Banks dividend policy: Evidence from Pakistan Kashif Imran a, ⁎, Muhammad Usman b, 1 , Muhammad Nishat c, 2 a Department of Economics, Institute of Business Management (IOBM), Karachi, Pakistan b Applied Economics Research Center, University of Karachi, Pakistan c Institute of Business Administration (IBA), Karachi, Pakistan abstract article info Article history: Accepted 21 January 2013 Keywords: Dividend payout KSE Earning per share Transaction cost hypothesis The present study empirically investigates the factors that determine the dividend payout decisions among banks. For empirical analysis the data of sixteen banks listed in the Karachi Stock Exchange (KSE) are used. The results indicate that earning per share, last year's dividend payouts, capital ratio and size of the bank are crucial factors in the determination of dividend payouts, whereas cash flow is negatively associated with dividend payouts. The results support the Lintner model (1956) and also follow the transaction cost hypothesis. © 2013 Elsevier B.V. All rights reserved. 1. Introduction Dividend payout policy is one of the most debated topics and a core theory of corporate finance which still keeps its importance. Many researchers presented various theories and empirical evidences, how- ever the issue is still unresolved and open for further discussion. It is among the top ten unresolved problems in economic literature and one that does not have an adequate explanation for the observed dividend behavior of the firms (Allen and Michaely, 2003; Black, 1976; Brealey and Myers, 2005). In developed economies the investors and management of the firms decide very suspiciously whether to pay dividends or keep it as retained earnings (Glen et al., 1995). The role of dividend is still like a puzzle. There are several reasons whether businesses should pay dividends or not. A number of hypoth- eses have risen to get rid of some light on this puzzle but the problem is still there. Normally a firm faces the problem in allocation of earnings, whether to distribute among shareholders or retaining for reinvest- ment. The retained earnings is a main internal source of financing, how- ever higher retained earnings mean fewer dividends and vice versa (Black, 1976). The more profitable firms are, the more internal finance they have, hence, larger dividends. Practically every business adopts a dividend policy, which retains a portion of net earnings in such a man- ner that it will not comprise a threat to dividend payments. In literature there is no single explanation for dividend and researchers also do not agree on a single idea. The management can thwart from agency prob- lems to pay a sufficient amount of cash dividend. The dividend policy issue has significance due to several reasons. Firstly, the firm can use it as a tool for financial signaling to the outsider vis-a-vis the stability and growth prospects of the firm. Secondly, divi- dend plays a key role in a firm's capital structure. According to the “residual dividend” theory, a firm pays dividend only if she does not have any opportunity of profitable investment. Various researchers established a relationship between dividend and investment decision. Management normally does not like to reduce the dividend payments. During the last fifty years, a lot of empirical and theoretical work has been done, summarizing all these studies; three dominating views can be concluded i) dividend payments can positively change the market value of the firm (Gordon, 1963; Lintner, 1956). ii) A positive change in the dividend decreases the firm's value (Litzenberger and Ramaswamy, 1979). iii) Dividend policy does not affect the market value of the firm (Miller and Modigliani, 1961). So it can be concluded that the factors determining the dividend policy are mixed and depend upon the firms as well as countries' policies and market structure. The banks play a major role to facilitate the businesses as a financial intermediary in Pakistan, hence leading to growing investment and economic prosperity. However, there is no empirical study available in the case of Pakistan which analyzes or identifies the dividend policy behavior or factors of this important sector. Most of the studies on dividend behavior are based on non-financial firms in Pakistan (Eriotis, 2005; Fama and French, 2002; Glen et al., 1995; Imran, 2011; Javid and Ahmed, 2009; Nishat and Bilgrami, 1994; Smith and Watts, 1992). The objective of the present study is to empirically identify the various factors determining the banking sector' dividend paying behav- ior by using the sample of sixteen banks listed in the Karachi Stock Exchange (KSE), for the period 2000 to 2010. The remaining paper is organized as follows. Section 2 provides literature review. Section 3 develops the empirical model and econo- metric methodology. Section 4 consists of empirical results, and the last section concludes the study. Economic Modelling 32 (2013) 88–90 ⁎ Corresponding author. Tel.: +92 321 7609189. E-mail addresses: kashif.imran@iobm.edu.pk (K. Imran), muhammadusmanara@gmail.com (M. Usman), mnisht@iba.edu.pk (M. Nishat). 1 Tel.: +92 300 2679529. 2 Tel.: +92 308 2229333. 0264-9993/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.econmod.2013.01.041 Contents lists available at SciVerse ScienceDirect Economic Modelling journal homepage: www.elsevier.com/locate/ecmod