The efects of dividend policy on capital structure: evidence from GCC companies

Abstract

Purpose: This study investigates the interplay between dividend policy and capital structure decisions within the distinct institutional framework of Gulf Cooperation Council (GCC) non-fnancial frms. It seeks to resolve conficting empirical evidence by examining how regional characteristics—such as market opacity and ownership concentration—reshape standard fnancial theories.

Design/methodology/approach: Leveraging an unbalanced panel of 1,396 frm-year observations (2012–2022) across six GCC countries, the analysis employs fxed efects and System Generalized Method of Moments (GMM) estimators. This dual approach controls for unobserved heterogeneity and rigorously addresses endogeneity concerns prevalent in dynamic fnancial modeling. The study further tests the moderating role of proftability to identify conditional efects on leverage decisions.

Findings: Empirical evidence reveals a positive signifcant relationship between dividend payout ratios and leverage, contradicting the Pecking Order Theory typically observed in developed economies. Instead, the results support Signaling Theory, suggesting that in low-transparency markets, concurrent high dividends and debt signal managerial confdence. However, moderation analysis indicates a nuanced boundary condition: High-proftability frms tend to reduce leverage when paying dividends, whereas low-proftability frms exhibit a weaker relationship, relying more on external debt to sustain payouts.

Originality/value: This research advances corporate fnance literature in three specifc ways. First, it validates Signaling Theory within an emerging market context characterized by information asymmetry, challenging the universal dominance of Pecking Order assumptions. Second, it uniquely identifes proftability as a critical moderator that reverses the dividend–leverage nexus, ofering a granular view of fnancial behavior often overlooked in regional studies. Third, by applying System GMM to a comprehensive GCC dataset, the study provides robust causal inferences that address endogeneity issues frequently ignored in prior regional fnance literature.