Dividend policy and banks’ performance: Assessing the relevance versus irrelevance theory

Abstract

The correlation between dividend policy and firm performance remains a highly debated topic in the field of corporate finance. There exists literature both in favor of and against this connection. The aim of this research is to identify the importance of different dividend policies for commercial banks in Ethiopia during the period from 2008 to 2021. Data from eight commercial banks, extracted from their audited financial statements and a publication by the Central Bank of Ethiopia, was utilized for the study. Various regression models, including simple linear regression, fixed-effects models, and random-effects models, were employed to analyze the data. The Hausman test was conducted to determine the most appropriate regression model. The results of the Hausman test indicate that the random effect model is suitable for characterizing the relationship between variables in model one, while the fixed effect model is more appropriate for model two. Both the random-effects and fixed-effects regression models support the notion of dividend policy irrelevance. Consequently, the study concludes that the dividend irrelevance theory is applicable to commercial banks in Ethiopia. As a result, investors and shareholders should view dividends not only as a source of income but also as a tool for evaluating banks from an investment perspective.