COST OF DEBT AND DIVIDEND POLICY: EVIDENCE FROM MENA REGION

  • Imad Jabbouri School of Business Administration, Al Akhawayn University in Ifrane,Morocco
  • Harit Satt School of Business Administration, Al Akhawayn University in Ifrane,Morocco
  • Omar Farooq Aalborg University, Denmark

Abstract

Prior literature documents a positive relationship between dividend policy and corporate governance, and negative relationship between the quality of corporate governance and cost of debt. Therefore, we hypothesize that there is a negative relationship between cost of debt and dividend policy. Using a sample of firms from the MENA region (Middle East and North Africa), during the period between 2004 and 2008, we document a negative relationship between cost of debt and dividend policy. Our results remain robust even after controlling for various firm-specific characteristics. The main reason for this negative relationship is that dividend policy act as a substitute for corporate governance mechanisms in emerging markets. Prior literature argues that creditors take into consideration the quality of corporate governance while assessing the riskiness of the firm. High dividend payout ratio reflects proper corporate governance, which would result in a lower required rate of return by creditors, a lower cost of debt for the firm.

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Published
2014-09-16
How to Cite
Jabbouri, I., Satt, H., & Farooq, O. (2014). COST OF DEBT AND DIVIDEND POLICY: EVIDENCE FROM MENA REGION. European Scientific Journal, ESJ, 10(10). Retrieved from https://eujournal.org/index.php/esj/article/view/4120