Dividend theory and empirical evidence : a theoretical perspective

Abstract

Objective: The objective of this study is to theoretically review the existing theoretical and empirical literature on dividend policy to understand the status and applicability of the theory in different economies and to discover any potential knowledge gaps for further research. -- Study Design and Methodology: This is a descriptive analysis of existing theoretical literature and its application in different economies. The study used a sample of empirical studies to gather empirical evidence. -- Findings: Dividend policy has a significant role in the firm decision-making process, a uniform dividend policy for all firms may not be feasible because of the differences in firms’ ownership, investor’s preference and firm characteristics, firms maintain a consistent dividend policy to avoid giving wrong signals to investors. The study also confirms inconsistency in the application of existing dividend theory with empirical evidence in different markets. We find that the ownership structure of a firm has greater influence in the firm decision-making process and recommend future studies should explore the extent to which ownership structure influences dividend policy and firm value. -- Significance of the study: This study provides a framework for evaluating dividend policy practices between developed and developing countries, evaluate the relevance and applicability of dividend theory within the context of developing economies and identify the best dividend policy practices. The study will form part of the body of knowledge in the finance literature that will enable scholars to appreciate the critical issues involved in dividend policy decisions and provide a base for identifying knowledge gaps for further research.