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The Effect of the Financial Structure Decision and Governance Mechanism on Shareholders' Wealth: Nonlinearity Evidence from a Petroleum‐based Economy

The Effect of the Financial Structure Decision and Governance Mechanism on Shareholders' Wealth:... This study was designed to determine the nature of the association between the financial structure decision and shareholders' wealth—dividend payments—of firms listed on one of the largest stock markets in oil‐based economies, the Saudi stock market. The study used panel data for all nonfinancial firms listed in Saudi Arabia's primary stock market (TASI) during the period from 2000 to 2018. The pooled ordinary least squares, quantile, generalized method of moments and U‐tests were conducted to evaluate the association between the financial structure decision and dividend payment. The preliminary findings revealed a positive effect of financial leverage on dividend payments using a linear model. However, when a nonlinear model was used, the study found a nonlinear relation between the financial structure decision and dividend payouts, which exhibited an inverted U‐shaped curve driven by levels of debt. This nonlinear relation verifies the tenets of the trade‐off theory of optimum debt level based on the costs and benefits of the debt. Further, the study found a negative influence of firm performance, size, and age on dividend payments. The outcomes of this study may provide useful insights for policymakers, managers, and lenders into the optimal level of financial leverage and efficient dividend policies. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Journal of Financial Studies Wiley

The Effect of the Financial Structure Decision and Governance Mechanism on Shareholders' Wealth: Nonlinearity Evidence from a Petroleum‐based Economy

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Publisher
Wiley
Copyright
Copyright © 2023 Korean Securities Association
ISSN
2041-9945
eISSN
2041-6156
DOI
10.1111/ajfs.12400
Publisher site
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Abstract

This study was designed to determine the nature of the association between the financial structure decision and shareholders' wealth—dividend payments—of firms listed on one of the largest stock markets in oil‐based economies, the Saudi stock market. The study used panel data for all nonfinancial firms listed in Saudi Arabia's primary stock market (TASI) during the period from 2000 to 2018. The pooled ordinary least squares, quantile, generalized method of moments and U‐tests were conducted to evaluate the association between the financial structure decision and dividend payment. The preliminary findings revealed a positive effect of financial leverage on dividend payments using a linear model. However, when a nonlinear model was used, the study found a nonlinear relation between the financial structure decision and dividend payouts, which exhibited an inverted U‐shaped curve driven by levels of debt. This nonlinear relation verifies the tenets of the trade‐off theory of optimum debt level based on the costs and benefits of the debt. Further, the study found a negative influence of firm performance, size, and age on dividend payments. The outcomes of this study may provide useful insights for policymakers, managers, and lenders into the optimal level of financial leverage and efficient dividend policies.

Journal

Asia-Pacific Journal of Financial Studies – Wiley

Published: Jun 1, 2023

Keywords: Financial structure; Nonlinear relation; Dividend payments; Financial leverage; Oil economy; G30; G32

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