ADDIS ABABA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Determinants of dividend policy: The case of Zemen Bank

Senior Essay Submitted to the Department of Accounting and

Finance in Partial fulfillment for Requirements of Bachelor of
Arts Degree in Accounting and Finance
Prepared By

Solomon Sisay

Under the Supervision of

Ayele Kebede

June 2016

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 ACKNOWLEDGEMENTS

Prior to any thing I thank the almighty God for giving me each unit of seconds, holy will and
strength to prepare this research paper. Secondly I am so indebted to my study Ayele Kebede
for his unreserved advice and valuable comments through the whole process till the paper are
finalized. My special heart-felt gratitude goes to zemen bank staff members, particularly to the
department of finance, as well as human resource department, who have provided all necessary
material and information for may paper. I also want to take this opportunity to sincerely express
my indebtedness to my brother Shimels Sisay for his invaluable contribution for my academic
achievement and, always supporting and encouraging me in every walk of my life in general.
Lastly, I would like to thanks to my families, friends, and all the people for their valuable
comments, material and moral support.

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 Table of Contents

Contents Page No

Acknowledgements.....................................................................................................................i

Table of Content........................................................................................................................ii

Tables .......................................................................................................................................iv

Acronyms ..................................................................................................................................v

Abstract.....................................................................................................................................vi

CHAPTER ONE

1. Introduction (background).....................................................................................................1

1.1 Statement of the problem...........................................................................................................1

1.2 Research question .....................................................................................................................2
1.3 Objective of the study................................................................................................................4
1.4 Research design and methodology.............................................................................................4
1.5 Philosophical assumptions.........................................................................................................5
1.6 Sampling and population...........................................................................................................6
1.7 Methods of data collection.........................................................................................................7
1.8 Significance of the study............................................................................................................7
1.9 Scope of the study .....................................................................................................................8
1.10 Limitation of the study…………………………………………….............……………..8
1.11 Organization of the paper...................................................................................................9
CHAPTER TWO

2. Literature Review.................................................................................................................10

2.1 Theoretical review.......................................................................................................10

2.1.1 Types of dividend payout policy.........................................................................11

2.1.2 Explanations for paying dividends ......................................................................12

2.2 Empirical reviews .............................................................................................................15

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 2.2.1 Determinant of dividend payout policy.......................................................................15

2.2.1.1 Profitability ..............................................................................................................16

2.2.1.2 Firm’s size.................................................................................................................17

2.2.1.3 Liquidity ...................................................................................................................17

2.2.1.4 Growth opportunities ...............................................................................................18

2.2.1.5 Financial leverage.....................................................................................................20

2.2.1.6 The effect of previous year’s dividend......................................................................22

2.3 conclusions and knowledge gaps.........................................................................................23

Chapter Three

3. Data presentation and analysis................................................................................................24

3.1 Background of the organization.........................................................................................24

3.2 Results and data analysis........................................................................... ........................24

3.2.1 Questionnaire results..................................................................................................25

3.2.2 In-depth interview results.......................................................... ................................26

3.3 Presentation of a result..........................................................................................................37

Chapter Four

4. Conclusions and recommendation.......................................................................... ................40

4.1Conclusions.........................................................................................................................40

4.2 Recommendations...............................................................................................................41

4.3 Areas for future research......................................................................................................42

References

Appendix

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Tables

Table 1 respondent’s profile…………………………………………………………...25

Table 2 effect of profitability on dividend payout policy……………………………...27

Table 3 effect of liquidity on dividend payout policy………………………………....28

Table 4 effect of firms size on dividend payout policy……………………..................29

Table 5 effect of firm’s age on dividend payout policy………………………………..30

Table 6 effect of firm’s earning power on dividend payout policy………….....……...31

Table 7 effect of growth on dividend payout policy……………………………….…..32

Table 8 dividend practices of the company...............……………………………….....34

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Acronyms

AGM: Annual general meeting

ZB: Zemen bank

ETB: Ethiopian Birr

GCC: Gulf co-operation council

MA/MSC: Masters or masters of Science

NPV: Net present value

NYSE: New York securities exchange

S.C: Share Company

US: United States

UK: United Kingdom

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 ABSTRACT

The dividend payout policy is one of the most debated topics within corporate finance and
some academics have called the company’s dividend payout policy an unsolved puzzle. The
researcher therefore decided to conduct a study regarding the determinants of zemen banks
share company dividend payout policy. In order to achieve this objective, the study uses
quantitative research approach. Data collected by questionnaire from the respondents and in-
depth interview is conducted with finance manager of zemen bank. The study analyses a range
of determinants of dividend policy: Profitability, growth, Liquidity, firms earning power, firm
age and size of the company. The results show that dividend payout policy decisions are
relevant and profitability, growth, firms earning power and firms age are significant factors
which positively influence dividend payout policy of zemen bank's share company. On the
other hand, liquidity and firm's size influences dividend payout policy's of the company less
significantly.

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 CHAPTER ONE

INTRODUCTION

1. Background of the study

Almost each company earns profit each year and that profit is reinvested in business or
distributed to shareholders. The process that how much and in which way profit is distributed
among shareholders is called dividend policy.

Dividend policy is one of the most debatable issues in modern corporate finance and still a
puzzle. Black (1976) argues that “the harder we look at the dividend picture, the more it seems
like a puzzle, with pieces that just don’t fit together”. This led to competing theoretical and
empirical research to explain why companies pay or do not pay dividends. The dividend policy
is still listed as one of the top ten crucial unresolved issues in the world of finance in which no
consensus has been reached (Brealey & Myers, 2003).

In order to guide the dividend decision, there are alternative theories according to residual
policy theory states a firm will only pay dividends from the earnings left after financing all
positive NPV projects. In this policy, the main concern of the managers is to invest more and
more and in this case dividend policy becomes irrelevant. In contrast, the residual dividend
policy, indicate that firms pay a fixed percentage of its earning to the share holder each year.
And calculated by dividing dividend per share by firm earning per share. Further, the Smooth
Residual Dividend Policy argues firms pay fixed amount of dividend to shareholder each year,
firms don’t cut dividend after announcing the dividend. Many firms adopt this type of
policy .The Small Quarterly Dividend with Annual Bonus policy states firms pay low regular
dividends, if the earning increases than normal earning then firms pay additional dividend
designated as extra or special dividends. There are various ways in which such income
generated can be put to use. Based on the residual theory of dividend, there is the tendency for
companies to reinvest such profit in the business. Because of clientele effect there has been
increasing pressure on companies to pay dividends. Dividends are referred to as reward for
providing finance. (Kumar, 2003). The question is should all income be paid out as dividends
or part? What percentage should be retained and what percentage to be paid?.While making this
decision the management considers available investment opportunities that would increase

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future earnings and if such opportunities are not available the board of directors mostly has to
decide on whether to pay a large, small or zero percentage of their earnings as dividends to
shareholders. (Miller & Modigliani, 1961).The dividends and dividend policy were the subject
of many studies for many years from past to present (Lintner, 1956; Miller and Modigliani,
1961; Amidu and Abor, 2006). Based on these it is logical to follow that there are so many
controversy surrounding dividend policy in corporate finance. Many researchers in past have
come up with theoretical models explaining what factors managers should consider while
making a dividend decision. Dividend decision is important for both the investors and
corporations. It is the decision of company’s management that what proportion of the earnings
should be invested and what proportion should be distributed to shareholders as dividends. The
leverage includes the warnings indicating the managers’ information about the investing
opportunities. The theories of the investment structure express that the managers of the
companies with appropriate opportunities for growth should choose a less leverage, because if
they increase their external debt, will not be able to use the advantages of their investing
opportunities and therefore there will be a negative relationship between the future growth and
the leverage, since the managers of the companies with high opportunity to grow will choose
the low leverage. Such results can be in regressions which control the growth opportunities.

The financial statements of Ethiopian share companies reveal that a very limited amount of the
sectors returns are reinvested in the industry. That means much of the earning is paid as a
dividend rather than retaining it for future growth (Smith and Chamberlain, 2009). In addition,
despite many share companies are operating and expanding their branches continuously in
Ethiopia, only their financial statement shows the lump sum figure about their financial
performance and they pay dividend. To the knowledge of the researcher, no study to date
provides a comprehensive analysis of the potential agency factors that impact share company
dividend policy.

In sum, the above issues coupled with the gap in the literature call for research in the area of
determinants of dividend policy. To this end, the present study will provide insight into the
factors that influence dividend policy in the Ethiopian share companies in particular zemen
bank.

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1.1 statement of the problem

From a strategic point of view, the dividend payment decision can be taken as one of the most
important decisions. The payment of dividend has implications for both investment decisions
and financing decisions. Dividend payments affect the level of equity retained in a firm for
future attractive investment opportunities. The more cash that a company pays out in the form
of dividends, the less funds it will has available to finance future attractive investment
opportunities and the greater the probability that it will have to issue new shares to raise more
capital. If the payments are not replaced by issuing new equity securities, the decision also
influences the financial structure of the company.

Empirical studies on the relation of age of the firm and dividend payout had showed
that since mature companies are relatively older and more likely have low-growth phase with
less investment opportunities, they need few capital expenditures, this reason enable them to
pay high dividend to their shareholder. A newly established company may require much of its
earnings for expansion and plant improvement so this may result to adopt a strict dividend
policy ( Husam - Aldin 2008). Therefore, the age of the firm is used as a proxy for the firm’s
growth opportunities. In economics and management, the age of share companies and
institutions is divided into the stages. These researchers have expressed four stages to describe
the age cycle of the company as (1) the introduction stage, (2) the growth stage, (3) the
maturity stage, and (4) the decline stage Anthony and Ramesh (1992). They investigated the
relationship between the function criteria such as increasing of selling and investment expenses
with the price of the stock market.

Eddy and Seifert (1988), Redding (1997), and Fama and French (2001) indicated that large
firms distribute a higher amount of their net profits as cash dividends, than do small firms.
Several studies have tested the impact of firm size on the dividend-agency relationship. Lloyd,
et al. (1985) was among the first to modify Rozeff's model by adding “firm size” as an
additional variable. They considered it an important explanatory variable, as large companies
are more likely to increase their dividend payouts to decrease agency costs. Their findings
support Jensen‘s (1992) argument, that agency costs are associated with firm size. Furthermore,
larger firms have lower likelihood of bankruptcy and, therefore, should be more likely to pay
dividends.

