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Background
of the study

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When
a company makes a profit there are mainly two alternatives, that top
level managements of accompany would face, in one side whether decide
to retain earnings in the company to expand investment is more
appropriate or in the other side whether decide to distribute
earnings to their shareholders in the form of dividend is more
appropriate (Hellström, 2012). According to Kretlow (2001), to
determine the appropriative proportion of retained earnings and cash
dividend payments of shareholders in the firm the prevalence of clear
dividend policy is a guide line for top level managements. Since, in
most business dividend policy is one of the important issues and it
needs critical considerations to achieve long term wealth
maximization or current dividend payment demands of their investors.

To
support the effect of dividend policy on firm’s value and firms
stock price, various dividend policy theories has been developed and
such theories used as a bench mark to investigate the determinant of
firms dividend payout decisions, from such theories, dividend
irrelevance theory conducted by Miller and Modigliani (1961),
suggests that dividend policy is irrelevant to the value of the firm
and in its stock price in perfect capital market. This means value of
the firm and its stock price only depends on the level of earnings
and the riskiness of their investment instead of how to distribute
their profit (M and M, 1961).

Whereas,
in contrast to dividend irrelevance theory, different dividend policy
theories have been specified by different researchers namely bird in
the hand theory (Gordon, 1963 and Lintner, 1962), agency cost theory
(Michael & Meckling, 1976) and signaling theory (John &
Williams, 1985). In particular, “Bird in the hand” theory
suggested that dividend policy is relevant to the value of the firm
and its stock price.

According
to Bird in the hand hypothesis increasing payments of dividends will
increases firms value, since, payments of more dividends today
decrease investment cost of capital as a result which increases
firm’s stock price (Gordon, 1963 and Lintner, 1962). Basically more
of dividend policy theories with the exception of Miller and
Modigliani dividend irrelevance theory confirmed that dividend policy
is relevant on firm’s value and its stock price. Since, in this
real world there is no perfect capital market, therefore within this
controversial issues company’s shareholders and managers should be
aware about the determinants of firm’s dividend payout decision. As
a result, to assess this problem different internal and external
factor to be considered accordingly to identify determinants of
firm’s dividend payout decisions.
From internal factors perspective; profitability is one of the
internal factors that affect the dividend payout decisions of firms.
Profit means the excess of firm’s revenue over expense and it is
the cornerstone of every business, since, all activities in the
business depend upon profit. It is logical that the profitability of
the firm affects the dividend payout decision because profit after
tax is available source to
make dividend payments (Ahmed and Murtaza 2015).
Liquidity position is the best indicator of firm’s ability to what
extent the claim of short term creditors are covered by the use of
current assets. It is one of the important factor’s to be
considered since, by its nature the payment of dividend is cash out
flow, if there is excess cash in the firm’s which is expected to
pay higher dividend than firm’s having less cash (Waswa
et al. 2014). Companies which have high leverage ratio in their
capital structure expected to pay less amount of dividends whereas,
firms with low leverage ratio are expected to pay higher dividends,
because principal and interest payments to creditors will reduce the
ability of firms to have residual income to provide dividend payment
to their shareholders (Ahmed
and Murtaza, 2015). The
size of the firm also affects the dividend payout decisions of firms.
According to Waswa
et al. (2014), the larger the firm have an advantage to raise
external funds than simply focusing on internal source of funds at
the expense of dividend, as a result the larger the firm is expected
to pay higher dividend to reduce agency problem.

Growth
and investment opportunities
also one of the important factors being considered in dividend payout
decisions of firms, since infant firms use their profit for
re-investment purpose instead of providing dividend to their
shareholders. And the residual theory proposes that firms with high
growth opportunities expected to pay lower dividend payout ratio than
firms with low growth opportunities (Ahmed
& Murtaza 2015, and Waswa
et al., 2014).

And
from external factors perspective, inflation is an influential factor
to be considered in dividend payout decisions firms. Even inflation
decreases the purchasing power of money it may negatively or
positively affect the dividend payout decisions of firms. According
to Mambo
(2012), in the short run, inflation positively affects firm’s
dividend payout decision but not in the long run.
Finally, other influential external factors affecting dividend payout
decisions of firms incorporated in this study is corporate tax.
Payment of tax reduce firm’s available amount of earnings for
dividend payments to shareholders, since higher corporation tax
liability reduce firm’s after tax profit and which is consistent
with tax effect theory (Gill et al., 2010). Therefore, in Ethiopia
conducting this study was largely demanded, since, different private
banks provide different DPR and as per the best knowledge of a
researcher, in Ethiopia there was no a single empirical study
investigates the effects of both internal and external factors on
dividend payout decision of Ethiopian private commercial banks.

