African Development Review, Vol. 29, No.

2, 2017, 293–304

Dividend Policy and Shareholders’ Value: Evidence from Listed

Companies in Ghana

Daniel Ofori-Sasu, Joshua Yindenaba Abor and Achampong Kofi Osei

Abstract: This study examines the effect of dividend policy on shareholder value of listed companies in Ghana. It analyses
the factors affecting dividend policy and how dividend policy affects shareholders’ value. Data from 2009 to 2014 financial
reports of listed companies on the Ghana Stock Exchange were used. The data was analysed using pooled OLS panel regression.
The findings reveal that ROE, firm age, tax, tangibility, GDP growth and interest rate are statistically significant in explaining
dividend policy. The study suggests that firms consider the use of dividend yield as an appropriate measure when making choices
in dividend policy. The study finds a positive relationship between dividend per share and shareholders’ value. More so, firms
with higher dividend yield tend to reduce shareholders’ value, as confirmed by a negative and significant relationship between
dividend yield and shareholders’ value. It concludes that dividend policy has a strong relationship with shareholders’ value. The
study recommends that managers should embark on prudent investment activities that would generate higher returns (both
dividend and capital gains) to shareholders in order to increase shareholder value.

1. Introduction
In the post economic crisis (2007–2008), studies by Acharya et al. (2010) recognized the need for the discovery of
appropriate measures that have significant influence on forecasting the wealth of shareholders during the economic
downturn. Most studies (Acharya et al., 2010; Demirg€ucS -Kunt et al., 2003) have examined the importance of various
determinants used in empirical literature to predict both the dividend policy and wealth of shareholders. Moreover, these
studies examined determinants of dividend policy and shareholders’ wealth using different measures (Berger and Bouwman,
2013) before the financial crises. However, there may be different variables observed for the individual companies that could
possibly aid in predicting the wealth of shareholders then also, firms are expected to suffer most from a severe shock to the
financial system of shareholders.
Previous studies have attempted to model the effect of dividend policy on firm value as well as factors that determine dividend
policy. Despite the increase in research, mostly from developed economies, there is no consensus on how macroeconomic
indicators and firm characteristics influence dividend policy and shareholder value in emerging markets. Additional insight into
the dividend policy argument can be gained by considering emerging markets like Ghana. However, research from such an
emerging market context is limited. Evidence from literature reveals that dividend policy decision in developed markets differ
from that of developing markets (Ranti, 2013). They differ in terms of its measure, theories, approaches, corporate governance
issues and firm characteristics, and across sector firms in different countries. This study, thus, attempts to fill this gap in literature
by examining the determinants of dividend policy and its effect on shareholder value in emerging markets, more specifically in
the Ghanaian context.
Dividend policy is simply the policy a firm uses to decide the amount it will pay shareholders (Fama and Babiak, 1968).
Dividend policy does not only have implications for shareholders but also for different stakeholders. Dividend payment
decisions by different firms are influenced by many different variables, thus leading to mixed results in both developed and
developing market literature. The market price of a company’s common stock is a measure of its shareholders’ wealth. As
explained earlier, the optimal decision of dividend policy is the choice that maximizes the common stock of that company, which
also results in shareholders’ wealth maximization. Many firms have emerged and the standards of corporate dividend policies

University of Ghana Business School; e-mail: doforisasu@yahoo.com, joshabor@ug.edu.gh and kaosei@ug.edu.gh
© 2017 The Authors. African Development Review © 2017 African Development Bank. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 293
294 D. Ofori-Sasu et al.