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Explaining why companies pay dividend and some do not pay dividends is still
problematic to explain and therefore dividend policy remains controversial. Some researchers
like Amidu and Abor (2006) believe that setting dividend policy involves judgmental decision
making and that there has been emerging concern that there is no single explanation of
dividend. Because of increasing complexities, competition, global and corporate structure, it is
difficult to single out one single factor affecting dividend and dividend policy. Researchers
follow different approaches being theoretical and empirical, simple to complex models to study
factors that are expected to have effects on dividend policy. However, recent empirical studies
have been focused on developed countries where their corporate characteristics are different
from developing countries. In this regard the financial industry in Ethiopia has seen tremendous
improvement over the last decade. This had led to influx and establishment of corporations in
Ethiopia. This study will investigate the important determinants of dividend policy of Ethiopian
corporations in the case of zemen bank. Therefore this study will firstly attempt to study the
dividend practice and determinants of dividend policies of Zemen bank.

1.2 Research question

In light of the problems discussed above the research specifically aims to answer the following
research questions.

1. What are the determinants of dividend polices in Zemen Bank?

2. Is dividend policy decision of Zemen Bank affected by growth, profitability and liquidity?

3. Does firm’s age, size and earning power has impact on dividend policy for Zemen Bank?

1.3 Objective of the study

This study is conducted to achieve the following general and specific objectives

1.3.1 General objective

The general objective of the study is to analyze the factors that determine the dividend policy of
Zemen Bank.

1.3.2 Specific objective

The above broad objective is broken down in to the following more specific and focused ones.
Specifically, the purpose of this study is to:

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1. Identify the determinant factors of zemen bank's dividend policy.

2. To identify the relationship of growth, profitability and liquidity on dividend policy of

Zemen bank.

3. To establish the impact of firm’s age, size and earning power on dividend policy of Zemen
bank.

4. To have a detailed analysis of the dividend policy of Zemen bank.

1.4 Research design and methodology

1.4.1 Research approach

When conducting a research, there are different ways of approaching the problem. According
to Creswell (2009), there are three approaches of research; quantitative, qualitative and mixed.

A quantitative approach is one in which the investigator primarily uses postpositive claims
for developing knowledge, employs strategies of inquiry such as experiments and surveys, and
collect data on predetermined instruments that yield statistics data (Creswell, 2009). The
second approach is qualitative approach and it is one in which the inquirer often makes
knowledge claims based primarily on constructivist perspectives or participatory perspectives
or both. It also uses strategies of inquiry such as narratives, phenomenologist, ethnographies,
grounded theory studies, or case studies (Creswell, 2009).The benefits of a qualitative
research approach lies in the in-depth information generated by studying a phenomena
closely (Mack et al. 2005).The third approach is mixed approach in which the researcher tends
to base knowledge claims on pragmatic grounds. It employs strategies of inquiry that involve
collecting data either concurrently or sequentially to best understand research problem. The
data collection involves gathering both numeric information (e.g., on instruments) as well as
text information (e.g., on interviews) so that the final database represents both quantitative and
qualitative information. Hence, this approach mixes the strengths of the two extreme
approaches.

In this study, the quantitative method was predominantly used. However, to have a better
insight and gain a richer understanding about the research problem, the quantitative method
was supplemented by the qualitative method of inquiry. That is, to get the benefits of a mixed
methods approach to collect data by using unstructured interview, questionnaire, and critical

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observation method of data collection from primary and secondary data sources and to alleviate
the bias in adopting only either qualitative or quantitative approach.

1.4.2 Philosophical assumptions

The post-positivist critical realist believes that the goal of science is to hold steadfastly to the
goal of getting it right about reality, even though we can never achieve that goal! Because all
measurement is fallible, the post-positivist emphasizes the importance of multiple measures and
observations, each of which may possess different types of error, and the need to use
triangulation across these multiple errorful sources to try to get a better bead on what's
happening in reality. Interpretivism, also known as interpretivist involves researchers to
interpret elements of the study, thus interpretivism integrates human interest into a study.
Accordingly, “interpretive researchers assume that access to reality (given or socially
constructed) is only through social constructions such as language, consciousness, shared
meanings, and instruments” (Myers, 2008). Ontology is a system of belief that reflects an
interpretation of an individual about what constitutes a fact. In simple terms, ontology is
associated with a central question of whether social entities need to be perceived as objective or
subjective. Epistemology as a branch of philosophy deals with the sources of knowledge and
concerned with possibilities, nature, sources and limitations of knowledge. Epistemology is the
philosophy of knowledge or of how we come to know. Methodology is also concerned with
how we come to know, but is much more practical in nature. Epistemology and methodology
are intimately related: the former involves the philosophy of how we come to know the world
and the latter involves the practice.

1.4.3 Research design

The researcher used a case study research design and the data needed were obtained from the
headquarter of the bank, Zemen bank which is found in Kazanchis. For the purpose of the
present study, quantitative approach which has proved to be ideal for the study on determinants
of dividend policy of Ethiopian Share Company’s in Zemen bank.

1.4.4 Sampling and population

The researcher used judgmental sampling techniques to claim selected employees from the
bank, rather than taking employees of the bank which are not concerned to its questionnaires

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and interviews. So the researcher have been focused on those employees working in the area of
related department such as finance department, marketing department, and also the
management positions of the bank. The rationale behind was employees assuming management
positions most likely know about the dividend payment systems of the bank. Hence, in addition
to the questionnaire, face to face interviews were conducted with the employees having
management position to get additional and sufficient information.

The population of the study comprises all Ethiopian share companies. Despite this fact, due to
time, financial and other constrains not these entire share companies would not be used in
conducting the study. Rather a selected bank (Zemen bank) located in the city of A.A were
used. Even from the banks, only a selected employee was used.

From the total over 180 Zemen bank headquarter employees, the researcher was contacted 20
respondents and the rest were excluded because of several reasons like unrelated field, lack of
knowledge or awareness, lack of time and financial constraints and manager of the bank could
be selected for interview questions. Such a small sample size was chosen for the expectation
that, most of the samples could be chosen from one single bank and at most from the same or
related department and therefore this were result in mostly similar and representative
response( or data) if more than 20(twenty) samples would have been chosen.

1.4.5 Sources of data

The researcher used both primary and secondary data sources to get enough data. The primary
data source of this study included the employee and related department such as finance
department, marketing department, and also the managements of zemen bank. Therefore the
employees were the sources of data for the questionnaire. The other primary data came from
the interview. The source of data for this study was personnel from the management part. The
third sources of primary data were collected from the researcher record of the observed
condition in the working area. Any outside of the bank sources such as government rule,
commercial codes related to the research were utilized. Secondary data were collected from the
bank reports prepared annually, journals and different research papers. Quantitative data were
analyzed throughout the research.

1.4.6 Methods of data collection

Questionnaires and interview were used for the method of data collection. The primary data
were collected through questionnaires, interviews and direct observation. In the questionnaire a

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priority prepared question paper were distributed to the employees. In addition to the
questionnaire, face to face interviews were conducted with the employees having management
position to get additional and sufficient information. The method to be applied in observing
was being independent and impartial in looking and recording the fact. This is for the fact the
observable subjects should never be awared the condition. The methods for the secondary data
were simply asking and receiving documents from the bank in addition to reviewing related
literatures. The researchers construct number of questions in a logical order. Besides, the
researcher was asked question in face to face interview with finance manager of the bank.

1.4.7 Methods of data analysis

After primary and secondary data had been collected, descriptive and analytical analysis were
used .Because the descriptive analysis is used to understand the data observed and the
analytical analysis is used to analyze the statistical tools like income statements, statement of
retained earnings, balance sheets and statement of cash flow. Finally, the results from
questionnaires have been presented in written form supported by tables and percentages.

1.5 Significance of the study

Knowing the dividend payment trend of share companies in the banking industry is a good
insight for the investors and management in all sectors in general, and for the existing and
potential investors and management of the banking industry in particular.

This study has significance from various directions. Firstly, the study will supplies evidence
whether factors identified by previous studies are the same as the ones found to be determinant
of dividend policy of Zemen bank. Secondly, the study could be taken as a reference to take in
to account the different determinant factors while having decisions on dividends for the
managers of banks and other businesses as well. Because, to some extent, dividend payment
practice in banks may share some important similarities with other sectors. This research will
help both investors and corporations to understand about significant factors that determine the
dividend policy of Ethiopian corporations in particular Zemen bank. This study will have also
significance for students and for the government at large. Finally, managers of Zemen bank will
use the result of the study to review their dividend policy decision in line with the findings of
the study.

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1.6 Scope of the study

The finding of the research would be more fruitful, if it was conducted widely by including all
other Ethiopian share companies. The study was limited in examine possible factors that could
affect the dividend policy decision in Zemen bank over the period covered 2010/2011 up to
2014/2015 for five years of analysis. In addition the dividend policy decision is influenced by
external factors like absence of secondary market and financial system of a country. This study
did not consider the possible effect of absence of secondary market and financial system of the
country on dividend policy because it is very difficult to address all the factors that affect the
dividend policy. Also the study was examined only firm factors like current earning or
profitability, firm age and size, growth, liquidity, and firms earning power. Finally the result of
this study was not generalized to other corporations other than Zemen bank.

1.7 Limitation of the study

The quality of the output of this study was highly dependent on the genuine data acquired from
the selected representative share companies. This implies that, the finding and the analysis of
this paper is the result of companies’ authentic data. So that, lack of willingness, for various
reasons like suspect of miss use of the companies confidential information for non
academic purpose limited the reliability of the research paper to achieve its objectives. In
addition, small number of firms with long dividend history, very limited number of
corporations, shortage of pervious similar researches in Ethiopian case, and limited resource
affected the qualities of the study output.

1.8 organization of the paper

This study has four chapters. The first chapter included background information, statement of
the problem, objective of the study, research method adopted, significance, scope and limitation
of the study is presented. The second chapter dealt with review of literature in which theories,
empirical evidence and knowledge gap is identified. The third chapter dealt with discussion and
analysis of data of the organization. The last chapter brought the research to it’s an end with
conclusion and possible recommendation.

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 CHAPTER TWO

LITERATURE REVIEW

Dividend payout policy has been an issue of interest in financial literature. Different arguments
and theories have been put forward to explain the different facts about dividend payout policy.
This chapter will cover three broad topics that are related to dividends and determinant of
dividend payout ratio. Section 2.1 is about the theoretical review in which a number of theories
that have been developed on dividend payout policy are presented. This is followed by a
review of relevant empirical studies on determinants of dividend payout policy in section 2.2.
Finally, conclusions on the literature review and knowledge gaps will presented in section 2.3.

2.1. Theoretical review

In discussing the meaning of dividend payout policy, it is important to define a dividend.

Various definitions existed in the literature on the definition of dividend. A dividend is simply
the money that a company pays out to its shareholders from the profits it has made (Doughty,
2000). Such payments can be made in cash or by issuance of additional shares as a stock
dividend. Davies and Pain (2002) defined it as the amount payable to shareholders from profits
of the corporation or distributable reserves.

