022
1.000
0.362
0.068
1.000
0.151
1.000
Notes: Panel A: This table exhibits the correlation matrix for SC firms. The dependent variable is MPS,
while the independent variables are DPO, DPS, DY, EPS, PROF, FS and LEV. Panel B: This table exhibits
the correlation matrix for NC firms. The dependent variable is MPS, while the independent variables are
DPO, DPS, DY, EPS, PROF, FS and LEV
Source: Authors’ own work
Table 3.
Matrix of
correlations
JIABR
Table 4.
Results of VIF
Variable
VIF
1/VIF
Panel A: VIF (Shariah-compliant firms)
DPS
EPS
DPO
PROF
DY
LEV
FS
Mean VIF
4.664
4.442
1.597
1.543
1.194
1.176
1.117
2.247
0.214
0.225
0.626
0.648
0.838
0.85
0.895
.
Panel B: VIF (noncompliant firms)
DPS
EPS
DPO
PROF
DY
FS
LEV
Mean VIF
4.597
4.47
1.669
1.514
1.405
1.244
1.044
2.278
0.218
0.224
0.599
0.66
0.712
0.804
0.958
.
Source: Authors’ own work
model and the Hausman specification test to choose between the random and fixed-effects
models. The results are given in Table 5.
As the p-value for the BPLM test is significant for SC firms, we reject the null hypothesis
that error variances are all equal and conclude that error variances are not equal. More
specifically, there are substantial differences in panels. Hence, pooled OLS cannot be used;
instead, the random effects or fixed-effects model shall be used. Next, the Hausman (1978)
specification test is used to choose between the random and fixed-effects models. Because
the p-value of the Hausman test is significant, the preferred model, in this case, is the fixedeffects model for SC firms. However, the value of the BPLM test for NC firms is insignificant
at 5%. Hence, we conclude that the error variances are all equal, and the preferred model will
be the pooled OLS.
We also checked the data for heteroskedasticity and serial correlation. We applied the
modified Wald test for heteroskedasticity and the Wooldridge test for serial correlation. The
results are presented in Table 6.
The p-value for the Wald test is significant at 5%; thus, we reject the null hypothesis of
homoskedasticity and conclude that the data contains heteroskedasticity. For the second
Test
BPLM (chibar2(01))
p-value
Hausman
p-value
Shariah-compliant
Noncompliant
83.75
0.000
193.99
0.000
0.05
0.4085
Table 5.
Results of BPLM and Note: The table presents the results of the BPLM test and the Hausman test for SC and NC firms
Hausman tests
Source: Authors’ own work
test, we accept the null hypothesis of no first-order serial correlation in the data as the pvalue is insignificant at 5%. To handle the problem of heteroskedasticity, we have used the
robust option in Stata.
4.4 Results of the main model
Tables 7 and 8 present the results of the main models for SC and NC firms, respectively. The
dependent variable is the MPS, while the independent variables are DPO, DY, DPS, EPS,
PROF, FS, and LEV. The results reveal a positive relationship of DPS and EPS with MPS for
SC firms and a positive relationship of DPO and DPS with MPS for NC firms. Because DPO,
DPS and EPS are the proxies of dividend policy, the positive relationship supports the birdin-hand and signaling theories. The former postulates that shareholders prefer to receive
consistent dividends because of uncertainty about future capital gains (Gordon, 1959), while
the latter holds that, because of information asymmetry, firms use their dividends as a
signal to convey information to shareholders about their future earnings. Hence, a high
dividend payment reflects high future earnings and vice versa (Battacharya, 1979; Miller
and Rock, 1985). The results are in line with many previous studies, such as David et al.
(2022), Farrukh et al. (2017), Ullah et al. (2021), and Khan et al. (2018).