vary from country to country over time. For instance, a study by Ramcharran (2001) found low dividend yields for emerging
markets. The interest in examining the factors that cause the variations in the value of shareholders has increased in literature
(Masum, 2014). Also, the value of dividends varies greatly among shareholders. Previous studies from Azhagaiah and Sabari
(2008) only focused on the effect of dividend policy on shareholders’ wealth in developed economies; Hussainey et al. (2011)
examined the relationship between dividend policy and share value, using data from the United Kingdom while Masum (2014)
used data from the Dhaka Stock Exchange market. These studies show the plethora of research conducted with respect to
dividend policy in the developed country context with few examining the developing countries. In bridging this context gap,
Amidu and Abor (2006) studied the determinants of dividend pay-out of firms in Ghana.
Over many decades in academic research, dividend policy has been analysed, but no explanation for what influences dividend
behaviour among firms has been established universally (Brealey and Myers, 2005). Most countries have interesting characteristics
that would make the study appropriate in terms of taxes, GDP growth, inflation rate and interest rate. For instance, increasing debt
financing means increasing the amount of dividends paid to shareholders, which makes the firm prone to high risk. This suggests
that firms with a higher level of market risk are more likely to pay lower rates of dividend. In Nigeria for instance, Olubukunola
(2013) found that dividend policy highly depends on size, growth, board independence and level of gearing of firms. Other studies,
specifically in Nigeria, have looked at the relationship between profitability and dividend policy (Ho, 2003).
The present study attempts to examine the effect of dividend policy on shareholder value by first analysing the determinants of
dividend policy of firms listed on the Ghana Stock Exchange (GSE). This was done by employing macroeconomic and firm
characteristic variables in the model. The paper presents sections that give a review on concepts, theories and empirical literature
on the subject. The models used, results, discussions, summaries of findings and conclusion are presented in subsequent sections.

2. Literature Review

2.1 Dividend Policy and Shareholders’ Value

Dividend payments, as indicated by Frankfurter and Lane (1992), is considered partly as a method to drive the concerns of
shareholders. It encourages managers and owners to improve the stability of their firms which consequently leads to increased
profits. The components of net profits are dividends and retained earnings, and dividend is the difference between net profits or
earnings and retained earnings. Ross et al. (2008) confirmed the work of Miller and Modigliani (1961) that dividend is a ‘source
of cash flow to shareholders and it gives an information about the performance of a firm’. Dividend policy helps firms to decide
how much each shareholder should receive in terms of dividend payment (Ross et al., 2008). After a firm has generated profits,
part of the profit is retained and the other part is paid as a dividend to shareholders. So the price of a share is subject to the amount
of dividend distributed (such as cash or share dividend) to its shareholders. Decisions on dividend payments are made by the
Board of Trustees of the enterprise, in accord with the dividend policy.
According to Azhagaiah and Sabari (2008), shareholders’ wealth is a function of dividend, financing and investment decisions
of a firm. They represented shareholders’ wealth using the market price of the common shares of the firm. They stated that ‘the
value of a firm is measured by the common stock price of the firm’. Thus, the optimal dividend policy maximizes the share price
of a firm which in turn maximizes the wealth of shareholders (Kyereboah-Coleman, 2007). An effective use of firms’ resources
and the market value of the common shares are considered as key indicators for the creation of shareholder wealth. According to
Amidu (2007) companies are incorporated with the primary objective of maximizing share value. Moreover, returns comprise
capital gains as a result of an increase in share prices and dividends, which is possible when firms produce sufficient distributable
profits. Consequently, the firm’s performance determines the ability of firms to meet the needs of their shareholders, as firms are
organized to maximize the wealth of shareholders at an acceptable level of risk (Rose and Hudgins, 2008). Therefore, dividend
policy is important for companies and their shareholders.

2.2 Theoretical Review

The objective of corporate governance literature (Ayogu, 2001) is to provide in-depth understanding on the various issues that
strengthen the management of corporate bodies. The basic theories of literature underlying dividend policy include information
asymmetries, agency costs theory, signalling models, free cash flow hypothesis, pecking order, separation of ownership and
© 2017 The Authors. African Development Review © 2017 African Development Bank
Dividend Policy and Shareholders’ Value 295