Dividend policy is primarily concerned with the decisions regarding dividend payout and
retention. A payout policy is a set of principles regarding a corporation’s distributions to
shareholders. Lasher (2000) described it as the practice adopted by managers in making
dividend payout decisions. It details the amount of cash to be distributed to the
shareholders and what is to be retained by the firm for further investment. It is a decision that
considers the amount of profits to be retained and that to be distributed to the
shareholders of the firm (Watson and Head, 2004). The objective of a firm’s dividend
payout policy is to be consistent in the overall objective of maximizing shareholders wealth
since it is the aim of every investor to get a return from their investment.

This section of the chapter discusses theories on dividend payout policy. Accordingly, section
2.1.1 presents the types of dividend policy. Then theories on explanations for paying dividends
are presented in section 2.1.2.

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2.1.1. Types of Dividend payout Policy

Theoretically, there are different types of dividend policies. These includes constant payout,
progressive policy, residual policy, zero policy and non- cash policy.

Constant or fixed policy: The Company pays out a fixed amount of its profit after tax as
dividend. Thus, the company maintains a fixed payout ratio of dividend. This type of policy
allows the shareholders to clearly know the amount of dividend to expect from their
investments in the company. However as noted by Watson and Head (2004), the policy
could be traumatic to companies experiencing a volatile or fluctuating profit earning.
This is because of the uncertainty of its profit. If there are viable capital projects, the policy can
be chaotic.

Progressive policy: Payments of dividend is on a steady increase usually in line with

inflation. This could result in increasing dividend in money terms. The firm uses the policy as
a ratchet. Every effort is made to sustain the increase even though marginal. Seldom,
the company may be constrained to cut down on dividend payout. This is to enable it
sustain its operations. This though is not a frequent action as it sends a wrong signal to
investors. Firms operating this policy will opt to avoid paying dividends during the period
rather than consistently cut down on the dividend (Kolb and Rodriguez, 1996).

Residual policy: Dividends are just what is left after the company determines the
retained profits required for future investment. This policy gives preference to its positive NPV
(Net Present Value) projects and paying out dividends if there are still left over funds
available. Dividend becomes a circumstantial payment paid only when the investment policy is
satisfied. There is a tendency therefore that this type of policy could give rise to a zero dividend
structure. Firms may need to modify this policy to ensure that investors of the different
clienteles are not chased out by a strict application of the policy (Kolb and Rodriguez, 1996).

Zero dividend policy: Some firms may decide not to pay dividend. This is especially common
in newly formed companies that require capital to execute their projects. All the profit is thus
retained for expansion of the business. Investors who prefer capital gains to dividends because
of taxation will naturally be lured by this kind of policy. This type of policy is quite easy to
operate and avoids all the costs associated with payment of dividends (Watson and Head,
2004).

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Alternative policies to paying cash: In order to give shareholders a choice between
dividends or new shares, the firm might choose to buy back shares. This is share or stock
repurchase. This has a significant advantage in terms of tax to the shareholder. While the
dividend is fully taxed just as ordinary income, the stock repurchase or buyback is not taxed
until the shares are sold and the shareholder makes a profit or capital gain (Ross et al. 2003).
There is also the policy of stock dividends and splits. Shareholders are given additional shares
in lieu of cash as dividend (Brealey et al. 1999).

2.1.2. Explanations for Paying Dividends

Dividend policy is possibly one of the most discussed and mindboggling subjects in
corporate finance. Perhaps it is for that reason literature offers such an abundant amount of
information and research on the matter. There are several theories as to why firms should pay
dividends or not. These theories include the dividend irrelevancy theory, bird in the hand
theory, signaling theory, agency theory, Clientele effect, tax preference and life cycle theory.

Dividend irrelevancy theory

The dividend irrelevancy theory proposed by Miller and Modigliani (1961), argued that in a
perfect market; one with independence of investment and dividend policies of firms, perfect
capital markets, no taxes, perfect information, no transaction or flotation cost, markets
are complete, and no agency costs or contracting cost associated with stock ownership,
dividend payments will not affect firm value. The reason is that in the presence of perfect
market conditions, investors can create their own dividends without cost. If investors want a
dividend they can simply sell off some of their shares. Equally if investors are paid a dividend,
which they do not want, they can merely use the dividend to purchase additional shares in the
firm. So if investors can create their own dividend policy without incurring extra costs,
dividends are indeed irrelevant. However the irrelevancy theory only holds, in such a perfect
market, in which these seven assumptions hold. Nevertheless markets are not perfect and taxes
and transaction costs do exist. Even so this does not make the theory less important. The
dividend irrelevance theory supplies a framework through which one can test the
implications of a violation of any of the assumptions.

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Bird in hand theory

Gordon (1959) presented the bird-in-hand or the uncertainty hypothesis. As the name indicates,
the author argued that dividends minimize the uncertainty associated with deferred
dividend payments. Further explanation for the bird in hand theory has been given by
Gordon (1963) and Walter (1963), in which they concluded that investors always prefer
cash in hand rather than a future promise of capital gain due to minimizing risk or lowering
risk. Due to this preference, investors pay higher prices for a company’s shares with cash
dividends compared to a company that holds their profits when other factors are fixed
(Baker and Powell, 1999).

Agency cost theory

Agency theory is based upon the separation of ownership and management in

corporations. Owners of the firm delegate managers to act on their behalf. Jensen and
Meckling (1976, p.308) define agency relationship as “a contract under which one or
more persons (the principal(s)) engage another person (the agent) to perform some
service on their behalf which involves delegating some decision making authority to the agent.

The main assumption of this theory is the conflict of interests between managers and
owners. Such conflicts lead to agency costs (monitoring costs, other costs by the agent to assure
the owners that there will be no harm to owner’s interest, and finally any remaining
loss from differences in agent actions and the owners actions compared to those if the
owners take such actions). Stemming from this argument, agency theory stated that dividends
act as a protection for investors because dividends reduce the excess cash available to managers
after investment and operational activities. With the excess cash, managers may in good or
bad faith invest it in less than desirable investment opportunities, which may have
undesirable risk/return characteristics for the investors.

Signaling theory

Signaling hypothesis originates from the information asymmetry between managers and
shareholders. Information signaling theory in the context of dividend policy was first
introduced by Ross (1977), who created a theoretical model for dividend signaling.

13
Signaling theory assumes that mangers typically have more information about the value of the
firm’s assets than outside agents. Managers therefore use dividend changes to communicate to
the shareholders about the financial situation of the company. The information may
reflect the strategies that the firm is employing in the short run or long run.

Signaling theory suggests that managers, who are expecting abnormal returns in the
future, would be more willing to share the earnings with the shareholders, since they
expect that in any way they will have enough cash flows to undertake all their projects with
expected positive, high NPV. If managers predict to have losses or decreasing profits, they
would prefer to keep today’s surplus for the future. Further the explanation regarding the
signaling theory given by Bhattacharya (1979) and John and Williams (1985), dividends
allay information asymmetric between managers and shareholders by delivering inside
information of firm future prospects.

Clientele effect

Miller and Modigliani (1963) described the clientele effect by stating that each firm has its own
body of stockholders, who find its dividend policy optimum. This statement is the basis of what
is called the clientele effect. The idea is that investors have different financial needs and
investment objectives. For example, assuming that investors have a portfolio of investments,
these investments are attuned to serve the investors goal such as: high growth, capital
preservation, income generation, and other types of strategies.

These goals vary in terms of investor’s age, family size, education expenses, career,
employment package, and other characteristics.

Based on this argument, investors perceive and categorize stocks depending on their
financial and operating characteristics. This perception creates a clientele base for each
category of stocks. Therefore, changing the characteristics of firms (e.g. product line,
investment and dividend policy, etc) could have an impact on the clientele. Depending on the
magnitude of the change, investors could exit the company by selling its stock and buying
another one that meets their goal.

14
Tax preference theory

In order to maximize shareholders wealth, the theory suggests that corporate managers should
take into account the cost associated with taxation when deciding on dividend payments.
The premise of the argument is based on the fact that in most countries income taxes on
dividends are higher than that on capital gains. In addition, taxes on dividends are paid upon
receipt of the dividend while taxes on capital gains can be deferred until the investor wishes to
sell the shares. Based on this, investors should, in theory, prefer capital gains over receiving
cash dividends assuming that the transaction cost (e.g. brokerage commission) does not
exceed the tax benefit. As a result, the theory argued that investors are willing to pay a
premium for those companies who pay lower dividends but retain their earnings as capital gains
(Al Yahyaee, 2006).

Life cycle theory

The life cycle theory is also cited as one of the explanations for dividend payment.
Mueller (1972) proposed a formal theory that a firm has a relatively well-defined life
cycle, which is fundamental to the firm life cycle theory of dividends. The theory
explains that as firms pass through the various stages in their lives, they tend to alter the
dividend policy depending on the financial needs of each stage. Implied in this theory is the
fact that firms that are in their growth stages are less likely to pay more dividends as compared
to firms that are at their maturity stages. Old firms therefore, because they do not have a lot of
growth opportunities to fund, are expected to pay more dividends.

2.2 Empirical Review

In earlier section, the major theories of dividend and some issues concerning the effects
of dividend policy on the value of a firm and different dividend policies for setting a
firm’s long-run target payout ratio were discussed. In this section, in line to the dividend
determinant factor to be tested in the Ethiopian banking sector, the determinant factors of
dividend payout of previous empirical studies shall be discussed hereafter.

2.2.1 Determinants of dividend payout policy

Many theories and models have been put forth to examine the numerous facets of
dividend study.

15
The first empirical study of dividend policy was performed by Lintner (1956). Through his
interview with managers of 28 selected companies, he discovered that firms have long-
run target dividend payout ratios and place their attention more on dividend changes than on
absolute dividend levels. He also finds that dividend changes follow shifts in long-run
sustainable earnings (managers’ smooth earnings) and managers are hesitant to make dividend
changes that may later need to be reversed. Managers also try to stabilize dividends and avoid
dividend cuts. Lintner developed a partial - adjustment model to describe the dividend decision
process that explained 85 percent of year-to year dividend changes.

The seminal article by (Miller & Modigliani, 1961) is groundbreaker in the theoretical
modeling of dividends, which first proposed dividend irrelevance. On the other hand,
theories which support dividend relevance include tax preference, signaling, and agency
explanations. Other researchers have developed and empirically tested various models to
explain dividend behavior. Some conducted surveys of corporate managers to learn the most
important determinants of corporate dividend activity. Determinant factors of dividend
payouts based on previous empirical studies for different industry of different countries are
discussed below:

Company characteristics that affect firms’ dividends policy include the firm’s profitability,
liquidity, size, ownership structure and capital structure, among others. The discussion here will
concentrate on profitability, liquidity and size.