On the other hand, DY showed a significant negative relationship with MPS for both firm
types. The negative relationship of DY is consistent with the clientele theory that investors
prefer to invest in stocks with particular DYs. Investors in high tax brackets are more
inclined to hold stocks with low DY and vice versa (Issa, 2015). The findings are in line with
Tests
Modified Wald test
p-value
Wooldridge test
p-value
Shariah-compliant
Noncompliant
14308.92
0.0000
3.436
0.0689
57310.03
0.0000
1.774
0.1917
Note: H1 ¼ Data is homoscedastic; H2 ¼ No first-order serial correlation in the data
Source: Authors’ own work
MPS
Coef.
St. err.
t-value
p-value
DPO
DPS
DY
EPS
PROF
FS
LEV
Constant
R-squared
F-test
0.922
1.251
18.721
1.987
5.91
12.116
0.424
623.769
0.656
0.712
4.343
0.369
2.088
34.208
0.213
548.015
0.215
12.675
1.41
0.160
1.76
0.080
4.31
0.000
5.38
0.000
2.83
0.005
0.35
0.723
1.99
0.048
1.14
0.256
Number of obs
Prob > F
[95% conf. Interval]
0.367
0.149
27.265
1.26
1.802
79.414
0.843
454.361
2.212
2.651
10.176
2.714
10.018
55.183
0.004
1701.898
396.000
0.000
Dividend
policy and
shareholders’
wealth
Table 6.
Results of
heteroskedasticity
and serial correlation
tests
Sig.
*
***
***
***
**
Notes: The table shows the results of the fixed-effect model for SC firms. MPS is the dependent variable,
while DPS, DY, EPS, PROF, FS and LEV are the independent variables. ***, ** and * represent the
significance level at 1, 5 and 10%, respectively
Source: Authors’ own work
Table 7.
Results of the fixedeffect model for
Shariah-compliant
firms
JIABR
Table 8.
Results of the pooled
OLS for
noncompliant firms
MPS
Coef.
St. err.
t-value
p-value
DPO
DPS
DY
EPS
PROF
FS
LEV
Constant
Mean dependent var
R-squared
F-test
1.188
30.89
29.51
0.574
3.869
0.278
0.013
67.298
0.595
0.888
3.953
0.692
2.423
11.176
0.019
175.471
225.108
0.951
801.560
2.00
0.047
34.80
0
7.46
0
0.83
0.407
1.60
0.111
0.02
0.98
0.67
0.501
0.38
0.702
SD dependent var
Number of obs
Prob > F
[95% conf. Interval]
0.018
29.143
37.291
1.937
0.9001
21.717
0.024
278.05
Sig.
2.359
32.637
21.729
0.788
8.638
22.273
0.049
412.646
923.273
300.000
0.000
**
***
***
Notes: The table shows the results of the pooled OLS for NC firms. MPS is the dependent variable, while
DPS, DY, EPS, PROF, FS and LEV are the independent variables. *** and ** represent the significance
level at 1 and 5%, respectively
Source: Authors’ own work
those of Hunjra et al. (2014), Hussainey et al. (2011), Aminu and Salawudeen (2019), and
Okafor et al. (2011).
However, no significant effect of DPO on MPS for SC firms and EPS on MPS for
NC firms could be found, supporting the dividend irrelevance theory. According to
this theory, a firm’s dividend policy does not affect its shareholders’ wealth (Black and
Scholes, 1974; Miller, 1986; Miller and Modigliani, 1961). The insignificant relationship
was also found by David et al. (2022), Khan et al. (2018) and Chenchehene and Mensah
(2015), among others.
For control variables, the results of PROF and LEV are significant for SC firms. PROF is
positively related to MPS, while LEV is negatively related to MPS. The findings reveal that
share prices increase with increased profits while decreases with increased debt financing.
The reason is that more profits result in more earnings available to shareholders and, as a
result, more EPS, thus increasing shareholders’ wealth. On the other hand, increased debt
financing decreases available earnings for shareholders because of increased financing
costs. The findings are consistent with previous studies by Abdullah et al. (2015), Ansar
et al. (2015), Hashemijoo et al. (2012), Khan et al. (2011), and Masum (2014).
