COMSATS ISTITUTE OF INFORMATION AND

TECHNOLOGY, ISLAMABAD

Determinants of Corporate Dividend

Policy in Jordan: An Application of the
Tobit Model Husam-Aldin Nizar Al-
Malkawi∗ “
Aisha Javaid
Masters in Management Sciences (MSMS)
Department of Management Sciences
FA15-RMS-014
Overview of Presentation
Introduction

Purpose of the study

Research questions
Research objectives
Significance of the study
Research hypothesis
Research Methodology (Data collection, Measures and Analysis

procedures)
Results of data Analysis
Conclusions
Implications
Limitations and Future research
References
Abstract
 This paper examines the determinants of corporate
dividend policy in Jordan.
 The study uses a firm-level panel data set of all publicly

traded firms on the Amman Stock Exchange between 1989

and 2000.
 The study develops eight research hypotheses, which are

used to represent the main theories of corporate dividends.

 A general-to-specific modeling approach is used to choose

between the competing hypotheses.

 The study examines the determinants of the amount of

dividends using Tobit specifications.

Introduction
The topic of dividend policy is one of the most
enduring issues in modern corporate finance. This
has led to the emergence of a number of competing
theoretical explanations for dividend policy. No
consensus has emerged about the rival theoretical
approaches to dividend policy despite several
decades of research.
 Theoretical Consideration and Prior Research

1. M&M demonstrate that under certain

assumptions including rational investors and a
perfect capital market, the market value of a
firm is independent of its dividend policy
2. The bird-in-hand theory (a pre-Miller-
Modigliani theory) asserts that in a world of
uncertainty and information asymmetry
investors will often tend to prefer dividends to
retained earnings.
 Theoretical Consideration and Prior
Research
3. The tax-preference theory posits that low dividend
payout ratios lower the required rate of return and
increase the market valuation of a firm’s stocks.
Because of the relative tax disadvantage of
dividends compared to capital gains investors
require a higher before-tax risk adjusted return on
stocks with higher dividend yields (Brennan, 1970).
Theoretical Consideration and Prior
Research
4. Another closely related theory is the clientele
effects hypothesis. According to this argument,
investors may be attracted to the types of stocks
that match their consumption/savings
preferences.
5. According to signaling theory Despite the tax
penalty on dividends relative to capital gains,
firms may pay dividends to signal their future
prospects
Theoretical Consideration and Prior
Research
6. The information asymmetry between managers
and shareholders, along with the separation of
ownership and control, formed the base for another
explanation for why dividend policy may matter;
that is, the agency costs thesis.
Research Hypothesis
 Hypothesis 1: Dividends serve as a
bonding mechanism to reduce agency
problems
 Hypothesis 2: Ownership and control

structures affect corporate dividend

policy
 Hypothesis 3: Dividends as a signaling

device
Research Hypothesis
 Hypothesis 4: Firm growth and investment
opportunities are negatively associated
with dividend payouts
 Hypothesis 5: The firm size is positively
associated with dividend payouts
 Hypothesis 6: The firm debt is negatively
associated with dividend payouts
Research Hypothesis
 Hypothesis 7: There is a positive
relationship between a firm’s
profitability and dividend payouts
 Hypothesis 8: The relative tax

disadvantage of dividends induces

lower dividend payouts
Summary of Research Hypotheses and Proxy
Variables
Tobit Estimation
 The evaluation of the determinants of the
amount of dividends is carried out using the
general specification of the censored data
estimation, namely the Tobit model. Indeed,
the observed dependent variable, the
amount of dividend paid by each firm, may
either be zero or positive.
 y =α+βx+ €
Results
Conclusion
 Thispaper has examined the main
determinants of corporate dividend policy
in Jordan. Tobit specifications were used to
examine the determinants of the level or the
amount of dividends paid. The results were
obtained using the maximum likelihood
estimations of the random effects Tobit
regressions
Conclusion
 The data showed that ownership dispersion as measured by
the natural log of the number of stockholders (STOCK)
seems to not be related to dividend policy in Jordan.
 The fraction held by insiders (INSD), the second proxy for
the agency costs hypothesis, has negative impact on the level
of dividends paid.
 Similarly, the existence of government or its agencies
(STATE) in a firm’s ownership structure (controlling
shareholder) affects the amount of dividends (positively).
 Other variables of ownership structure seem to have no
influence on dividend policy. By and large, the evidence is
consistent with the agency costs explanation.