2.2.1.1. Profitability

Several surveys provide useful insights into what factors financial managers considered most
important in determining their firm’s dividend policy. Farrell, et al. (1983) surveyed 562
firms from New York Stock Exchange (NYSE) with “normal” kinds of dividend polices
in 1983. Based on their analysis of 318 responses from utility, manufacturing, and
wholesale/retail firms, they found that the major determinants of dividend payments were
the anticipated level of future earnings and the pattern of past dividends.

Pruitt and Gitman (1991) surveyed financial managers of the 1,000 largest US firms
about the interplay among the investment, financing, and dividend decisions in their
firms. Their evidence suggested that important influences on the amount of dividends
paid were current and past years’ profits, the year-to-year variability of earnings, and the

16
growth in earnings. Baker and Powell (2000) found support for their hypothesis that the most
important factors influencing a firm’s dividend policy are the level of current and expected
future earnings and the pattern or continuity of past dividends.

DeAngelo, et al. (2004) posited that the high/increasing dividend concentration may be the
result of high/increasing earnings concentration. Their findings supported this contention and
they found that just as dividend concentration had increased; so did the concentration of
earnings. Earnings in both 1978 and 2000 of the sample firms are concentrated among a
relatively few firms at the top end of the distribution, and that such concentration is notably
greater in 2000 than it was in 1978. There was also strong link between losses and the failure to
pay dividends. Their findings suggest that earnings do have some impact on dividend payment.

Gill, et al. (2009) analyzed the determinants of dividend payout ratio for 226 financial reports
of united state public companies in the year of 2007. Their results showed that profitability
were the key determinants of dividend changes. In addition, their findings showed that firms
in the service industry the dividend payout ratio is the function of profit margin, sales
growth, and debt-to-equity ratio and rot manufacturing companies they found dividend
payout ratio is the function of profit margin, tax, and market -to-book ratio.

Baker and Smith (2006) surveyed 309 sample firms exhibiting behavior consistent with a
residual dividend policy and their matched counterparts to learn how they set their
dividend policies. Their results showed that for the sample and matched firms, the pattern of
past dividends, the level and stability of earnings, and desire to maintain a long-term dividend
payout ratio elicit the highest level of agreement from respondents.

In Malaysia, Annuar and Shams her (1993) investigated the dividends and earnings behavior of
firms listed on the Kuala Lumpur Stock Exchange (KLSE). The data used consist of annual
earnings and dividends for the period 1975 to 1989. Their findings were that the dividend
decisions of the firms partially depended on their current earnings and past dividends, and firms
have long-term target dividend which is conditioned upon their earnings ability.

In Nigeria, Okpara and Chigozie (2010) analyzed the determinant of dividend Payout
policy in Nigeria of firms from Nigerian Securities and Exchange Commission. Using
factor analytical tool to regress data of annual financial reports for the period of 1980 to 2006
found that earnings (profitability) exert a negative impact on the payout ratio and dividend

17
yield indicating that they are appointed to retention, as they increase, for the growth of
the firm. While current ratio (liquidity) and previous year’s dividend exert a positive impact
on the payout ratio, showing firstly that firms are more willing to payout dividends when they
have no problem with meeting their short term needs for cash, and secondly that firms try to
increase their payout ratio from its previous level. Hence, they conclude that earnings, current
ratio, and previous year’s divides are good predictors of dividend payout policy in Nigeria.

2.2.1.2 Firm’s Age

Empirical studies on the relation of age of the firm and dividend payout had showed
that since mature companies are relatively older and more likely have low-growth phase with
less investment opportunities, they need few capital expenditures, this reason enable them to
pay high dividend to their shareholder. A newly established company may require much
of its earnings for expansion and plant improvement so this may result to adopt astrict
dividend policy. Talat Afaz(2011) analyzed the impact of firm age on dividend policy
for 120 firms listed in Karachi stock exchange, Pakistan for the period 2002 to 2007. OLS
regression method was used to analysis dependent variables of dividend payout anddividend
intensity using age, age-square and age-cube as independent variables. The results reported
positive and significant relationship between age and dividend payouts of companies.

2.2.1.3. Firm size

Eddy and Seifert (1988), Jensen et al. (1992), Redding (1997), and Fama and French (2001)
indicated that large firms distribute a higher amount of their net profits as cash dividends,
than do small firms. Several studies have tested the impact of firm size on the dividend-agency
relationship. Lloyd, et al. (1985) was among the first to modify Rozeff's model by adding “firm
size” as an additional variable. They considered it an important explanatory variable, as large
companies are more likely to increase their dividend payouts to decrease agency costs.
Their findings support Jensen‘s (1992) argument, that agency costs are associated with firm
size. They were of the view that for large firms, widely spread ownership has a greater
bargaining control, which, in turn, increases agency costs. Furthermore, Sawicki (2005)
illustrated that dividend payouts can help to indirectly monitor the performance of managers in
large firms. That is, in large firms, information asymmetry increases due to ownership
dispersion, decreasing the shareholders’ ability to monitor the internal and external activities of

18
the firm, resulting in the inefficient control by management. Paying large dividends can be a
solution for such a problem because large dividends lead to an increase in the need for external
financing, and the need for external financing leads to an increase in the monitoring of large
firms, because of the existence of creditors.

Larger firms have an advantage in capital markets in raising external funds, and therefore
depend less on internal funds Higgins (1981). Furthermore, larger firms have lower likelihood
of bankruptcy and, therefore, should be more likely to pay dividends. This implies an
inverse relationship between the size of the firm and its dependence on internal
financing Gill, et al. (2009). Thus, larger firms are expected to pay more dividends.
Furthermore, the effect of firm size on dividends is seen as a proxy for agency problems. The
assumption is that the larger the firm, the more difficult (costly) monitoring will be (i.e.
the greater the agency problem). Thus, dividends could play a role in alleviating the agency
problem. In addition, the positive relationship between dividend yield and size supports the
generally accepted principle that larger firms have easier access to capital markets Aivazian, et
al. (2003).

In Qatar, Al -Kuwari (2007) investigated determinants of dividend policy in emerging

market of 119 non financial firms listed on Gulf Co-operation Council (GCC) country
stock exchanges from 1999 to 2003. His result showed that firm size as statistically
significant variables of dividend payout. The results indicated that the firms in which the
government owned a proportion of the shares, paid higher dividends compared to the
firms owned completely by the private sector. Furthermore, the results illustrated that the firms
chose to pay more dividends when firm size and profitability were high. The model also
revealed that the leverage ratio was an additional variable that affected the dividend payout
ratio of a firm.

2.2.1.4. Liquidity

Liquidity is usually measured by the firm’s cash flow; the cash flow position of a firm is an
important determinant of dividend payouts. It is very important to compare a firm’s liquidity
position in relation to its dividend payment. Logically, a firm will only pay dividend if it has a
strong cash position. Cash dividend distribution not only depends on the profitability of firms
but also depends on the free cash flow, which is the amount of operating cash flow left over

19
after payment for capital expenditures. According to Liu and Hue (2005), if the cash dividend
is less than the free cash flow, it means the firm has residual cash, if cash dividend is more
than the free cash flow then it means the firm needs financing to meet the requirement
of cash dividend. A poor liquidity position means less generous dividend due to
shortage of cash. Alli, et al. (1993) argues that dividend payments depend more on cash
flows, which reflect the company's ability to pay dividends, than on current earnings, which
are less heavily influenced by accounting practices. They claim that current earnings do not
really reflect the firm's ability to pay dividends. Amidu and Abor (2006) found a positive
relationship between cash flow and dividend payout ratios. Anil and Kapoor (2008) also
indicate that cash flow is an important determinant of dividend payout ratio.

Mohamed, et al. (2006) empirically analyzed the determinants of dividend payment for the top
200 companies in terms of market capitalization, listed on the Malaysian share market.
Large firms were chosen to increase the likelihood of capturing dividend payers.

The findings showed that firms paid out on average, about 40 percent of their earnings as
dividends. Furthermore, a quarter of their operating cash flow was used to pay dividend.

Lastly, the study confirms the fact that liquidity was important determinants of dividend
payment. Liu and Hue (2005) in his study of Chinese listed firms found that cash dividend
payout ratio of most firms were between 20 to 50 percent, meaning that cash dividend payment
was higher than the accounting profit. However, he found that 50 percent of the sample firms
had dividend cash payment higher than the free cash flow. He attributed this finding to the
ruling made by the security commission of China in 2000 which stated that listed companies
must have cash dividend payment in the past three years. This shortage of cash was usually
financed through selling shares or right issue.

One theory that can be used to explain why firms borrow money to pay for dividends is the
agency theory. Agency theory has also been a popular view in the discussion of
dividends relevancy, as been advanced by Jensen, et al. (1992), Rozeff (1982) and
Easterbrook (1984). Agency theory posits that there is a conflict of interests between the
managers (agents) and the outside shareholders (principals). Managers may consume excessive
perquisites out of undistributed earnings or they may invest the earnings in less than optimal
investments. This conflict of interests is referred to as agency costs.

20
Dividend has been identified as a mechanism that can reduced agency costs. By paying out a
large dividend, it reduces the amount of funds available for managers to spend
excessively on perquisites. Furthermore, the larger dividend payment forces the firm to seek
external financing, which will subject it to the scrutiny of the capital market for new funds and
reduces the possibility for suboptimal investments. Therefore, according to the agency theory
this will reduce the monitoring costs to the firm. In short, if the costs involved in
paying dividends are less than t he benefit gained from the additional monitoring, then it
makes sense for companies to have large dividend payouts. Rozeff (1982) postulates and
finds evidence that firms establish higher dividend payouts when insiders hold a lower fraction
of the equity and/or a greater number of stockholders own the outside equity. This evidence
supports the view that dividend payments are part of the firm’s optimum monitoring and
bonding package and serve to reduce agency costs.

2.2.1.5. Growth opportunities

According to (Miller & Modigliani, 1961), in perfect capital markets, corporate

investment and dividend decisions are independent. However, in the presence of market
imperfections such as taxes, flotation costs, and agency costs, both dividend and
investment decisions might be closely related or interdependent. The relationship between
investment and dividend policies can be seen from two perspectives. Firstly, by paying
dividends a firm is forgoing a relatively cheap source of financing i.e. retained earnings,
as compared to debt and new equity issues. Secondly, dividend payments reduce the firm's
available funds for investment activities. In other words, dividends and investments are
competing for limited and low-cost internal funds Elston (1996).

