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Dividend Payout, Retention Policy and Financial Performance in Commercial Banks: Any Causal Relationship?

Author

Listed:
  • Olarewaju Odunayo Magret

    (Durban University of Technology, South Africa)

  • Migiro Stephen Oseko

    (University of KwaZulu-Natal, South Africa)

  • Sibanda Mabutho

    (University of KwaZulu-Natal, South Africa)

Abstract

Dividend policy remains one of the top ten unresolved issues in corporate finance including in the banking sector. Hence, this study explores data from 250 commercial banks in 30 Sub-Saharan African countries to establish the causal relationship between the use of two major dividend policies in the sector and financial performance for the period 2006 to 2015. The empirical results of the vector error correction block exogeneity Wald test and Pairwise Granger causality test reveal that only retention policies Granger cause performance (ROA), even though both major policies posit a positive relationship with performance (ROA) in the Vector Error Correction Model estimate. Therefore, commercial banks in Sub Saharan Africa and also in the entire world should use their free cash flows wisely by exploring all available viable investment opportunities. By doing this, not only owners’ profit but wealth is fully maximised such that their survival, value creation, and future growth is fully justified.

Suggested Citation

  • Olarewaju Odunayo Magret & Migiro Stephen Oseko & Sibanda Mabutho, 2018. "Dividend Payout, Retention Policy and Financial Performance in Commercial Banks: Any Causal Relationship?," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 63(1), pages 37-62, April.
    • Handle: RePEc:vrs:subboe:v:63:y:2018:i:1:p:37-62:n:3
    DOI: 10.2478/subboec-2018-0003
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    More about this item

    Keywords

    Retention policy; Wald test; Granger causality; Stakeholders’ interest; Creditors’ right; Wealth maximisation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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