Statement of the problem

In
Ethiopia, the dividend payout trends of private banks as indicated
from their annual report there is no uniform dividend payout ratio’s
across banks. This indicates that different private banks pay
different DPR, for instance, in the year 2014 and 2015, Awash
international bank distributed 95% net profits as dividend (AIBAR,
2015), while the bank of Abyssinia distributed 74.8% and 74.9%
net
profits as dividend respectively (BOAAR,
2015)
whereas Dashen bank provide only 25% dividend from the total net
profit of the bank in the year 2012 to 2015 (DBAR,
2015).
The sensitivity of the dividend payout ratio of private banks depends
on different factors such as profitability, growth and investment
opportunities, capital structure, asset growth, and inflation,
liquidity, and tax payments. From the theory point of view, a more
profitable firm is expected to pay higher dividend than lower
profitable firm, but different banks in Ethiopia provide more of
stable dividend payout ratio at different profitability growth rate.
For instance in the year 2014-2015, Dashen bank provided 25% DPR at
17.8% and 0.063% profitability growth rate respectively. Abyssinia
bank also provide 74.8% DPR in the year 2014 at zero profitability
growth rate whereas in the year 2015 the bank provide 74.9% at 5.7%
profitability growth rate and Awash international bank provide 95%
DPR in the year 2014- 20015 at different profitability growth rate
even at decreasing rate (42.2% to 3.9%) respectively. The larger the
firm is expected to pay higher dividend than the smaller the firm
since, they may be less dependent on internal source of finance
(Ahmed
& Murtaza, 2015).

According
to Ahmed
and Murtaza (2015), highly
levered firm is expected to pay low dividend than low levered firm,
because of principal and interest payments to creditors will reduce
firm’s available income to make dividend, but Ethiopian private
banks such as AIB, BOA and DB provide quite different dividend payout
ratio averagely with the same leverage ratio of (88.4%) in the year
2013 to 2014. In Ethiopia Different private banks have different
assets growth rate meaning some banks grow at increasing rate (BOA
grow 11.12% to 21.2% and in the same year Dashen bank grow 11.7% to
12%), but their dividend payout ratio is quite less than the DPR of
AIB, it grows at decreasing rate of 24.3% to 13.7% in the same
operational year of 2013/4 to 2014/5. The existence of such gap from
the theoretical literature indicates that conducting this study in
Ethiopia is demanded to examine what really matters the dividend
payout decisions of private banks in Ethiopian context. And from
empirical literature perspective, as per the best knowledge of the
researcher, in Ethiopia, there was no a single empirical study that
shows the impact of both firm specific and macro factors on dividend
payout decision of Ethiopian private commercial banks. Therefore,
conducting this study in Ethiopian is feasible by identifying
profitability, liquidity, leverage, bank size, growth, tax and
inflation as significant determinants of dividend payout decision.

Objectives of the study

General objective of the study

The
main objective of this study was to examine firm specific and
macroeconomic factors affecting dividend payout of private commercial
banks in Ethiopia.

Specific objectives of the
study

To
examine how and to what extent internal (firm specific) factors
would affect dividend payout decisions of private commercial banks
in Ethiopia.

To
examine how and to what extent macroeconomic factors would affect
dividend payout decisions of private commercial banks in Ethiopia.

Hypothesis of
the study

Hypotheses
are the pre-estimations about future results. By considering the
above research objectives, the hypotheses (HP) that this study
attempts to test are:

HP1:-
Profitability has a positive impact on dividend payout of private
banks in Ethiopia

HP2:-
Liquidity has a positive impact on dividend payout of private banks
in Ethiopia

HP3:-
Leverage
has a negative impact on dividend payout of private banks in
Ethiopia

HP4:-
Growth
has a negative impact on dividend payout of private banks in Ethiopia

HP
5:- Banks
size has a positive impact on dividend payout of private banks in
Ethiopia

HP
6:- Inflation
has a negative impact on dividend payout of private banks in Ethiopia