control, bird-in-the-hand theory and the clientele effect. These issues and related theories are the foundation on which the
explanation of dividend policy has gained popularity (Al-Malkawi, 2007; Azhagaiah and Sabari, 2008; Hussainey et al., 2011).
The theory and behavioural tax-adjusted factors also contribute to the fundamental principles of dividend policy. Most
shareholders would defer taxes on dividends not paid out. Conversely, Miller and Modigliani (1961) and Amidu and Abor (2006)
argued that ‘shareholders are indifferent between dividends and capital gains on a tax-free world’. The dividend irrelevant
theory, proposed by Miller and Modigliani and the assumption underlying this theory is that there is a perfect capital market and
100 per cent payment (payout) of the administration in each period. They stated that the theory of dividend policy is said to be
irrelevant as ‘shareholder wealth remains unchanged when all aspects of the investment policy are stable and any increase in the
current payment is funded by a reasonable stock price’. Moreover, there are instances where some shareholders expect to receive
dividends while others wait to see that stock prices rise without taking dividend. Miller and Modigliani argued that the value of a
firm is not affected by the distribution of dividends, rather the values of shares are affected by future earnings and riskiness of its
investment. On the other hand, the relevance theory of dividend treats dividends as active variable decision retained earnings as
residue, and investors prefer current dividend to future dividends or capital gains.
In terms of information asymmetry, Modigliani and Miller (1958) argue that shareholders have some information about the
characteristics of the firm that are held privately to them. In this scenario, the signalling theory, as used in the corporate dividend
policy, provides the means for providing a quality message at a lower cost. This indicates that signals in dividend policy imply
that alternative signalling methods cannot be used as perfect substitutes (Rodriguez, 1992). For the agency cost theory, it argues
that firms will have to pay higher dividends when facing high agency cost. Dividend payments reduce free cash flows to
managers and put pressure on managers to raise funds in the capital market. Therefore, firms will pay out high dividends to
shareholders rather than investing back into unprofitable projects.
The ‘theory of agency costs’ arises from conflict of interests between players such as directors, shareholders or debt holders
(proposed by Jensen and Meckling, 1976). The behaviour of managers to minimize their efforts to consolidate the development of the
resources or waste for their own interests or goals is a key problem in corporate governance. However, dividend policy puts pressure
on managers to perform as managers would like to increase their efforts and to avoid wasting the resources of the firm in the interest of
shareholders. Indeed, dividend involves the payment of profit after tax obligations to be met by management (Jensen, 1986). On the
other hand, shareholders have interests that benefit themselves at the expense of debt holders. From the separation of ownership and
control perspective, Schooley and Barney (1994) indicated that companies that have majority shareholders pay smaller dividends than
firms with minority shareholders—which implies that managerial ownership has an impact on dividend policy.
According to Jensen (1986), a conflict of interest between shareholders and bondholders can be mitigated by shareholders
who receive large dividend payments. Moreover, bondholder wealth transfer to shareholders can be prevented through debt
policies that minimize dividend payments (John and Kalay, 1982). Funds remaining after funding projects with positive net
present value may cause agency costs between managers and owners. This, according to Jensen (1986) is referred to as the free
cash flow hypothesis. In tax-adjusted models, as there are increases in tax liability, there are also dividend reductions leading to a
rise in reinvestment. Managers, compared to investors, have more information about the operation. In the pecking order theory, it
is posited that ‘firms should finance new projects first with at least sensitive information sources’. It also states that ‘firms with
high growth opportunities are likely to retain a larger portion of their profits to fund their expansion projects as against returning
these profits as dividends to the shareholders’. However, firms would also like to pay out and maintain dividends at the expense
of profitable investment projects. Moreover, firms prefer paying dividend and finance investment with internal sources of funds
than with external sources of funds. Thus, if dividend payments to shareholders are high, then the financing debt or new
investments with internal sources tend to be high.
On the other hand, bird-in-the-hand theory suggests that investors prefer dividends to capital gain and firms that have a cash
pay out appear to be better compared to firms retaining the earnings for the growth of the firm. Dividend policies of firms tend to
attract different clientele (groups of investors) depending on how the clientele want to receive their return on investment.
Companies that want to earn longer-term expected return, could plough back into the company by forgoing dividends. This
explains the clientele effect and dividend theory.