This suggests that in imperfect capital markets there may be a link between dividends and
investments. Intuitively, firms with high growth and investment opportunities will need the
internally generated funds to finance those investments, and thus tend to pay little or no
dividends. In contrast, firms with slow growth and fewer investment opportunities are likely to
pay more dividends. Note that this prediction is consistent with the free cash flow hypothesis.
That is, companies with low investment opportunities are likely to have an overinvestment
problem; hence by paying dividends companies can limit management's policy of
overinvesting (Jensen, 1986) and Lang and Lichtenberger (1989).

21
Researchers such as Rozeff (1982), Jensen, et al. (1992), Alli, et al. (1993), Mohammed, et al.
(2006), and many others, have found a significant negative relationship between
dividends and firms' investment opportunities. Al-Malkawi and Nizar (2008) document that,
investment opportunities are a significant determinant of corporate dividend policy. More
recently, Fama and French (2001) affirmed that investment opportunities influenced dividend
decision. They found that firms with better growth and investments opportunities have lower
payouts. Firms that have never paid are smaller and they seem to be less profitable than
dividend payers, but they have more investment opportunities, and their investment outlays are
much larger than their earnings.

Several studies found that the sales/revenues growth rate was commonly used as a proxy
variable for growth opportunities in dividend and investment policy relationship. Sales growth
may impact on dividend payout ratios. Dividend payout levels are not totally decided after a
firm's investment and financing decisions have been made Amidu and Abor (2006);
rather, the dividend decision is taken along investment and financing decisions. (Grill, et
al., 1983) pointed out that firms' use of target payout ratios, firms’ motives for paying
dividends, and the extent to which dividends are determined are independent of
investment policy. Higgins (1981) shows a direct link between growth and financing needs of
a firm. Rapidly growing firms require external financing because working capital needs
normally exceed the incremental cash flows from new sales.

Furthermore, according to the "maturity hypothesis" presented by Grullon, et al. (2002), as

firms become mature their growth and investment opportunities shrink, resulting in a decline in
their capital expenditures. Thus, more free cash flows are available to be paid as dividends.
They pointed out that a dividend increase is a sign of "changes in a firm's life cycle, especially
as to a firm's transition from higher growth phase t o a lower growth phase". Using a large
sample of dividend change announcements of US firms for the period 1967 to 1993,
Grullon, et al. found that, firms that increase dividends experience decline in their systematic
risk and profitability. They stated" according to the maturity hypothesis, an increase in
dividends is informative about a shrinking investment opportunity set, declining systematic
risk, declining return on assets, and profit growth".

22
A decline in a firm's risk is perceived as good news, while decrease in profitability is bad news.
In their study, Grullon, et al. (2002) showed that the stock market reacts positively to a
dividend-increase announcement, which implies that the good news about risk reduction
dominates the bad news about declining in profitability. In addition to the good news
associated with the decrease in the systematic risk, the market may perceive a dividend
increase as helping to reduce the overinvestment problem. They concluded “an increase in
dividends may not only convey information about changes in the firm's fundamentals but
also about the management's commitment not to overinvest”.

2.2.1.6. Financial leverage

The financial structure of a firm consists of both debt (liabilities) and equity financing. Long-
term financing usually refers to the firm's capital structure; the debt -to-equity ratio is a
financial ratio that indicates the relative proportion of equity and debt used to finance a
company's assets. This ratio is also known as risk, gearing or financial leverage. Pruitt and
Gitman (1991) indicate that risk affects firms' dividend policy Firms with high growth
rates and high dividend payout ratios utilize debt financing and firms with high leverage
compared to their respective industry Chehab (1995).In addition to the tax advantages
(interests deduction on income), the use of debt financing can lever-up shareholders'
return on equity. However, leverage entails risk; that is, when a firm acquires debt
financing it commits itself to fixed financial charges embodied in interest payments and the
principal amount, and failure to meet these obligations may lead the firm into liquidation.

The risk associated with high degrees of financial leverage may therefore result in low dividend
payments because, ceteris paribus, firms need to maintain their internal cash flow to pay
their obligations rather than distributing the cash to shareholders. Moreover, Rozeff (1982)
points out that, firms with high financial leverage tend to have low payouts ratios to reduce
the transaction costs associated with external financing. Lloyd, et al. (1985) and Collins, et
al. (1996) found statistically significant and negative relationship between firm’s risk and the
dividend payout ratios. Their findings suggest that firms having a higher level of risk will pay
out dividends at lower rate. D'Souza (1999) also finds statistically significant and negative
relationship between risk and dividend payout. Mohamed, et al. (2006) examined an emerging
market and found a direct relationship between financial leverage and debt-burden level

23
that increases transaction costs. Thus, firms with high leverage ratios have high transaction
costs, and are in a weak position to pay higher dividends to avoid the cost of external financing.
Dhillon (1986), however, found conflicting evidence for the relationship between dividend
payout ratios and leverage. In some industries payout and leverage ratios are positively
related while in other industries the relationship is negative. Furthermore, as argued by
(Jensen, 1986), debt can serve as a substitute device for dividends in reducing the
agency costs of free cash flow. That is, when a firm obtains debt, it makes a fixed
commitment to creditors, which reduces the discretionary funds available to managers and
subjects them to the scrutiny of debt -suppliers. This suggests that, highly levered firms are
expected to have low dividend payouts.

2.2.1.7. The effect of previous year’s dividends

Previous dividend payments have long been regarded as the primary indicator of a firm’s
capacity to pay dividends Lintner (1956), because it is assumed that the management will
maintain a stable dividend policy. Furthermore, the information asymmetry hypothesis
assumes that dividend policy is “sticky” or shows a tendency to remain at t he level of
previous dividends Baskin (1989).

In Pakistan, Ahmed and Javid (2009) examined the dynamics and determinants of
dividend payout policy of 320 non-financial firms listed in Karachi Stock Exchange
during the period of 2001 to 2006. The results consistently support that Pakistani listed non-
financial firms rely on both current earnings per share and past dividend per share to set their
dividend payments. However, the dividend tends to be more sensitive to current earnings than
prior dividends. The listed non- financial firms having the high speed of adjustment and low
target payout ratio show the instability in smoothing their dividend payments.

In Saudi Arabia, Al-Ajmi and Abo Husain (2007) analyzed a sample of 54 Saudi- listed firms
during 1990 and 2006. The result contradict to Linter’s stability model; Firms have more
flexible dividend policies since they are willing to cut or skip dividends when profit declines
and pay no dividends when losses are reported. Lagged dividend payments, profitability,
cash flows, and life cycle are determinants of dividend payments.

2.3. Conclusions and knowledge gaps

Generally during the last fifty years, a lot of empirical and theoretical work has been done
regarding dividend policy. Summarizing all these studies the following points can be
concluded.

24
First the literature on dividend policy had produced a large body of theoretical and
empirical research, especially following the publication of the dividend irrelevance
hypothesis of Miller and Modigliani (1961). However, various market imperfections exist
(taxes, transaction costs, information asymmetry, agency problems, etc) and these market
imperfections have provided the basis for the development of various theories of dividend
policy including tax-preference, clientele effects, signaling, and agency costs.

Second, review of the literature showed that the researches on the determinants of
dividend payout had been comprehensively studied in developed countries around the
world and in some emerging countries like Pakistan, India and Malaysia. Besides, most of
the researches focus on manufacturing, and other non financial sectors rather than share
companies. However, relatively little work had been undertaken in Ethiopia; this was
especially true for share companies industry. Therefore, it is expected that a comprehensive
examination of the determinants of dividend payout in Ethiopian share companies will make an
important contribution to knowledge.

25
 CAPTER THREE

DATA RESENTATION AND ANALYSIS

As mentioned in chapter one the objective of the study is to examine the determinants of
dividend payout policy and is conducted only in Ethiopian share companies in Zemen bank.
The previous chapter has presented the research questions, and the choice of the appropriate
research method for the study. This chapter presents the results and analysis of the findings of
the different methods used. The chapter is organized to have three sections. Section3.1
background information about the organization3.2 presents about results and data analysis of
questionnaire and in-depth interview. And finally the results obtained under these different
methods are jointly analyzed in the discussion section presented in section 3.3.

3.1 Background of the organization

Zemen bank S.C.(ZB) was founded on October 1, 1999 and commenced operation on
September, 2001. Its head quarter is in the heart of Ethiopian financial centre, in Addis Ababa.
Its ownership structure is a private share company with more than 3326 shareholders and with
more than 512 employees. Its main service is general modern banking service. It has a capital
of ETB 63,617 million and 153.3 million of assets and it is profitable throughout its year of
service, with over 25.4% investment return on the average. It do not has business partner and
banks. Their client base doorstep banking makes the firm unique among its broadest multi-
channel banking services. .

Vision

The vision of Zemen Bank is to bring a new dynamism to the financial sector and the banking
business in Ethiopia.

3.2 Results and data analysis

This is about the information gathered from Zemen bank. It also helps to identify and
investigate the determinants of dividend payout policy's of Zemen bank S.C.

As indicated in the methodology part of the study, the researcher uses primary data collected
through interview and questionnaires and secondary data from the company finance director
and its five year (2011-2015)annual report. The collected data is used to analyze in order to

26
achieve the stated objective and statement of the problems to drive a possible solution. Finally
the result is believed to be sufficient to give some suggestion and recommendation regarding
the determinant of dividend payout policy of Zemen bank S.C. The data collected is discussed
and analyzed below.

3.2.1 Respondent’s profile

Respondents were asked to indicate their gender, educational status, educational background
and year of experiences. and the researcher has tried to put all respondents answer which was
collected by using questionnaires and it analyzed and interpreted hereunder. (see table 1
below).

Table 1 respondent’s profile

Items Statement Respondent

Number percentage
1. Gender
 Male 15 75%
 Female 5 25%
Total 20 100%
2. Educational status
 Diploma -- _
 Degree 14 70%
 MA/MSC 6 30%
 other _ _
Total 20 100%
3. Educational background
 Management 4 20%
 Accounting and Finance 10 50%
 Economics 2 10%
 Marketing 4 20%
 Other _ _
Total 20 100%
4. Year of experience
 1-3 8 40%
 4-7 5 25%
 8-10 3 15%
 Above 10 4 20%
Total 20 100%
(Source: - Data collected through questionnaires)

According to item 1 of table 1, 15(75%) of the respondents are Male and the remaining 5(25%)
of the respondents are Female. this indicates that most of the employees are Male.

27
In item 2 of the table 1, educational status of respondents indicates that 14(70%) of the
respondents are degree holders and the remaining 6(30%) are masters; this indicates that the
most of the employees are degree holders.

According to item 3 of table 1, educational background of the respondents replied that 4(20%)
of respondents are Management experts, 10(50%) of the respondents are from the area of
Accounting and finance, 2(10%) of the respondents are from Economics, the remaining 4(20%)
of the respondents are from the areas of Marketing. this indicates that the most of the
employees are from the area of Accounting and finance.