HP
7:- Tax
has a negative impact on dividend payout of private banks in Ethiopia

Significance of
the study

The
main objective of this study was to examine the determinants of
dividend payout decision in Ethiopian private commercial banks.
Hence, conducting research is important from different aspects
(Creswell 2012), that means research is the re-investigations of
problems to add values to the existing knowledge (literature), to
provide directions and way of practical improvements and to provide
important inputs to decision makers in the studied area. Therefore,
the finding of this study would provides an important information to
decision makers (board of directors and managers in the bank) to
formulate or revised their dividend payout decision by considering
the significant factors affecting the dividend payout decisions of
the bank. From investors point of view the finding of the study helps
shareholders to make prediction or decision about what will be the
dividend payout ratio of their bank, since, the result of this study
accordingly identified or indicated the significant dividend payout
factors of banks. Finally the significance of this study goes to
future researches conducted in the area. Since, the result of the
study provides that some recommendations and this study will use as
literature and an input to conduct further investigation in the area,
because in Ethiopia conducting this study is largely demanded due to
the emerging of different firms in different sectors.
Scope and
delimitation of the study

In
Ethiopia, because of emerging different firms in different sectors,
empirical studies to examine dividend payout factors were largely
demanded. However, the scope of this study was only to examine the
determinants of dividend payout decisions of Ethiopian private
commercial banks. Therefore, the main focus of this study was
delimited to examine internal and external factors affecting the
dividend payout decisions of Ethiopian private commercial banks,
those private commercial banks distributed dividends in the study
period of the researcher incorporating in the study sample banks as
well, by including the variables of profitability, liquidity size,
growth, leverage, inflation and tax. Methodologically the scope of
the study was delimited to quantitative research approach with the
use of secondary data obtained from national bank of Ethiopia and
from their audited annual report for the period of 2008-2016. The
analysis of the study also delimited to quantitative analysis, since
the study used secondary data. To make inference about the dividend
payout factors of Ethiopian private commercial banks in the
population descriptive and fixed effect model regression analysis
were used accordingly.

Limitations of
the study

This
study was not conducted without its limitations. One, in order to
examine the determinants of dividend payout decision of firms, in
this study Ethiopian private commercial banks are the only target
populations and only secondary data was used. But conducting this
study in both financial and non-financial sectors through the use of
primary and secondary data is more favorable to investigate dividend
payout factors. The second, limitations of this study was researcher
only incorporates profitability, liquidity, leverage, size, growth,
inflation and tax as the influential factors to examine dividend
payout decisions of Ethiopian private banks. Whereas, incorporating
more variables such as mixture of ownership, absence of secondary
market and others helps the study to be more dependability. Thirdly
the limitation of this study goes to its sample size determination
and its study period specifications. This indicates that to
investigate the determinants of dividend payout decisions of
Ethiopian private commercial banks only eight banks were sampled
covering the period of 2008-2016. Since most of the banks are infant,
have no long period dividend payout history to conduct the study with
more samples over the long period.
Organization of
the paper

This
study organized in five chapters. The first chapter is the
introductory part, which deals about background of the study,
statement of the problem, objectives of the study, hypothesis of the
study, significance of the study, scope and delimitation of the
study, and limitations of the study. Chapter two presented the review
of theoretical literature and empirical studies related to the
determinants of dividend payout decisions of firms. Chapter three
discussed about the methodology part of the study including research
approach, model specification, data type and collection methods,
methods of data analysis target population and sampling, sample
frame, variables description and measurements. The fourth chapter
discussed panel data unit root test, model specification tests,
classical linear regression model assumption tests and the
statistical analysis of the data. Finally, chapter five presented the
conclusion and recommendations of the study.

Chapter
Two: literature
Theoretical
reviews

Even
if the main objectives of the researcher is to examine the internal
and external factors affecting dividend payout decisions of firms in
special reference of private banks in Ethiopia, it is important to
provide a brief introduction what the theoretical literatures and
empirical studies says about dividend payout factors.
Theories of
dividend policy

In
the current business environment dividend policy decision is one of
the most valuable decision made bay top level managements of the
firm. Dividend policy guides firm’s top level managements, whether
to pay dividend today or decide to retain earnings in the business,
but in the practical manner decision about distribution of dividend
to shareholders or decision about retention of earnings in the
business are the two conflicting issues towards their effect on firms
value (Kretlow, 2001). This means payment of dividend to the
shareholders or retention of earnings in the business become sources
of conflict between the management and shareholders. Since,
shareholders simply expect return from their investment in the form
of dividend whereas to make dividend payment to shareholders top
level management of the business considers a number of factors
affecting dividend payout decisions (Elmi
& Muturi, 2016).
To the effect of dividend policy on firms’ value and its stock
price different dividend policy theories has been emerged such as
dividend irrelevance theory, bird-in-the hand theory, clientele
effect theory, agency cost theory, tax effect theory and signaling or
information content theory, each of them briefly discussed in the
following section.