The inter‐relationship between capital structure and dividend policy: Empirical evidence from Jordanian data

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Abstract

The study investigates the under‐researched relationship between capital structure and dividend policy in emerging markets with regard to the Jordanian market. The empirical analysis focuses on the estimation of both single equation models and structure equation models using the reduced form equations to examine the joint determinants of capital structure and dividend policy. The study investigates whether capital structure and dividend policy theories can explain the financial decisions in emerging market such as the Jordanian market. Namely, the study examines agency theory, signalling theory, pecking order theory and bankruptcy theory. The results indicate that there is a positive relationship between debt‐to‐asset ratio on the one hand, and asset tangibility, profitability, market‐to‐book, liquidity, firm size, and industry classification on the other hand. Also, there is a negative relationship between debt‐to‐asset ratio and profitability. In addition, there is a positive relationship between dividend payout ratio on the one hand, and profitability, asset tangibility, market‐to‐book and industry classification on the other hand. Finally, the results of the reduced form equations show that capital structure and dividend policy have the following common factors: profitability; asset tangibility; market‐to‐book; industry classification; and limited evidence of institutional ownership. Therefore, the determinants of capital structure and dividend policy in emerging markets such as the Jordanian market share the same set of suggested factors with the developed markets.
LanguageEnglish
Pages209-224
Number of pages16
JournalInternational Review of Applied Economics
Volume25
Issue number2
Early online date9 May 2011
DOIs
Publication statusPublished - 2011
Externally publishedYes

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Interrelationship
Empirical evidence
Dividend policy
Capital structure
Profitability
Assets
Industry classification
Emerging markets
Book-to-market
Reduced form
Debt
Market share
Pecking order theory
Institutional ownership
Bankruptcy
Signaling theory
Factors
Financial decisions
Dividend payout
Asset markets

Cite this

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title = "The inter‐relationship between capital structure and dividend policy: Empirical evidence from Jordanian data",
abstract = "The study investigates the under‐researched relationship between capital structure and dividend policy in emerging markets with regard to the Jordanian market. The empirical analysis focuses on the estimation of both single equation models and structure equation models using the reduced form equations to examine the joint determinants of capital structure and dividend policy. The study investigates whether capital structure and dividend policy theories can explain the financial decisions in emerging market such as the Jordanian market. Namely, the study examines agency theory, signalling theory, pecking order theory and bankruptcy theory. The results indicate that there is a positive relationship between debt‐to‐asset ratio on the one hand, and asset tangibility, profitability, market‐to‐book, liquidity, firm size, and industry classification on the other hand. Also, there is a negative relationship between debt‐to‐asset ratio and profitability. In addition, there is a positive relationship between dividend payout ratio on the one hand, and profitability, asset tangibility, market‐to‐book and industry classification on the other hand. Finally, the results of the reduced form equations show that capital structure and dividend policy have the following common factors: profitability; asset tangibility; market‐to‐book; industry classification; and limited evidence of institutional ownership. Therefore, the determinants of capital structure and dividend policy in emerging markets such as the Jordanian market share the same set of suggested factors with the developed markets.",
keywords = "capital structure, dividend policy, panel data, emerging markets, single equation, reduced form equations, joint determinants",
author = "Basil Al-Najjar",
year = "2011",
doi = "10.1080/02692171.2010.483464",
language = "English",
volume = "25",
pages = "209--224",
journal = "International Review of Applied Economics",
issn = "0269-2171",
publisher = "Routledge",
number = "2",

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AB - The study investigates the under‐researched relationship between capital structure and dividend policy in emerging markets with regard to the Jordanian market. The empirical analysis focuses on the estimation of both single equation models and structure equation models using the reduced form equations to examine the joint determinants of capital structure and dividend policy. The study investigates whether capital structure and dividend policy theories can explain the financial decisions in emerging market such as the Jordanian market. Namely, the study examines agency theory, signalling theory, pecking order theory and bankruptcy theory. The results indicate that there is a positive relationship between debt‐to‐asset ratio on the one hand, and asset tangibility, profitability, market‐to‐book, liquidity, firm size, and industry classification on the other hand. Also, there is a negative relationship between debt‐to‐asset ratio and profitability. In addition, there is a positive relationship between dividend payout ratio on the one hand, and profitability, asset tangibility, market‐to‐book and industry classification on the other hand. Finally, the results of the reduced form equations show that capital structure and dividend policy have the following common factors: profitability; asset tangibility; market‐to‐book; industry classification; and limited evidence of institutional ownership. Therefore, the determinants of capital structure and dividend policy in emerging markets such as the Jordanian market share the same set of suggested factors with the developed markets.

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