3. Empirical Literature
Evidence from the Ghana Stock Exchange (GSE) revealed a positive effect of dividend policy on profitability and sales growth
while Amidu (2007) found that profitability, leverage and dividend policy were negatively associated. Thus, dividend policy
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296 D. Ofori-Sasu et al.

revealed a strong positive relationship with profitability (Nazir et al., 2010), which suggests that when profitability increases,
firms are encouraged to pay high dividends. This highlights the decision to pay dividends on profits. According to Amidu and
Abor (2006), there is a positive relationship between payment of dividend and firm performance. Evidence from the findings of
Boujjat (2016) shows the relevance of dividend policy in enhancing firm performance in Morocco. Similarly, the study by
Enekwe et al. (2015), found that dividend policy has a positive and significant effect on performance evaluation of firms in
Nigeria. This means that companies with high performance tend to announce and pay high dividends. More so, previous studies
have investigated how dividend policy decisions are influenced by a number of firm specific variables. Profit determines the
ability of a firm to pay dividend. Amidu and Abor (2006) found that the disbursement of dividend was positively linked to tax,
profitability and cash flow but negatively associated to risk and firm growth.
Determinants of dividend, according to Baker and Powell (2000), is industry specific and are the expected level of future
profits or earnings (Baker and Powell, 2000). Analysis by Pruitt and Gitman (1991) established a direct link between the current
and previous year profits and dividend payments. A study by Al-Malkawi (2005), however, found a negative impact between
financial leverage and dividend policy of firms. This means that companies mostly finance their assets with debt and put pressure
on the portfolio of their liquidity. Interest payments and the amount of principal debt reduce the ability of firms to have residual
income that guarantee the payment of dividend (Mollah, 2001). Conversely, firms find it very difficult and most often in a weak
position to pay dividend when at the same time trying to avoid that cost of financing external debt (Mollah, 2001; Adelegan,
2003). Recently, Chen and Dhiensiri (2009), in their study, found that firms with high revenue growth tend to have lower
dividend payments, and there is the possibility for a fast-growing firm to have a high demand for funds. Diamond (1967) found
that firms that have advanced in years or are in business for a long time with a great reputation are likely to pay more dividends.
Ojeme et al. (2015) argued that the firm size and return on investments of firms are some key factors that determine the value of a
firm. In addition, in a corporate environment, it is possible to get divergent dividend policy that is specific to firms, markets and
industries. There are cases where pattern and dividend policies of developed markets cannot work for emerging or developing
markets such as Ghana. It is for this reason that this study is to find out the determinants of dividend policy and the relationship
between dividend policy and the shareholders’ value in Ghana.
In terms of the impact of macroeconomic variables on dividend policy and shareholder value, evidence in literature shows that
a change in interest rate, inflation rates and other macroeconomic variables have a great impact on future dividend payments
(Chen et al., 2005). This is because macroeconomic factors like GDP, exchange rates, discount rates and inflation rates cause
stock prices or return to change, which in turn impact expected dividends. Future dividend reflects economic activities and since
dividends are paid at the end of the year, changes in macroeconomic indicators will affect their payments. These variables have
an inverse relationship with dividend policy as well as shareholders’ value (Rahman and Rashid, 2009).
Managers should consider that dividend policy will lead to maximizing the wealth of shareholders (Masum, 2014) since
changes in the payment of dividend ratio could affect the wealth of shareholders (Botha, 1985, p. 55). The mode of financing,
investment and dividend position of a firm determine the wealth of shareholders. More so, the market price of the common
shares of a firm is a measure of the wealth of shareholders. As previously explained, the optimum decision of dividend policy
is the option that maximizes the common stock of this firm, which also has the effect of maximizing wealth of shareholders.
According to Ansar et al. (2015) there is a positive relation between subsequent payment of dividend and shareholders’
wealth. However, the studies by Asquith and Asquith and Mullins (1983) reveal an inverse relationship between dividend
and shareholders’ wealth. Ansar et al. (2015) from their study indicated a strong relationship between dividend policy and
firm’s value which is consistent with the study by Travlos et al. (2001). Uddin and Chowdhury (2003) found that dividend
policy does not provide gain for shareholders’ wealth before and after dividend announcements. A recent study by
GejaLakshmi and Azhagaiah (2015) determined the impact of dividend policy on shareholders’ wealth of firms in India and
they found a positive and significant relationship between dividend policy and shareholders’ wealth; and dividend policy
tends to positively affect value creation for shareholders of companies listed in the Nairobi Securities Exchange (Mbuvi,
2015). These results call for further analysis on the effect of dividend policy on shareholders’ value in developing countries,
such as Ghana.

