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Impact of taxation on dividend policy: Evidence from Pakistan

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  • Khan, Naimat U.
  • Shah Jehan, Qurat Ul Ain
  • Shah, Attaullah

Abstract

This paper analyses the impact of capital gains taxation (CGT) on dividend policy among firms that are listed at the Karachi Stock Exchange (now, Pakistan Stock Exchange or PSX). The reason for choosing the Pakistani market is the country’s idiosyncratic taxation system regarding dividend and capital gains. In Pakistan, capital gains were tax-free and taxation of capital gains was levied for the first time beginning July 2010. This motivates us to study the special case of Pakistani market regarding the relationship between the imposition of capital gains taxation and the pattern of dividend payouts. For this purpose, we use both the static and dynamic panel data models (generalized methods of moments) to analyze dividend payment behavior for a sample of 284 non-financial firms listed at the PSX from the years 2006–2014. We use the dividends to total assets ratio as a dependent variable and a taxation dummy along with other control variables such as liquidity, leverage, profitability, last year’s dividend and firm size, as explanatory variables. Results of the regressions show that capital gains tax has no impact on dividend payments, while profitability, leverage, and last year’s dividend are the most significant determinants of dividend payments in the Pakistani market.

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  • Khan, Naimat U. & Shah Jehan, Qurat Ul Ain & Shah, Attaullah, 2017. "Impact of taxation on dividend policy: Evidence from Pakistan," Research in International Business and Finance, Elsevier, vol. 42(C), pages 365-375.
    • Handle: RePEc:eee:riibaf:v:42:y:2017:i:c:p:365-375
    DOI: 10.1016/j.ribaf.2017.07.157
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    2. Strike Mbulawa & Francis Nathan Okurut & Mogale Ntsosa & Narain Sinha, 2020. "Dynamics of Corporate Dividend Policy under Hyperinflation and Dollarization: A Quantile Regression Approach," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 13(3), pages 70-82, December.
    3. Cordelia Omodero, 2022. "The Role Of Corporate Tax, Earnings And Debt In Determining Dividend Policy Of Firms," Business Management, D. A. Tsenov Academy of Economics, Svishtov, Bulgaria, issue 3 Year 20, pages 46-69.
    4. Ahmed, Rizwan & ullah, Subhan & Hudson, Robert & Gregoriou, Andros, 2023. "The implications of liquidity ratios: Evidence from Pakistan stock exchange limited," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 235-243.
    5. Yin, Zhichao & Peng, Hongfeng & Xiao, Weiguo & Xiao, Zumian, 2022. "Capital control and monetary policy coordination: Tobin tax revisited," Research in International Business and Finance, Elsevier, vol. 59(C).
    6. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah,, 2023. "Internal pyramid structure, judicial efficiency, firm-level governance and dividend policy," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 764-785.
    7. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah, & Quresh, Shakir & Ahmad, Mushtaq, 2020. "Internal pyramid structure, contract enforcement, minority investor protection, and firms’ performance: Evidence from emerging economies," Research in International Business and Finance, Elsevier, vol. 52(C).
    8. Abdullah, Hariem, 2021. "Profitability and Leverage as Determinants of Dividend Policy: Evidence of Turkish Financial Firms," MPRA Paper 112134, University Library of Munich, Germany.

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