The Economic and Behavioural Factors Affecting Corporate Dividend Policy: Theory and Evidence

  • Abdullah Al Ghazali

Student thesis: Doctoral ThesisPhD


This focuses on corporate dividend policy. The first empirical chapter analyses the information content of dividend announcements and factors that drive dividend changes in Oman, as a unique environment, for the period 2000-2011. Our work complements, and contrasts with, an existing study (Al-Yahyaee et al., 2011), which demonstrates a positive correlation between dividends and stock prices in Oman, in support of the signalling theory. Employing multiple methods from earlier studies, we demonstrate that there is some relationship between dividends and future profitability. However, after controlling for the nonlinearity in the profitability process, we find no evidence for the signalling theory of dividends. Furthermore, our analysis affirms the importance of past and current profitability in influencing the magnitude and the propensity to change (increase or decrease) dividends in Omani firms. Moreover, the results provide no evidence of the life cycle theory as an important factor that influences dividend changes in the emerging market of Oman.The second chapter examines the relationship between managerial overconfidence, dividends and firm value by developing theoretical models that examine the conditions under which managerial overconfidence, dividends and firm value may be positive or negative. Furthermore, the models incorporate moral hazard, in terms of managerial effort shirking, and the potential for the manager to choose negative NPV projects, due to private benefits. Our models demonstrate that overconfidence can lead to higher dividends (when the manager is overconfident about his current ability) or lower dividends (when the manager is overconfident about his future ability). Furthermore, our results demonstrate that managerial bounded rationality could impact this relation.The final chapter empirically examines the effect of managerial overconfidence on UK firms’ payout policy for the period 2000 to 2012. The analysis incorporates, in addition to common firm-specific factors, a wide range of corporate governance factors and managerial characteristics that have been documented to affect the relationship between overconfidence and payout policy. Our results are robust to several estimation considerations. The findings show that the influence of overconfident CEOs on the amount of and the propensity to pay dividends is significant within the UK context. Specifically, we detect that there is a reduction in dividend payments in firms managed by overconfident managers compared to the non-overconfident counterparts. Moreover, we affirm that cash flows, firm size and profitability are positively correlated, while leverage, firm growth and investment are negatively correlated with the amount of and propensity to pay dividends. Interestingly, we demonstrate that firms with the potential for undervaluation reduce dividend payments. Some of the corporate governance factors are shown to motivate firms to pay more dividends, while these factors seem to have no influence on the propensity to pay dividends. The results also show that in general higher overconfidence leads to more share repurchases but lower total payouts. Overall, managerial overconfidence should be considered as an important factor influencing payout policy in addition to other known factors.
Date of Award24 Jun 2015
Original languageEnglish
Awarding Institution
  • University of Bath
SupervisorRichard Fairchild (Supervisor) & Bruce Morley (Supervisor)

Cite this