4. Methodology
The study used 30 listed firms on the GSE in Ghana and data were obtained from published audited annual reports of the firms.
Data included the 6 year period from 2009 to 2014 since these sampled firms have data available for the specified periods. The
© 2017 The Authors. African Development Review © 2017 African Development Bank
Dividend Policy and Shareholders’ Value 297

study employed pooled OLS panel regression to examine the nature and strength of the relationship that exists between the
dividend policy and shareholders wealth.

4.1 Empirical Estimation

The model below shows the determinants of dividend policy employed for the study.
Model 1

DY it ¼ b0 þ b1 ROEit þ b2 FAgeit þ b3 TAX it þ b4 FAT it1 þ : b5 GDPgrowtht þ b6 INTratet þ b7 INFratet þ eit ð1Þ

Where the dividend policy (DPit ) of the firms was captured using dividend yield (DY). These are expressed as:

DPS it
DY it ðDividend Y ield Þ ¼
PPS it

where

Dividend paid it
DPS it ðDividend per shareÞ ¼
Number of shares it

and PPS is the price per share. The subscript i indicates the individual firm i and t indicates time period. ROE (return on equity) is the
profitability variable of the firms (net income to total equity); FAge (firm age) is the natural logarithm of firm age (log of number of
years of firm); TAX is the corporate tax divided by net profit before tax of the firms; FAT is the ratio of net fixed assets to net total
assets; GDPgrowtht isGDP growth varied across time t; INTratet is interest rate varied across time t; and INFratet is inflation rate
varied across time t.
The model below shows the relationship between shareholders’ value and dividend policy indicators.
Model 2

X
n
MV it ¼ ė0 þ ė1 DY it þ ė2 DPS it þ ė3 MPS it1 þ ė4 TAX it þ ėėj ðCTRLÞit þ eit ð2Þ
j¼4

where shareholders’ value measured as the market value of equity of the firms; (MV it ) is market price per share (MPS) for firm i
at time t (dependent variable); MPSt-1 is lagged market price per share.
Explanatory variables include (average levels): DPS it (dividend per share) and DY it (dividend yield) are the dividend policy
variable as expressed in model 1 above; TAX is tax; e, b,a; ė arestochasticerrorterms; CTRLit is the control variable which
includes SIZE, firm size (log of firm’s total asset).
Macroeconomic variables: GDPgrowth is the natural logarithm of GDP per capita; INTrate is the log of real interest rate and
INFrate is the log of inflation rate.

5. Results
This section presents empirical results for the study.

5.1 Descriptive Statistics

Table 1 provides the descriptive statistics of the variables used, which includes variables for measuring divided policy, firm
specific variables, macroeconomic variables and shareholders’ value. The variables used were from 2009 to 2014.
From Table 1, dividend per share recorded a mean of 0.1264 indicating that listed firms in Ghana pay relatively low dividend.
The mean of dividend yield is 2.3654 per cent. We can say that the dividend yield of the firms listed in Ghana is relatively low.
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298 D. Ofori-Sasu et al.

This reflects the low performance of the firms. ROE recorded an average of 3.3396 per cent. From Table 1, the ROE of the firms
is relatively low. This suggests that the firms pay a low dividend because net profit or cash flows were relatively low over the
years under study. This further explains that firms in Ghana retain a higher profitability ratio (ROE) to grow their business.
The shareholders’ value, measured in terms of market value (market price per share), ranged from 0.01 (lowest value) to 38.05
(highest value), with a mean of 4.369. This shows that the market value for the firms in Ghana were relatively low over the study
period.
The average firm age is 7.53. The firm(s) with highest age recorded 12 years. Corporate tax rate recorded an average of 4.728.
Average FAT is 0.6089 while the average firm size is 8.7493, implying that firm size is relatively large. The high values of VIF of
TAX and FAT shows that they are highly correlated with other variables.
In terms of the macroeconomic variables, the mean of GDP growth is 1.4618, indicating that GDP growth was relatively high
over the years. Interest rate (INTrate) and inflation rate (INFrate) recorded an average of 2.8284 and 24589 respectively —
indicating that interest rate and inflation rate are relatively high. The macroeconomic variables, GDP growth and INT rate were
quite stable over the period.

