Re-examining Causal Relationship between Dividend Policies and Commercial Bank Performance: Evidence from 30 Sub-Saharan Africa Countries

Odunayo Magret Olarewaju ()
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Odunayo Magret Olarewaju: Durban University of Technology

Acta Universitatis Danubius. OEconomica, 2018, issue 14(3), 254-277

Abstract: This paper aims to test for causality between two dividend policies (dividend payout and dividend reinvestment plans) and return on equity as a measure of financial performance. Dividend policies issues have been continually debated around the world with mixed results, and yet to date, no definite conclusions have been reached. The study used 250 commercial banks from 30 SSA countries over the period between 2006 and 2015 to run long-run causality tests. The results from the block exogeneity Wald test from the panel vector error correction model, and the pairwise Granger causality test shows that there is a unidirectional causality between return on equity and dividend payout ratio. This implies no causality between dividend payout ratio and banks’ return on equity over the study period. Hence, we conclude that the widely adopted model for the payment of dividends in the SSA banking market is a win-lose game, as there is no causality between dividend payment and bank performance. As such, we recommend that other dividend policies that can minimize future financing costs, increase bank assets, and improve the future growth prospects of the region be explored.

Keywords: Dividend policy; Sub-Saharan Africa; Commercial banks; Causality test; Vector Error Correction Model (search for similar items in EconPapers)
Date: 2018
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