Item 4 of table 1 is about year of experience in their work. The result indicates that 8(40%) of
the respondents have a work experience of 1-3years in the position of their work, 5(25%) of the
respondents have work experience of 4-7 years, 3(15%) of them have 8-10 years of experience
and the remaining 4(20%) has a work experience of above 10 years. From these the researcher
observed that most of the respondents have work experience of 1-3 years.

This indicates that, since most of Ethiopian share companies are dominated by males and this
dominance increase when the position increases. Females are half of the total society thus the
bank has to encourage females to enhance their participation. Work experience of the
respondents contributes a lot to providing sufficient and full information required to analyze the
data. And also educational level and background (qualification) of the respondents contributes
a lot to the validity and efficiency of the response gathered.

3.2.2. Effect of Profitability on Dividend payout policy

Share holders have special initiator on the profitability of the bank, because profitability
determines company's ability to pay dividend to its shareholders. The researcher gathered
different information from the respondents using the questionnaire. Table 2 summarizes the
effects of profitability (independent variable) on dividend payout policies (dependent variable)
and the expected association between them.

28
Table 2 effect of profitability on dividend payout policy

No Item Respondent
Number Percentage
1. Do you think there is a relationship between
profitability and dividend policies of your
company? 20 100%
 yes _ _
 no _ _
 difficult to determine
Total 20 100%
2. Do current earnings have an impact on dividend
payout policy decisions of your company?
 Yes 16 80%
 No 4 20%
Total 20 100%
3. Does future earnings and patterns of past dividend
are related with your company’s dividend policy?
 Yes 4 20%
 No 16 80%
Total 20 100%
4 How dividend payout would be high?
 As a result of high profitability 18 90%
 As a result of low profitability _ _
 Not affected by profitability 2 10%
Total 20 100%
(Source:- Data collected through questionnaires)

According to item 1 of table 2, all 20(100%) of the respondents replied that there is relation
between profitability and dividend payout policy. As respondents replied that there is direct
relation between profitability and dividend payout policy. If there is high profitability, the
dividend payout gets high.

According to item 2 of table 2, 16(80%) of the respondents replied that current earnings have
an impact on dividend payout policy and the remaining 4(20%) of the respondents replied that
current earnings does not have impact on dividend payout policy's of zemen bank.

According to item 3 of table 2, 16(80%) of the respondents replied that future earnings and
patterns of past dividend are not related with dividend payout policy and 4(20%) of the
respondents replied that future earnings and patterns of past dividend are related with dividend
payout policy of our company.

29
For item 4 of table 2, 18(100%) of the respondents believed that dividend payout of the
company would be high as a result of high profitability, the remaining 2(10%) of the
respondents replied that dividend payout of the company would not be affected by profitability.

As shown above in table 2, profitability is related with dividend payout policy of Zemen bank
S.C. And their relation is direct; means the increase in profitability of Zemen bank Share
Company, would increase the dividend payout of the company.

This indicates that, profitable companies are more able to pay dividends. This is in line with the
respondents’ response above. Therefore, the more profitable zemen bank share company is, the
higher the possibility to pay dividends. Since there is a positive association between dividend
payout policy and profitability, company managers spent a considerable effort in their decisions
related to dividend. Hence, profitability is considered an important factor in influencing
dividend payment.

3.2.3. Effect of liquidity on Dividend payout policy

Respondents were asked to give their response towards the effects of liquidity on dividend
payout policies. Table 2 summarizes the effects of liquidity (independent variable)on dividend
payout policies(dependent variable) and the expected association between them.

Table 3 effect of liquidity on dividend payout policy

No Item Respondent
Number Percentage
1. Does liquidity affects dividend payout
policy of your company?
 yes 10 50%
 no 8 40%
 difficult to determine 2 10%
Total 20 100%
2. Is there a liquidity problem in your
company's dividend payment practice?
 Yes. 8 40%
 No 12 60%
Total 20 100%
(Source:- Data collected through questionnaires)

According to item 1 of table 3, 10(50%) of the respondents think liquidity affects dividend
payout policy of Zemen bank S.C., 8(40%) of the respondents believed that there is no effect of

30
liquidity on dividend payout policy of Zemen bank S.C. and 2(10%) of the respondents replied
that it is difficult to determine the effect of liquidity.

According to item 2 of table 3, 8(40%) of the respondents replied that liquidity problem affect
dividend payout policy's of Zemen bank and the remaining 12(60%) of the respondents replied
liquidity does not affect dividend payout policy of Zemen bank S.C. Most of the respondents
believed that liquidity doesn't affect Zemen bank’s dividend payout policy. From the analysis
presented above, the researcher concludes that there is less but direct relation between liquidity
and dividend payout policy of Zemen bank S.C.

To sum up, Liquidity is one of the important factors being considered in dividend payout
decisions because dividend payment generates cash outflow. a good liquidity position
increases ability to pay dividend, which means Zemen bank with good and stable cash flows is
able to pay dividend easily than other companies with unstable cash-flow position.
Accordingly, there is less but direct relationship between liquidity and dividend payout policies
of the company.

3.2.4 Effect of firm’s size on Dividend payout policy

The following analysis deals with the effects of firm's size on dividend payout policies of the
company. To get an appropriate answer 20 respondents were asked to give their responses. and
those respondents were taken from employees of the bank. The data collected using the
questionnaire is presented and analyzed below table 4.

31
Table 4 effect of firm’s size on Dividend payout policy

No Item Respondent
Number Percentag
e
1. Does firm’s size affect your company's dividend
payout policy?
 yes 9 45%
 no 11 55%
Total 20 100%
2. Have large firms effect on dividend- agency
relationship?
 Yes 8 40%
 No 12 60%
Total 20 100%
Total 20 100%
3. Generally, what is the size of your company in
terms of profitability ?
 up to 100,000 - -
 100,000 - 500,000 2 10%
 >500,000 18 90%
Total 20 100%
(Source:- Data collected through questionnaires)

According to item 1 of table 4, 9(45%) of the respondents think that firm’s size affects dividend
payout policy of Zemen bank S.C., 11(55%) of the respondents believed that there is no effect
of firm’s size on dividend payout policy of Zemen bank S.C.

According to item 2 of table 4, 8(40%) of the respondents replied that large firms affect
dividend-agency relationship and the remaining 12(60%) of the respondents replied that they
do not have effect on dividend-agency relationship.

According to item 3 of table 4, 2(10%) of the respondents replied that the company have
medium size, and 18(90%) of the respondents believed that the size of Zemen bank S.C is
large. From the analysis presented above, the researcher concludes that there is a less but direct
relation between firms size and dividend payout policy of Zemen bank S.C.

To sum up, A large firm typically has better access to capital markets and finds it easier to raise
funds with lower cost and fewer constraints compared to a small firm. Therefore, ceteris
paribus, large firms are more likely to afford paying higher dividends to shareholders. This
shows that firm size has a positive impact on dividend policy. But contrary to the expectation,

32
size has a negative but insignificant relationship with dividend policy. This shows that
company size does not determine the dividend policy of the company. The analysis above
shows that company size does not determine the dividend policy of the company.

3.2.5 Effect of firm’s age on Dividend payout policy

The researcher tried to investigate the effects of firm’s age on dividend payout policies of the
company. And to get an appropriate answer 20 respondents were asked to give their responses.
And also the respondents were taken from employees of the bank. The data collected using the
questionnaire is presented and analyzed in the following table.(see table 5 below)

Table 5 effect of firm’s age on Dividend payout policy

No Item Respondent
Number Percentage
1. Does firm's age affect your company’s
dividend policy ?
 Yes 12 60%
 NO 8 40%

Total 20 100%
2. Does the payment of dividend have
impact on your company?
 Yes 9 45%
 No 11 55%
Total 20 100%
(Source: - Data collected through questionnaires)

According to item 1of table 5, 12(60%) of the respondents think that firm’s age affects
dividend payout policy of Zemen bank S.C., 8(40%) of the respondents believed that there is no
effect of firm’s age on dividend payout policy of Zemen bank S.C.

Item 2 of table 5 indicates that, 9(45%) of the respondents replied that the payment of dividend
affects their company, and 11(55%) of the respondents believed that the payment of dividend
have no effect on dividend payout policy of Zemen bank S.C. From the analysis presented
above, the researcher concludes that there is a direct relation between firms age and dividend
payout policy of Zemen bank S.C.

This indicates that, age of the firm and dividend payout had showed significant relation, since
relatively older companies need few capital expenditures. so this enable the firm to pay high

33
dividend to their shareholders. Accordingly, firm age has a positive impact on dividend payout
policies of the company.

3.2.6 Effect of firm’s earning power on Dividend payout policy

Under this area the researcher tried to analyze the effects of firm's earning power on dividend
payout policies of the company. 20 respondents were asked to give their response towards the
effects of firm's earning power on dividend payout policies. The data collected is presented,
analyzed and interpreted hereunder.

Table 6 effect of firm’s earning power on Dividend payout policy

No Item Respondent

Number Percentage

1. Does your company’s earning fluctuates

over the period ?
 Yes 13 65%
 No 7 35%

Total 20 100%

2. How much profit is distributed by your

company as dividend?
 Higher 16 80%
 Lower 1 5%
 Indeterminate 3 15%
Total 20 100%

(Source:- Data collected through questionnaires)

For item 1 of table 6, 13(65%) of the respondents believed that zemen banks S.C earning
fluctuates over the period, and the remaining 7(35%) of the respondents replied that the
company's earning doesn't fluctuate over the period

From item 2 of table 6, 16(80%) of the respondents replied that Zemen bank S.C distribute
higher amount of profit as dividend, 1(5%) of the respondents believed that the company
distribute lower amount of profit as dividend and the remaining 3(15%) of the respondents
replied that is difficult to determine the amount of profit distribute by Zemen bank S.C. From
the analysis presented above, the researcher concludes that there is a direct relation between
firms earning power and dividend payout policy of Zemen bank S.C.

34
To sum up, firm’s earning power is found that one of a major significant factor of firm's
dividend payment. The finding was obtained from respondents of the questionnaire in table 6
above. as a result firms earning power has a positive and significant effect on dividend payout
policies of the company.

3.2.7 Effect of growth on Dividend payout policy

Growth of a given organization is among the most important independent variable which
positively affects the dividend payout policies of the company. 20 respondents were asked to
give their response towards the effects of firm's earning power on dividend payout policies. The
data collected is presented, analyzed and interpreted hereunder.