5.2 Correlation
We used the Pearson’s correlation coefficient to find whether there exist multi co-linearity among the variables by setting a
threshold of 0.7 for two variables to be considered as multicollinearity, as stated by Kennedy (2008). We considered assumptions
of multicollinearity in order to proceed to the regression analysis
From Table 2, we find a significant high correlation between FAT and TAX with a value of 0.9953. The VIF (see Table 1)
confirms a multicollinearity between FAT and TAX. We removed variables that were highly correlated predictors from the
model. Moreover, the regression models were separated into different models due to the problem of multicollinearity. In the two
equations (determinants of dividend policy and effect of dividend policy on shareholder value), we run the regression models by
dropping one of the variables that are highly correlated to ascertain if there were significant relationships.

5.3 Regression Analysis

The study employed the pooled OLS panel regression for the two models. The data variables are normally distributed.
Regression with robust standard error was used to correct for heteroscedasticity and autocorrelation. We find the determinants of
dividend policy in three different models, using dividend yield as the dependent variable.
From Table 3, we run three different models. From the models, net fixed asset to total asset (FAT) has a negative and
significant effect on dividend policy. This supports Badu (2013) that when firms focus less on the use of their tangible assets, they
tend to pay a high dividend. The results show that size of firm is not statistically significant in explaining dividend policies of the
firms in Ghana, which supports the findings of (Abdulkadir et al., 2016).

Table 1: Summary statistics

Variables Measures Obs. Mean Std. Dev. Minimum Maximum VIF

Dividend policy variables DPS 180 0.1264 0.5891 0 6.57 1.48

DY 179 2.3654 4.1700 0 28 1.57
Firm specific variables ROE 180 3.3396 25.7557 –102.739 211.5047 2.50
Firm Age 180 7.53 1.976 3 12 2.50
TAX 180 4.7286 57.8783 –6.5385 727.5507 134.11

FAT 180 0.6089 3.2644 0 41.4867 134.45

SIZE 180 8.7493 0.4470 7.1452 9.6650 1.29
Shareholder’s value Market value (MV) 180 4.3769 9.2169 0.01 38.05
Macroeconomic variables GDPgrowth 180 1.4618 0.6638 0.4511 2.4204 1.80
INTrate 180 2.8284 0.2484 2.5177 3.1355 1.98
INFrate 180 2.4589 0.2598 2.1668 2.8622 2.28
Source: BoG (2016) and WDI (2016).

© 2017 The Authors. African Development Review © 2017 African Development Bank
Dividend Policy and Shareholders’ Value 299

Table 2: Pearson correlation matrix

MV ROE TAX FAT FAge DPS DY SIZE GDPgrowth INTrate INFrate

MV 1.0000
ROE 0.0237 1.0000
TAX 0.0207 0.0091 1.0000
FAT 0.0140 0.0065 0.9953


1.0000
FAge 0.0397 0.0167 0.0985 0.113 1.0000
DPS 0.3182


0.0251 0.0119 0.012 0.0905 1.0000
DY 0.0409 0.0531 0.0163 0.032 0.0674 0.542


1.0000
SIZE 0.2072 0.0114 0.0179 0.0233 0.2652 0.073 0.0208 1.0000
GDPgrowth 0.0314 0.0336 0.0225 0.0348 0.0686 0.073 0.138
0.3056


1.0000
INTrate 0.0132 0.0510 0.0873 0.101 0.4453 0.043 0.1810
0.249 0.5466 1.0000
INFrate 0.0458 0.0036 0.0255 0.040 0.6984 0.051 0.0226 0.228


