INTERACTION BETWEEN DIVIDEND PAYOUT DECISIONS AND FINANCIAL PERFORMANCE OF THE BANKS LISTED IN BORSA ISTANBUL FOR THE PERIOD OF 2007-2019

Abstract

1. LITERATURE
   • RESEARCH PURPOSE AND IMPORTANCE

The banking sector plays a remarkable role in the significant movement of funds between demanders and suppliers in the financial system. Hence, examining the financial performance of the sector and determining the factors that contribute positively to financial performance is essential for the continuity and healthy functioning of the system.

This study aims to investigate whether there is a significant effect of dividend distribution on the financial performance of commercial banks that are traded in Borsa Istanbul (BIST) from 2007 to 2019 by the panel data analysis. According to the findings, there are statistically significant relationships between payout ratios and financial ratios of banks.

• CONTRIBUTION of the ARTICLE to the LITERATURE

In the literature, it is seen that many studies are investigating the effects of dividend distribution on firm performance, but there is no consensus regarding the existence or direction of this situation. The issue is seen to be quite open to new investigations and needs attention. Therefore, this study is expected to make a significant contribution in terms of determining the possible effect of payout decisions on financial performance.

Sandıkçı (2014) investigated whether there is a difference between the distribution of dividends on the financial performances of companies and set forth findings supporting the Gordon and Lintner approach. Dereli (2017) revealed in his study that the dividend distributions of the companies do not have a significant effect on stocks' value and stated that the view of Fischer Black is still valid. Contrary to these views, Kaba (2009), Demirel (2014), Savsar (2012) and Bostancı (2017) found out significant relationship between the market values​​ of companies and their dividend distribution amounts.

1. DESIGN AND METHOD

Annual financial statements of 10 banks traded in Borsa Istanbul are employed from 2007 to 2019. The variables used for the analysis are return on assets, return on equity and earnings per share, loan-to-asset ratio, payout ratio, market-to-book ratio, and price-earnings ratio. The panel data regression analyzes the data as it provides more informative finding and less multicollinearity among variables than time-series and cross-section analyzes.

• RESEARCH TYPE

The method utilized in the study is quantitative research technique. The relationship between dividend decisions and financial performance are investigated by econometric models.

• RESEARCH PROBLEMS

The research problem is if the dividend payout degree affects market-to-book value and price-earnings ratio.

• DATA COLLECTION METHOD

The analysis covers ten banks' financial indicators which are traded in Borsa Istanbul from 2007 to 2019. Accordingly, two models are employed considering the existing literature. The dependent variables are the market-to-book ratio and price-earnings ratio. The data are obtained through the Public Disclosure Platform (KAP) and Finnet platform. Other than the publicly available data, no other information is used in the analysis or requested from the companies.

• QUANTITATIVE / QUALITATIVE ANALYSIS

The econometric method employed in the analysis is panel data regression analysis. This method has advantages as it can present more informative finding and less multicollinearity among variables.

• RESEARCH MODEL

The econometric models established for the research are as follows:

PDDD_it = β₀ + β₁TO_it +β₂HBK_it + β₃KA_it + β₄AK_it + β₅OK_it + μ_it    

(1)

FK_it = β₀ + β₁TO_it +β₂HBK_it + β₃KA_it + β₄AK_it + β₅OK_it + μ_it                           

(2)

Here, i indicates the observation for the related bank for the year of t. Also:

PDDD:  Market-to-book ratio

FK:         Price-earnings ratio

TO:         Dividend payout ratio

HBK:     Earnings per share

KA:        Loan-to-asset ratio

AK:        Return on asset (ROA)

OK:        Return on equity (ROE)

• RESEARCH HYPOTHESES

The null hypotheses set for Model 1 and Model 2 are as below respectively:

H₀: Dividend payout ratio does not have a statistically significant effect on the market-to-book ratio.

H₀: Dividend payout ratio does not have a statistically significant effect on the price-earnings ratio.

1. FINDINGS AND DISCUSSION
   • FINDINGS as a RESULT of ANALYSIS

According to the descriptive findings, banks with the highest loan-to-asset ratio generally have the lowest results in terms of other variables utilized. Also, banks with the highest price-earnings ratio and market-to-book values ​​on average have the lowest dividend rates (Table 3).

Pearson correlation findings indicate that when the statistically significant values are examined, it is seen that there is a strong and positive relationship between PDDD and FK, AK and OK variables, between AK and OK variables, and also a strong and negative relationship between FK and HBK (Table 4).

Panel regression findings are represented in Table 5 and Table 6. The Hausman test findings indicate that the random-effects model is appropriate for the whole dependent variables. For Model 1, only the variable of KA is statistically significant, and it is negative. Model 2, the variables of KA, AK, and OK have statistically significant effects on FK.

• HYPOTHESIS TEST RESULTS

The null hypotheses could not be rejected based on the research findings. Hence the dividend payout ratio does not have a statistically significant effect on both of the financial performance of banks.

• DISCUSSING the FINDINGS with the LITERATURE

      The findings are compatible with those of Dereli (2017) and Sandıkçı (2014), and support the argument of the Modigliani and Miller approach that firm value is independent from dividend payout decisions.

1. CONCLUSION, RECOMMENDATION AND LIMITATIONS
   • RESULTS of the ARTICLE    

Considering the findings, it would be appropriate to implement policies that focus on the loan-to-asset ratio rather than dividend payout ratio in order to increase financial performance in the banking sector. However, the banking sector, which is subject to intensive supervision and regulations in the financial system, cannot act entirely independently, and the decisions taken are influenced by both national legal regulations and international regulations such as Basel.

• SUGGESTIONS BASED on RESULTS

Banks should focus on policies regarding the loan-to-asset ratio rather than payout ratio in order to increase market-to-book ratio, and price-earnings ratio.

The study is open to development by applying more sophisticated analysis methods, and taking into account the national and international turmoil terms, other financial variables and also macroeconomic indicators.

• LIMITATIONS of the ARTICLE

A limited number of banks in the sector and a limited number of periods that yield the optimum amount of regular observation could be considered for the analysis. Moreover, the data covers only the banks operating in Turkey.