Based on the findings, we accept H2 and H3 for both firm types, H1 for NC firms only
and H4 for SC firms only, while we reject H3 for both firm types.
Table 9.
Results of the joint
hypotheses test
Hypothesis
F-statistic
The effect of DPO on MPS is the same for SC and NC firms
The effect of DPS on MPS is the same for SC and NC firms
The effect of DY on MPS is the same for SC and NC firms
The effect of EPS on MPS is the same for SC and NC firms
The effect of PROF on MPS is the same for SC and NC firms
The effect of FS on MPS is the same for SC and NC firms
The effect of LEV on MPS is the same for SC and NC firms
0.00
16.57***
12.95***
1.68
1.76
2.59
7.25***
Note: ***Show significance at the 99% levels
Source: Authors’ own work
4.5 Results of joint hypotheses test
We also study the specific effect of each independent variable on the MPS and whether it
differs for both firm types. For this purpose, we used the F-test to test the null hypothesis of the
same relationship between each independent variable on the MPS for SC and NC firms. The
results of the F-test are given in Table 9. The significant results of DPS, DY and LEV imply
that the effect of these dividend policy variables on the MPS is significantly different for both
firm types. Hence, we reject our hypothesis of the same relationship for DPS, DY and LEV.
However, the coefficients of DPO, EPS, PROF and FS are not statistically different for SC and
NC firms. Therefore, we cannot reject our hypothesis for DPO, EPS, PROF and FS and
conclude that the relationship of these variables with the MPS is the same for both firm types.
5. Conclusion
The present study aims to analyze the effect of dividend policy on shareholders’ wealth in
SC and NC firms listed on the Pakistan Stock Exchange for 2016–2021. We used the fixedeffects model and pooled OLS to draw our conclusions based on the results of the BPLM and
Hausman tests. The findings reveal that the dividend policy does affect the shareholders’
wealth for both firm types. The DPS, DY and EPS, being the proxies of dividend policy,
were significant for SC firms. The DPS and EPS showed a positive relationship with market
price per share, while the DY exhibited a negative relationship with market price per share.
On the other hand, DPO, DY and DPS were found to have a significant effect on the
market share price of NC firms. The effect of DPO and DPS was positive, while it was
negative for DY. For control variables, only profitability and leverage were found significant
for SC firms, while no significant relationship could be found for any control variable for NC
firms. Furthermore, it was found that the relationship between DPS, DY, leverage and the
market price per share was substantially different for SC and NC firms.
It was further found that the Bird-in-Hand, Signaling, and Clientele theories are jointly
applicable to both firm types, and no single theory could exclusively explain the results.
The study has specific implications. The findings of this study provide valuable input to
the management of SC and NC firms regarding the reliable dividend policy factors that
affect the shareholders’ wealth. The results will help them devise an optimal dividend policy
to maximize shareholders’ wealth. Second, it explicitly shows how Shariah compliance
affects the relationship between dividend policy measures, profitability, firm size, leverage
and the shareholders’ wealth. Shareholders and potential investors can also benefit from the
study’s findings. They will better understand the critical firm-specific factors and their
effect on the stock price to make informed investment decisions. Lastly, it identifies the key
dividend theories applicable in Pakistan concerning SC and NC firms.
5.1 Research limitations and future research directions
The present study is based on firms from a single country, i.e. Pakistan. This limits the
generalizability of the results. Therefore, more studies should be conducted on this specific
issue by taking a large sample from multiple Muslim countries. In addition, including
industry dynamics in the model will further improve the study.
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and Management Sciences, Vol. 2 No. 5, pp. 1-8.
Further reading
Amidu, M. (2007), “How does dividend policy affect performance of the firm on Ghana stock exchange”,
Investment Management and Financial Innovations, Vol. 4 No. 2, pp. 103-112.
Corresponding author
Shehzad Khan can be contacted at: shehzadkhantopi@gmail.com
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Dividend
policy and
shareholders’
wealth