0.2951


0.4772


1.000

ROE has a negative and significant relationship with dividend policy. This means that ROE appears to be an important
determinant of dividend policy of firms which is not consistent with Badu (2013) and Enekwe et al. (2015). They concluded that
highly profitable firms pay high dividend. In this case, decreasing dividend yield will increase return on equity and this happens
when firms identify growth opportunities and decide to finance profitable projects with equity sources of funds. There is a
negative and significant relationship between dividend yield and firm age; implying that as firms increase in age, dividend policy
declines. This is expected because firms that have spent a long time in business (either in their decline or maturity stages of life
cycle), tend not to have more growth prospects to finance their business; thus, are more likely not to pay dividend. This agrees
with the findings of Diamond (1967) who concluded a negative relationship between dividend policy and firm age. Tax was
negative and significantly related to dividend policy, implying that firms will pay less dividend with increases in tax. Although
this findings supports the argument in literature that high corporate tax payment reduces earnings after tax — which in turn
decreases dividend pay ratio—yet it contradicts the study of Al-Malkawi (2007) who found a positive nexus between dividend
pay ratio and tax. This position seems to support existing literature. Interest rate was positive and statistically significant to
dividend policy while GDP growth was negative and significant with dividend policy. Firms or shareholders would defer taxes
on dividend not paid out, which confirms the clientele effect and dividend theory. Moreover, deferred tax payments will lead to a
decline in GDP growth in the long run—hence, the negative relationship between GDP growth and dividend policy. The positive
relationship between interest rate and dividend policy was not expected and it contradicts findings in literature. However, it
suggests that an increase in interest rates will require that shareholders go for higher returns in the form of dividend yield in order
to compensate for the increase in interest rate or to mitigate the effect of rising rates. The work of Wang et al. (2010) found that
dividend pay-out of majority shareholders increases when economic growth decreases. In our findings, GDP growth increases as
dividend pay-outs decrease, which is in line with Wang et al. (2010).
In terms of variables influencing dividend policy, our empirical model shows that ROE, firm age, tax, FAT, GDP growth and
interest rate are statistically significant in explaining dividend yield. If the assumption of ‘pecking order’ holds, then the negative
relationship between ROE and dividend policy posits that firms reinvest into the business with corporate sources of funds like
ROE, which tends to affect dividend pay-out negatively. Taxes are an appropriate tool for generating revenue for economic
growth. A decline in GDP growth explains the fact that shareholders defer taxes on dividend not paid. Findings agree with the
clientele effect and dividend policy. Moreover, as firms grow in age, it is more likely that the firm will identify growth prospects
in order to invest their funds. Thus, increasing retained earnings for investment purposes will decrease dividend payments, which
contradicts agency cost theory and ‘bird-in-the-hand theory’, but agrees with the pecking order theory.
In Table 4, the values of VIF show that there is no multicollinearity among the variables. From Table 5, three simple
definitional linear models were used to regress the market value (shareholders’ value) on dividend policy variables, firm specific
variables and macroeconomic variables.
From the three models, the results show that dividend per share (DPS) and market value (MV) were positively and
significantly related. This means that increasing dividend per share will increase shareholders’ value because a firm that pays
high dividends to shareholders expects positive results due to the signalling effect which informs investors about the financial

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300 D. Ofori-Sasu et al.

Table 3: Regression result of determinants of dividend policy

Dependent Robust SE
1 2 3

ROE –0.0097

–0.0111

(–2.47) (–2.40)
Firm Age –7.1171

–2.2881 –5.6634


(–2.41) (–0.90) (–2.15)
TAX –0.0012

(–1.73)
FAT –0.0476

–0.0371

(–2.11) (–1.70)
SIZE 0.0803 0.0944 0.0915
(0.70) (0.83) (0.79)
GDPgrowth –0.1543 –1.0169

–0.3047
(–0.22) (–2.42) (–0.44)
INTrate 0.2293
0.2262

(1.80) (1.79)
INFrate 0.0859
(0.75)
_cons 3.2474 5.3445
3.2769
(0.94) (1.88) (0.96)
Observations 179 179 179
R square 0.0608 0.0318 0.0621
F-stat 3.99


2.37

2.79









Note: Numbers in parentheses are t-statistics. Significant level: 1%, 5%, and
10%.

position of the firm, thus attracting more investors. It is in line with the findings of Adesola and Okwong (2009) and it also
supports the theory of dividend relevance that the choice of dividend policy affects the market value of equity. Dividend yield
was negatively and significantly related to shareholders’ value. This suggests that an increase in dividend yield will lead to a
decrease in shareholders’ value, which is consistent with Badu (2013). The lagged values of market price per share were
positively and statistically significant. This explains that previous year’s market price value per share has an information content
that increases the current value of market price per share. This confirms the study by Azhagaiah and Sabari (2008) and Badu
(2013). In general, dividend policy has a strong relationship with shareholders’ value and the results support previous studies by
Ansar et al. (2015) and Badu (2013).
From Table 5, size has a negative and significant relationship with shareholders’ value. This suggests that increasing firms’
size will induce a great inverse influence on shareholders’ value. Firm age and shareholders’ value were positive and significant

