Decoding dividend decisions: unveiling the key drivers of payout policy in Ethiopian banks

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Abstract
Why do profitable banks with strong balance sheets still hesitate to pay dividends? This study explores the underlying dynamics shaping dividend payout decisions among Ethiopian banks, using panel data from 16 private banks spanning 2014 to 2024. Applying an explanatory research design, the analysis employs rigorous econometric models Random Effect Standard Error (RE-SE), System Generalized Method of Moments (SGMM), and Fully Modified Ordinary Least Squares (FMOLS) to identify the most influential factors. The findings reveal that economic growth has a significant negative impact on dividend payouts, suggesting that banks tend to reinvest earnings during expansionary periods. Conversely, foreign direct investment (FDI) shows a strong positive effect, enhancing firms’ ability to distribute dividends. Asset growth, life cycle stage, and profitability all exhibit negative relationships with dividends, underscoring a preference for internal financing among growth-oriented and younger firms. Political stability, liquidity, and tax were found to be statistically insignificant, while evidence of dividend smoothing is minimal. These results align with the pecking order, life cycle, and agency theories and highlight the importance of stable, investor-friendly policies to attract FDI and enhance shareholder value. Future research should delve into disaggregated governance indicators and explore nonlinear effects to better understand dividend behavior in emerging markets.

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