Table 7 effect of growth on dividend payout policy

No Item Respondent
Number Percentage
1. Does your company’s dividend payout
policy affected by growth?
 yes 17 85%
 no 3 15%
Total 20 100%
2. Firms with slow growth and investment
opportunities pay what amount of dividend?
 Higher
 Medium _ _
 Lower 4 20%
16 80%
Total 20 100%
(Source:- Data collected through questionnaires)

According to item 1 of table 7, 17(85%) of the respondents think that growth affects dividend
payout policy of Zemen bank S.C. and the remaining 3(15%) of the respondents replied that
growth doesn't affect dividend payout policy's of zemen bank.

From item 2 of table 7, 4(20%) of the respondents replied that firms with slow growth and
investment opportunities pay medium amount of dividend and the remaining 16(80%) of the
respondents replied that firms with slow growth and investment opportunities pay lower
amount of dividend. From the analysis presented above, the researcher concludes that there is a
direct relation between growth and dividend payout policy of Zemen bank S.C.

35
To sum up, It is predicted that firms with high growth or investment opportunities tend to
generate adequate investment income, thus paying higher dividends. As discussed, the result
shows the relationship between growth and dividend payout policies is positive and significant.
And the company with slow growth and investment opportunities pay lower dividend. As a
result growth is an important factor after profitability.

3.2.8 Dividend practices

Under this area the researcher tried to analyze the dividend practices and their effects on the
dividend payout policies of the company. The relevant information was collected trough the
questionnaire from a sample of 20 respondents. And the following discussion focuses on the
assessment (data presentation, analysis and interpretation) of the dividend practices of the
company. (See table 8 below)

Table 8 effect of dividend practices on dividend payout policy

No Item Respondent
Number Percentage
1. Pay after financing all positive NPV (net present
value) projects.
 yes 17 85%
 no 3 15%
Total 20 100%
2. Pay fixed percentage of its earning.
 Yes -- --
 No 20 100%
Total 20 100%
3. Pay fixed amount of dividend.
 Yes 2 10%
 NO 18 90%
Total 20 100%
4. Pay low but regular dividend.
 Yes -- --
 No 20 100%
Total 20 100%
5. Pay zero dividends.
 Yes _ _
 No 20 100%
Total 20 100%

36
6 Pay after legal rules are comply
 Yes 20 100%
 No -- --
Total 20 100%
(Source:- Data collected through questionnaires)

According to item 1 of table 8, 17(85%) of the respondents replied that zemen bank pays
dividend after financing all positive NPV(net present value) projects and the remaining 3(15%)
of the respondents believed that the company don't follow the dividend policy theory which
dictates pay after financing all positive NPV(net present value) projects.

According to item 2 of table 8, all 20(100%) of the respondents replied that zemen bank doesn't
Pay fixed percentage of its earning as dividend.

According to item 3 of table 8, 18(90%) of the respondents replied that zemen bank doesn't Pay
fixed amount dividend and the remaining 2(10%) of the respondents replied that the company
pays fixed amount of dividend to the shareholders.

Item 4 of table 6 indicates that, all 20(100%) of the respondents replied that zemen bank doesn't
Pay low regular dividend to the shareholders.

From item 5 of table 8, all 20(100%) of the respondents replied that zemen bank doesn't Pay
zero dividend.

According to item 6 of table 8, all 20(100%) of the respondents replied that zemen bank pays
dividend after all legal rules are comply.

From the analysis presented above, the researcher concludes that zemen bank follows residual
dividend policy which dictates pay after financing all positive NPV (net present value) projects
and after comply legal rules.

To sum up, the above analysis deals with the dividend practices of the company. The
researcher tried to assess and suggest that which dividend policy does the company is
following. There are different alternative dividend payout policy theories. According to the
above analysis zemen bank follows Residual dividend policy which states, a firm will only pay
dividends from the earnings left after financing all positive NPV projects and paying out
dividends if there are still left over funds available. According to this theory dividend becomes
a circumstantial payment paid only when the investment policy is satisfied. Therefore there is a

37
tendency that this type of policy could give rise to a zero dividend structure. Since zemen bank
follows this policy it is advisable to modify this policy to ensure the shareholders need of
dividend payment.

3.2.9 In-depth interview results

As stated in chapter one, apart from the structured record review, this study employed in-depth
interviews with finance manager of Zemen bank S.C. The interview questions were
unstructured and focused on the importance of dividend payout decisions relative to investment
and financing decisions, view towards dividend policy, and the main factors that affect the
payout policy of the company.

Before turning to the issue of dividend policy determinants, the interview explored the broad
issue of the importance of the payouts in zemen bank relative to investment and financing
decisions. In contrast to the dividend irrelevance argument, the interviewee considered
dividend policy to be an important decision for their company. Moreover, the discussions
demonstrated that a broad interdependency of investment, financing and dividend policies
exists in zemen bank. And decisions about dividends were not taken in isolation but were
considered alongside the investment and financing needs of firms in order to maximize the
shareholders value.

Regarding the impact of dividend payment, management pays more attention to its impact on
the company’s capital needs. A high dividend payout reduces company’s access to retained
earnings. For that reason, management may prefer lower dividend payout ratios, but must
recognize the realities imposed by shareholders preference for at least some payment of
dividends. It was also sought to discover what makes top management take decisions to pay
dividends. The interviewee suggested that the most important factor was meeting shareholder
requirement for income. Besides, managers seem to favor the statement and acknowledge the
shareholder’s preference for the periodic cash payment of dividends. So the interview evidence
shows that manager of zemen bank share company express greater support for bird-in-the-hand
explanation for paying dividend.

In addition, the interviewee suggested that the board of directors propose the amount to be paid
as dividend and it will be finally approved in annual general meeting (AGM) by the vote of
shareholders.

38
In response to a specific question about the existence of target dividend payout ratio, the
interviewee stated that our company did not have target ratios and did not payout a constant
proportion of earnings as dividends. The actual payout ratio was instead revised each year
depending upon the current earnings, the situation of the company and market.

On the question that focuses on the determinants of dividend policy, respondents offered
various factors, A number of factors were mentioned by the finance manager (interviewee),
suggested that the most common factor sighted was situation of the firm, industry effect,
profitability (current earning power), past dividends, taxation, number of claim, leverage, size,
monetary rules and regulation, liquidity and growth. But the target of the researcher is about
profitability, growth, liquidity, firm's earning power, firm’s age and firm's size.

From the factors listed above, interviewee suggested that a company’s profitability and current
year earnings were the main and most important factor in crafting a dividend policy. After
profitability and current year earnings the interviewee believed that the firm's growth and age
of zemen bank was the most important factor when setting a dividend level. In addition, the
interviewee indicated that zemen bank’s dividend policy fluctuated with the company’s change
in investment and financing needs.

Besides, the interviewee indicated that the liquidity and size of the firm had positive but less
impact on their companies dividend policy. The interviewee reflected that as the size of the
firm increase in terms of branch, asset and other things it attracts customers and reflect the
firm’s ability to meet the claim. This will enhance the premium to be collected from customers
and results increase in profitability in which it results in increase in dividend.

On the other hand the interviewee replied that debt increases the profitability of zemen bank's
share company; higher debt (premium collection) was much more likely to indirectly allow the
company to pay more dividends from the enhanced earnings.

Overall, the results clearly suggest that, the managers believe that the dividend policy matters
and a company’s dividend policy were influenced by a number of factors. Further, zemen bank
did not have target ratios; instead, the dividend payout fluctuates from year to year.

3.3 Presentation of a result

39
This section of the chapter discusses some of the main implications of the results. The analysis
is based on the results of the respondents and the in-depth interview. The results obtained under
these different methods are jointly analyzed.

Profitability

As shown in table 2 this study hypothesized that profitable companies are more able to pay
dividends. The result is in line with the respondents’ response. This result is consistent with the
signaling theory of the dividend policy theory. Therefore, the more profitable zemen bank S.C
is, the higher the possibility to pay dividends. Fama and French (2001) reported a positive
association between dividends and profitability which they interpret as evidence in support of
the pecking order theory.

Thus, profitable companies will find it more significant to pay dividends and to generate more
retained earnings. This result is also similar to Lintner (1956, p. 107) where Lintner stated that
“…net earnings were the dominant element which determined current changes in dividends”.
Besides Al-Kuwari (2009) and Pruitt and Gitman (1991) concluded that current year’s profits
are important factors that influence dividend policy.

Hence, profitability is considered an important factor in influencing dividend payment.

Liquidity

As shown in table 3 and in- depth interview, the results indicated that there is less but direct
relationship between liquidity and dividend payout policies of the company. This implies that
the increase or decrease in liquidity has less significant effect on dividend payout policies of
zemen bank Share Company. Because shareholders do not trust managers, and they therefore,
think that the managers may be engaged in excessive spending if they have excess free
cash flow at their disposal. Many empirical studies showed a positive relationship between
liquidity and dividend payout. This positive association between liquidity and dividend policy
is supported by prior literature and signaling theory. Alli et al. (1993) observed that dividend
payment depend on liquidity. Amidu and Abor (2006) found a positive relationship between
liquidity and dividend payout policies. Anil and Kapoor (2008) also indicated that liquidity is
an important determinant of dividend payout ratio. Besides, the finding is consistent with the

40
answer of the interviewee and the respondents as most of them claimed that liquidity or the
availability of cash has positive but less significant in setting dividend levels.

Firm Size

A large firm typically has better access to capital markets and finds it easier to raise funds with
lower cost and fewer constraints compared to a small firm. This suggests that the dependence
on internal funding decreases as firm size increases. Therefore, ceteris paribus, large firms are
more likely to afford paying higher dividends to shareholders (Holder et al. (1998) and Fama
and French (2001)). Accordingly, it was analyzed in table 4 that firm size has a positive but less
impact on dividend policy of zemen bank's share company. But contrary to the expectation,
firm's size has a negative but insignificant relationship with dividend policy. This shows that
company size does not determine the dividend policy of the company. It is also consistent with
the result found in the in-depth interview in which of the interviewee revealed positive but less
impact of firm's size on dividend payout policy.

Hence, firm's size is considered less important factor in influencing dividend payments of
zemen bank Share Company.

Firm’s Age

Empirical studies on the relation of age of the firm and dividend payout had showed
that since mature companies are relatively older and more likely have low-growth phase with
less investment opportunities, they need few capital expenditures, this reason enable them to
pay high dividend to their shareholder. A newly established company may require much of its
earnings for expansion and plant improvement so this may result to adopt a strict dividend
policy. Talat Afaz(2011) analyzed the impact of firm age on dividend policy for 120 firms
listed in Karachi stock exchange. Accordingly, it was analyzed in table 5 that firm age has a
positive impact on dividend policy of zemen bank's share company. The result is in line with
the respondents’ response which results a positive and significant relationship between firm's
age and dividend payouts policies of zemen bank Share Company.