Table 4: VIF results

Variable VIF

DPS 1.51
DY 1.45
SIZE 1.30
MPSt-1 1.25
FirmAge 1.04
TAX 1.02
GDPgrowth 1.00
Mean VIF 1.23

© 2017 The Authors. African Development Review © 2017 African Development Bank
Dividend Policy and Shareholders’ Value 301

Table 5: Regression results: dividend policy and shareholders’ value

Dependent Robust SE
1 2 3

DPS 4.5737


4.6988


4.7708

(2.80) (2.83) (2.90)
DY –0.2705
–0.2692
–0.2798

(–1.77) (–1.81) (–1.88)
MPSt-1 0.7316


0.7386


0.7463



(7.13) (7.57) (7.75)
ROE –0.0024
(–0.60)
SIZE –0.2427
–0.1545
(–1.71) (–1.05)
FirmAge 6.1518 6.8802

(1.53) (1.78)
GDPgrowth 1.1432

1.1256

0.9666

(2.05) (2.07) (1.88)
TAX 0.00179
0.0019

(1.78) (1.96)
_cons 0.9276 –4.9025 –6.2030
(0.89) (–1.17) (–1.63)
Observations 179 179 179
R square 0.6724 0.6788 0.6775
F-stat 20.05


18.53


15.71









Note: Numbers in parentheses are t-statistics. Significant level: 1%, 5%, and
10%.

in the third model (Table 5). Firms that increase in size are attributed to investment growth opportunities; hence, influence their
dividend policy (pay less). On the other hand, firms that increase in age have good reputation to attract cheaper credit to expand
operations and, thus, increase both firm and share value. From Table 5, tax has a positive and significant relationship with
shareholders’ value, which agrees with financial theory (Al-Malkawi et al., 2010) that firms are more likely to switch from
issuing dividends to buying shares, when shareholders tax rates on dividend exceed those on capital gains. GDP growth has a
positive significant relationship with shareholders’ value indicating that as GDP growth increases, market value of equity
increases.

6. Conclusion
Most studies have examined the determinants of dividend policy, using different measures of dividend variables. The choice
of dividend policy affects the value of a firm. The study therefore suggests that firms consider the use of dividend yield (the ratio
of dividend per share to price per share) as an appropriate measure for determining dividend policy. The findings showed that
dividend policy decision of firms in Ghana is negatively influenced by corporate tax, ROE, firm age, fixed assets to total asset
ratio and GDP growth but positively affected by interest rate. This study affirms that firms pay low dividends when corporate
taxes and GDP growth increase, when they decide to retain more profits (ROE) and when age and tangible assets increase. The
implications of this study to stakeholders and policymakers is to provide the need to make critical business and financial
decisions on dividend policy which in turn will lead to the maximization of shareholders’ wealth. Investors should invest in firms
with high growth opportunities. Managers should also aim at diversifying into new investments opportunities, which in the long
run would yield high profits for firms to pay high dividend. It is also suggested that future studies should look at dividend policy
and its determinants from the perspective of firms across different groups in sub-Saharan Africa, since determinants of dividend
policy may differ across countries due to differences in institutional framework and heterogeneity among firms in different
environmental groups. Dividend policy has a strong relationship with shareholders’ value. This implies that although firms in
© 2017 The Authors. African Development Review © 2017 African Development Bank
302 D. Ofori-Sasu et al.

Ghana have the potential to invest in new opportunities, uncertainties of the environment drive firms to pay more dividend to
attract investors with the aim to increase shareholders’ value. The study recommends that managers should embark on prudent
investment activities or growth options to generate higher holding period returns by improving on income returns (both dividend
pay-out and capital gains) to shareholders in order to increase shareholder value. Future research should test and analyse the
impact of age, interest rate, tax and GDP growth on both dividend policy and shareholder value. Researchers, investors and
managers can benefit by testing the relationship between dividend policy behaviour and shareholder value across different
sectors.

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