Impact of Dividend Policy on Shareholder Wealth with Firm Growth as a Moderator

Abstract

Dividend policy has long been one of the hotly debated areas in corporate finance, with conflicting models of dividend policy and different predictions regarding the impact of dividend policy on shareholder value and when dividends are value-relevant. The present study uses quantitative panel data methodology and takes into consideration the moderating effect of firm growth in the effect of dividend policy on shareholder wealth of Pakistan Stock Exchange (PSX) listed companies. Secondary data were obtained from the audited annual reports and stock market data from 80 consistent dividend-paying non-financial companies listed on the Pakistan Stock Exchange (PSX) for the time span 2018-2023, which resulted in 480 firm-year observations. The operationalisation of dividend policy is in terms of dividend payout ratio (DPR) and dividend yield (DY); of shareholder wealth through market price per share (MPPS) and earnings per share (EPS); and of firm growth through the sales growth rate (SGR) and the asset growth rate (AGR). Descriptive statistical analysis, Pearson correlation and fixed-effects panel regression are used, along with the test of moderation using the structural equation modeling (SEM) and interaction terms. The results suggests that dividend payout ratio has significant and positive direct effect on market price per share (β = 0.44, p < 0.001) and EPS (β = 0.38, p < 0.001). Additionally, dividend yield is positively related to shareholder wealth measures (β = 0.36–0.42, p < 0.001). Critically, the dividend policy-shareholder wealth relationship is much stronger for high growth firms than for low growth firms, with a significant positive response to dividend increases (β = 0.62) for the growth firms, compared with the low growth firms (β = 0.28), which contradicts the conventional wisdom that growth firms prefer retention. The model accounts for 61.8% of the variance in MPPS. These results support the signalling theory of dividends and also have implications for dividend policy of PSX-listed firms.