Are tests of dividend policy robust to estimation techniques: The case of an emerging economy?

In recent years, there is high tendency to use either simple or complicated models to conduct empirical studies on banking and finance data without due regards being given to the structure, suitability and the choice of econometrics models. In particular, there are numerous works that have emerged to examine dividend policy, which is considered one of the most controversial topics in corporate finance literature ([41]), using inappropriate methodologies leading to false conclusions. This paper, therefore, attempts to address this issue by proposing appropriate and robust estimation methods; the Tobit model and the Generalized Method of Moment, to model banks’ dividend policy. It uses 160 firm-year observations of banks listed in an emerging market namely Karachi Stock Exchange. We find that modelling dividend policy is sensitive to the estimation techniques. Our results show that Pakistani banks neither smooth their dividends nor follow stable dividend policy, contrary to what has been reported in the previous literature that used OLS estimates. These findings provide new implications for investors and policy makers in such an emerging economy. •Paper study Pakistani banks dividend payout ratios.•It uses Tobit, GMM and dynamic panel data models.•Paper finds banks do not follow smooth and stable dividend policy.•Central bank to regulate financial institutions for improved dividend policy.