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Volume :12 Issue : 2 2005
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Exploring Determinants of Dividend Payout Policies: Evidence from Kuwait Stock Exchange
Auther : Amani K. Bouresli
Fayez A. Abdulsalam
The free cash flow over-investment hypothesis has found support in the US market as a potential explanation for the observed dividend policies. In this study, we attempt to explore potential determinants for the observed dividend policies, as well as examining whether there is support for the free cash flow hypothesis in Kuwait. We found strong variation between dividend payers and non-payers in terms of operating performance, investment opportunities, size and leverage. Dividend payers have significantly higher earnings, higher market-to-book, and lower leverage. Our results also revealed that a firm’s earnings are the major determinant of dividend payout decisions in Kuwait. Surprisingly, we found that dividend-payers have significantly higher growth options, contrary to the expectations of the free cash flow hypothesis. The results also imply the existence of the agency cost problem of free cash flow. Upon testing, however, there was no evidence to support its existence, and accordingly we conclude that the agency cost problem of free cash flow is irrelevant to dividend policy determination in Kuwait.