European Online Journal of Natural and Social Sciences 2016; www.european-science.com Vol.5, No.2 pp. 263-274 ISSN 1805-3602 Antecedents of Dividend Policy: Empirical Evidence from Banking Sector of Pakistan Rizwan Hamid 1* , Muhammad Shahbaz Yaqub 2 , Muhammad Mubashir Hussain Awan 3 1 Monnoo group of industries, Lahore Pakistan; 2 Department of Management Sciences Virtual University of Pakistan; 3 Management Studies Department Govt. College University, Lahore * E-mail: rizwanhamid@monnoo.com Received for publication: 02 November 2015. Accepted for publication: 30 March 2016. Abstract This paper explores the determinants of dividend policy of commercial banks operating in Pakistan. Dividend decision of any bank primarily depends upon its profitability, retained earnings, cash flows, corporate taxes and leverage. This study is an attempt to find out key determinants and their impact on cash payout and total payout ratios. It also aims to test the implication of dividend theories on Pakistani banks using data for a period of 8 years ranging from 2006 to 2013. Balanced panel data regression with fixed effects model has been used in this study. All independent variables - PAT, SLACK, EPS, CTA and TD 1 reported significant results. We found significant role of profitability theory, packing order theory, free cash flow theory and agency cost theory in determining dividend policies whereas, tax effect and financial slack has no effect in banking sector of Pakistan. Keywords: cash payout, stock payout, determinants of dividend policy, dividend theories. Introduction A long history of corporate dividend policy reveals that dividend policy was bound up with the development of corporate finance itself (Frankfurter & Wood, 1997). In the early16th century, in Great Britain and Holland, the captains of sailing ships on track started selling of financial claims to the investors. At the end of each voyage 2 , the capital and the profits were distributed according to their investments. Each venture ensured the distribution of profit to the investors at the end of its life (Baskin, 1988). That was the emergence of business as “going concern” and made a fundamental practice of the business to decide the percentage of business profit to be distributed to the owners. This produced the first dividend payment in the history. It also evolved the ownership structure of business houses into what presently known as joint stock companies. In the middle of 17th century, the success of corporate form of business opened the doors for other business. Importance placed by the investors on dividend policy gave birth to another issue in modern corporate finance - paying the regular and constant dividend remained vital for the corporate managers during the 19th century (Frankfurter & Wood, 1997). In corporate finance, the finance managers face two operational decisions in their organizations - the investment decisions and the financing decisions. A 3rd decision is regarding distribution post-tax profits to the stockholders or plough back in the business operations. This decision needs a consideration of shareholders’ wealth maximization while putting it into action. cash flows, and leverage Profitability, retained earnings, earnings per share, 1 2 This type of business was called as Commenda. Under the commenda, the commendator provided the capital by the investors and the Commendatarius managed the investment (Walker, 1931, p.97). Openly accessible at http://www.european-science.com 263