FACTORS AFFECTING DIVIDEND PAYOUT: EVIDENCE FROM COMMERCIAL BANKSethiopan

Abstract

II| P a g eApproval Sheet III| P a g eAcknowledgement First and foremost, I would like to thank the Almighty God for his support and protection in all aspects of my lifeand saint marry.It is an accepted fact that nothing constructive could be achieved in isolation. I would like to express my sincere gratitude to my advisor Tamirat Getahun(PhDcand.), and my co-advisor Assistant ProfessorMekuanint Aberafor theirguidance and valuable suggestion at every stage of this thesis. I also appreciate the support given by the staffs of National Bank of Ethiopiaand selected bank managersand workersfor their Cooperation in data collection of this study. At last,but not least, I would like to thank all my friends and my family for their unconditional support. IV| P a g eTable Content Content’spageStatement of Declaration.............................................................................................................................ITable Content.............................................................................................................................................IVList of Tables.............................................................................................................................................VIIAbstract......................................................................................................................................................VIIIList of Acronyms........................................................................................................................................IX1.Chapter One: Introduction................................................................................................................11.1.Background of the Study............................................................................................................11.2.Statement of the Problem...........................................................................................................31.3.Objectives of the Study...............................................................................................................51.3.1.General Objective of the Study..........................................................................................51.3.2.Specific Objectives the Study.............................................................................................51.4.Research Question......................................................................................................................51.5.Scope of the Study.......................................................................................................................61.7.Significance of the Study............................................................................................................61.8.Organization of the Study..........................................................................................................72.Chapter Two: Literature Review......................................................................................................82.1.Definition of Dividend.................................................................................................................82.2.Theoretical Literature Review...................................................................................................82.2.1.Dividend Irrelevance Theory.............................................................................................82.2.2.Bird in the Hand Theory....................................................................................................92.2.3.Clientele Effect Theory.....................................................................................................102.2.4.Signaling Theory...............................................................................................................112.2.5.Agency Theory...................................................................................................................112.2.6.Tax Preference...................................................................................................................122.2.7.Pecking Order Theory......................................................................................................132.2.9.Life Cycle Theory..............................................................................................................142.3.Types of Dividends....................................................................................................................142.3.1.Cash dividends..................................................................................................................142.3.2.Stockdividends..................................................................................................................142.3.3.Property dividend.............................................................................................................14 V| P a g e2.3.4.Liquidating dividends.......................................................................................................152.3.5.Scrip dividend....................................................................................................................152.3.Review of Empirical Studies....................................................................................................152.3.1.Studies in Developed and Emerging Market Countries................................................152.3.2.Studies in African Countries............................................................................................172.3.3.Studies in Ethiopia............................................................................................................182.4.Research Gap............................................................................................................................202.5.Conceptual Framework............................................................................................................233.Chapter Three: Research Methodology..........................................................................................243.1.Research Design........................................................................................................................243.2.Research Approach...................................................................................................................243.3.Sampling Design........................................................................................................................243.4.Data Type and Source...............................................................................................................253.5.Method of Data Analysis..........................................................................................................253.6.Variable Definition, Measurement and Hypothesis Development........................................253.6.1.Dividend Payout Ratio......................................................................................................263.6.2.Profitability........................................................................................................................263.6.3.Liquidity.............................................................................................................................263.6.4.Leverage.............................................................................................................................273.6.5.Growth Opportunity.........................................................................................................283.6.7.Previous Year Dividend....................................................................................................293.6.8.GDP Growth......................................................................................................................293.6.9.Inflation..............................................................................................................................303.6.9Exchange Rate...................................................................................................................303.7.Model Specification...................................................................................................................303.8.Ethical consideration................................................................................................................324.Chapter Four: Data Presentation Analysis and Interpretation....................................................33Introduction...............................................................................................................................................334.1. Descriptive Statistics.....................................................................................................................334.2. Correlation Statistics.....................................................................................................................354.3. Testing Assumptions of Classical Linear Regression Model (CLRM)......................................374.3.1. Normality test..........................................................................................................................374.3.2. Heteroscedastic Test...............................................................................................................37 VI| P a g e4.3.3 Multicollinearity test................................................................................................................394.3.4. Autocorrelation.......................................................................................................................404.4. Model Specification Test...............................................................................................................414.5. Model Selection(Random Effect versus Fixed Effect Models)..................................................414.6. Breusch and Pagan LM Test.........................................................................................................434.7. Discussion of the Results...............................................................................................................444.7.1 Factors affecting Dividend Payout.........................................................................................444.8. Summary of analysis......................................................................................................................515.Chapter Five: Conclusion and Recommendation..........................................................................525.1.Conclusion.................................................................................................................................525.2.Recommendation.......................................................................................................................545.3.Further Research Suggestion...................................................................................................55References.....................................................................................................................................................iAppendixes.................................................................................................................................................vi VII| P a g eList of TablesTable 2.1: Summary of Empirical Finding...................................................................................20Table 2.2: Conceptual Framework................................................................................................23Table 4.1: Descriptive Statistics...................................................................................................32Table 4.2: Matrix of Correlation...................................................................................................35Table 4.3: Normality Test.............................................................................................................35Table 4.4: White Test for Homoskedasticity................................................................................37Table 4.5:Variance of Inflation Factors Test................................................................................39Table 4.6: Durban-Watson statistics test......................................................................................40Table 4.7:Model specification test................................................................................................41Table 4.8:Hausman Test...............................................................................................................42Table 4.9: Breusch and Pagan LM Test........................................................................................41Table 4.10: Pooled OLS regression..............................................................................................42Table 4.11: Comparison between actual and expected result.......................................................51 VIII| P a g eAbstractIdentifying and explaining factors that influence dividend payout is one of the most debated issues among various academicians and policy makers alike. Due to this reason, the major objective of this study was toexamine factors that affect dividend payout evidence from commercial banks of Ethiopia.The study useddividend payout ratio as dependent variable and profitability, liquidity, leverage, growth opportunity, lagged dividend, and macro variable (inflation, GDP growth and exchange rate) as independent variable. The studyalsoappliedexplanatory research design to examine the cause-and-effect relationships between dependent and independent variable andusedquantitative research approach. The population of the study include all or seventeen commercial banks of Ethiopia, out of all commercialbanks the studywasincludeonlyeightbanks in this study by applying purposive sample selection method and by setting three criteria for selection purpose. The study also used secondary data (which consists of both cross sectional and time series information) from National Bank of Ethiopia and published annual reports of Ethiopian commercial banksthat have quantitative nature. The study used‘STATA 14’version and ordinary least square (OLS) regression method to analyze the data and classical linear regression model in order to ascertain no problem affect the results of the study.The result of the study shows that, previous year dividend and inflation were statistically significant factors and positively related with dividend payout. On the other hand, profitability growth opportunity and age of bank were statistically significant factors and negatively related with dividend payout and the remaining four factors were insignificant, including GDP growth rate,exchange rate and liquidity,leverage with dividend payout of commercial banks of Ethiopia.Finally, the study recommended that, banks managers and board of director give consideration to growth, profitability, previous dividend payout, age of their banks and inflation when they set dividendpayout as they are found to be the most significant variables that affect dividend payout.