Firm's Earning Power

Much of previous year studies showed that firm’s earning power is a significant factor of
dividend payout policy. Annur Md Nassir and Shamsher Mohamed (1993) found that a major

41
determinant of firms dividend payment was firm's current earning power. The finding was also
consistent with the result obtained from respondents of the questionnaire in table 6 above, and
the in-depth interview as the interviewee indicated that firm's current earning power is one of
the key determinant of dividend policies of zemen bank S.C. as a result firms earning power
has a positive and significant effect on dividend payout policies of the company.

Growth

It is predicted that firms with high growth or investment opportunities tend to generate
adequate investment income, thus paying higher dividends. As discussed, the result shows the
relationship between growth and dividend payout policies is positive and significant. And the
company with slow growth and investment opportunities pay lower dividend. The finding was
also consistent with the result obtained from respondents of the questionnaire in table 7 above,
and the in-depth interview as the interviewee indicated that the zemen bank's dividend policy
moved with the direction of change in growth and investment opportunity but it is inconsistent
with theory of pecking order that the company with high growth requires more internal
financing and thereby decrease dividend payout. As a result growth is an important factor after
profitability.

CHAPTER FOUR

CONCLUSIONS AND RECOMMENDATIONS

42
The preceding chapter presented the results and discussion, while this chapter deals with
conclusions and recommendations based on the findings of the study. Accordingly this chapter
is organized into three subsections. Section 4.1 presents the conclusions, section 4.2 presents
the recommendations and section 4.3 presents areas for future research.

4.1. Conclusions

Dividend policy is an important issue because it determines what funds flow to investors and
what funds are retained by the firm for future reinvestment. To this end, this study aimed at
examining possible factors that could influence the dividend policy of zemen bank S.C. In
order to achieve this objective, three research questions have been developed. To address those
research questions, the researcher conducted different method of data collection and to achieve
the research objectives, the study used quantitative research approach. More specifically, the
analyses were performed using data derived from the respondents, from the interview and
financial statements of Zemen bank S.C.

In the study profitability, growth, firm's earning power, age, liquidity and size were considered
as independent variables while dividend policy was considered as dependent variables. With
regard to in-depth interviews, the study conducted interview with the finance manager of the
bank. The results of the respondents’ response and in-depth interview analysis showed
significant positive relationships between dividend payout and profitability, growth, earning
power, and age of the firm.

Profitability is found to be the most significant factor that determines dividend payout policies
of zemen bank Share Company. This result suggested that, when Zemen bank is profitable tend
to pay high dividend. This result was in line with the pecking order and signaling theory of the
dividend policy theory. The results also showed significant positive associations between
dividend payout and growth. This indicates that when zemen bank is growing, more investment
income is accumulated and thereby increases dividend payout. Liquidity is also found to have
insignificant and positive relationship with dividend payout policies of zemen bank. Which
is against to the theory of agency? Theory of agency states companies that have high free cash
flow have high dividend payout ratio to prevent managers from engaging in excessive spending
if they have excess free cash flow at their disposal. But contrary to agency theory due to the

43
banks own inefficiency problem the company may hold excess liquidity at disposal which
could be used to generate earnings and as a result profit could decrease.

From the analysis earning power and firm's age are identified as statistically significant
variables that explain the dividend policy of zemen bank Share Company. Whereas size is
found to have insignificant but positive impact on dividend payout policies of zemen bank.
This is against with the theory of agency, which describes large firms face high agency costs as
a result of ownership dispersion, increased complexity, and the inability of shareholders to
monitor the firm activity closely.

Additionally, the discussions with the interviewee suggested that zemen bank S.C devote
considerable time and attention to dividend policy. In contrast to the dividend irrelevance
argument of Miller and Modigliani (1961), zemen bank S.C considered dividend policy to be
an important decision to the company. Moreover, the discussions demonstrated that a broad
interdependency of investment, financing and dividend policies exists in zemen bank and
decisions about dividends were not taken in isolation but were considered alongside the
investment and financing needs of firms in order to maximize the shareholders value. In
general, the results suggested that when zemen bank becomes more profitable, growing, aged
and high earner the company pays more dividends. Also the study clearly showed that
profitability, growth, age and firm's earning power were the four most important factors
affecting dividend policy of zemen bank S.C. on the other hand liquidity and firm's size are
also factors affecting dividend payout policies of the company but less significantly.

4.2. Recommendations

Since dividend policies have been described as a puzzle, it was necessary to conduct a
study regarding the determinants of dividend payout of share company. Investors, who are
trying to predict future dividends will therefore, gain some useful information regarding which
company selected factors to look for when predicting future dividends. Managers may also use
the study when determining the dividend payout ratios since they will be given useful
information regarding which factors they may consider when determining the dividend payouts.

On the basis of the findings of this study, the researcher has drawn the following
recommendations.

44
  Zemen banks share company managers should give consideration to profitability,
growth, age and firm's earning power when they set dividend policy as they are found to
be the most significant factors that affect dividend policy of zemen banks share
company . This will help them to make their dividend payout decision efficient,
effective and reasonable which in the long run will help them to achieve their objective
(maximizing profit) and satisfy employees and shareholders needs.
 To make an informed decision on investment options, investors need to look the bank
performance in the following factors; (profitability, earning power, growth of the bank,
and age) before making an investment decisions. Because these factors have a
significant impact on dividend payout policies of the company.
 Investors who want to invest on Ethiopian share company's zemen bank and prefer
stable dividend payout need to consider that zemen bank do not necessarily follow
stable dividend payout policy rather they changes their dividend policy from time to
time based different factors.
 Understanding the determinants of dividend payout policy has significant implication
on individual investor’s investment policy depending on his/her dividend preference.
Since, in the absence of secondary market, where searching and brokerage costs are
high, it is difficult for an individual investor to shift easily and construct his or her own
dividend policy by buying and/or selling existing stocks. Besides, investors who want to
select the paying dividend firms might have to look into the four mentioned factors
before selecting the companies.

4.3 Areas for future research

 This research has used only five years data in order to keep the sampled bank
representative due to bank recent establishment and history of recent dividend
distribution. Therefore, future researches could replicate this study using multiple years
data like 10 years.
 This research has used only company's specific variables. Future research could be
directed towards various directions. First, the inclusion of additional variables of the
firm could be examined. Second, the application of macroeconomic variable is another
potential extension of the present research. Finally, the investors’ views towards

45
 dividend payout policy were uncovered by the findings and so it can be explored by
future researchers.

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46
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Appendix
ADDIS ABABA UNIVERSITY

48
 COLLGE OF BUSINESS AND ECONIMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

DETERMINANTS OF DIVIDEND POLICY QUESTIONNAIRE

ON
ETHIOPIAN SHARE COMPANY ZEMEN BABK
FOR PARTIAL FULFILMENT OF THE BACHLEOR OF ARTS DEGREE IN
ACCOUNTING AND FINANCE

APRIL 2016

OBJECTIVES OF THE STUDY:

The study specifically aims to

 Identify the determinant factors of Zemen Bank's dividend policy.
 To identify the relationship of growth, and liquidity on dividend policy of Zemen Bank.
 To establish the impact of firms age and business risk on dividend policy of Zemen
Bank.
 To have a detailed analysis of the dividend policy of Zemen Bank.

DEAR RESPONDENTS: The questionnaire is prepared by a student of Addis Ababa Univer

Instruction

 No need of writing your name.

 Circle or put " X " mark in the box of your choice /Fill in the blank as per the question.

49
GENERAL QUESTIONS: (Background)

1.Gender

Male Female

2.Job assigned (position)_____________________

3. Educational Background

Management Accounting and Finance Economics

Marketing Other, please specify ____________

4.Education status.

Diploma Degree MA PHD

5. Year of experience

1-3years 4-7years 8-10years Above10years

SPECIFIC QUESTIONS:

6.Which of the following factors determine your company's dividend payout policy ?

No factors Strongl Agree Neutra Disagree Strongl

y l y
agree disagree
1 Profitability
2 Liquidity
3 Firm's earning power
4 Firm's age
5 Firm's size
6 Growth
Other 7
please
8
specify

50
7. How do you characterize your company dividend practice ?

No Dividend practice Yes No

1 Pay after financing all positive NPV(net present value)

projects.

2 Pay fixed percentage of its earning.

3 Pay fixed amount of dividend.

4 Pay low but regular dividend.

5 Pay zero dividend.

7
Other please

8
specify

PART I. profitability

Profitability Yes No
No
8 Do you think there is a relationship between profitability and
dividend policies of your company?
9 Does current earnings have an impact on dividend payout
policy decisions of your company ?
10 Does future earnings and patterns of past dividend are related
with your company’s dividend policy?

11 How dividend payout would As a result of high profitability

be high? As a result of low profitability
Not affected by profitability
I
ot

51
 II

er
h

PART II: FIRM'S SIZE, AGE AND EARNING POWER

No Firm's Size, Age and Earning power Yes No

12 Does firm’s size affect your company’s dividend payout

policy ?
13 Have large firms effect on dividend- agency relationship ?
14 Does firm's age affect your company’s dividend policy ?
15 Does the payment of dividend have impact on your company ?
16 Does your company’s earning fluctuates over the period ?
17 How much profit is distributed by your Higher
company as dividend ? Lower
Indeterminate
Up to 100,000
Generally, what is the size of your company 100,000-
in terms of profitability ? 500,000
>500,0000
18

I
Other

II

PART III: Liquidity

19. Does liquidity affects dividend payout policy of your company ?

Yes No Difficult to determine

20.Is there a liquidity problem in your company's dividend payment practice ?

Yes No

52
PART IV: GROWTH

Firm's Growth Yes No

No
Does your company’s dividend payout policy affected by
21 growth ?

22 Firms with slow growth and investment Higher

opportunities pays what amount of dividend ? Medium
Lower
Other I
please II
specify

23. What factor is the most important factor that affects your company’s dividend payout
policy? Please specify___________________________________________________________

____________________________________________________________________________

24. Is there any other factors that affect dividend payout policy in your company? If there,
please specify_________________________________________________________________

____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________.

====== THANK YOU =======

53
 Addis Ababa University

College of business and economics

Department of accounting and finance

Instrument for Unstructured face- to-face interview on the determinants of dividend payout
policy's of Zemen bank Share Company.

1. When your company declares and pay dividend?

2. How important are dividend payout decisions relative to investment and financing decisions?

3. Does the payment of dividend have impact on your company? How?

4. Who sets the amount of dividend to be paid?

5. How do you see your company dividend policy?

6. What are the main factors that affect the payout policy of your company?

Do you have any comments on the interview?

54