Int. J. Adv. Res. Sci. Technol. Volume 12, Issue 8, 2023, pp.1064-1070.

International Journal of Advanced Research in ISSN 2319 – 1783 (Print)

Science and Technology ISSN 2320 – 1126 (Online)

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Determinants of Dividend Payout in Private Insurance Companies of Ethiopia

Yohanis Bayisa
MBA In Finance Student, Department of Accounting and Finance, Ambo University, Ambo Ethiopia
[email protected].

ARTICLEINFO ABSTRACT

Article history: This study aimed to identify determinants of dividend payout in Ethiopian
Received 05 Aug 2023 private insurance companies. To achieve this objective, a quantitative
Accepted 11 Aug 2023 research approach was used. Secondary data from ten insurance companies
Available online 15 Sep 2023 for eleven years period from 2010 to 2020 were used as panel data for
analysis. The study analyzed both internal and macroeconomic variables;
Keywords: profitability, liquidity, leverage, firm size, firm age, and growth from internal
Dividend payout, factors and GDP and inflation from Macroeconomic variables. The random
Insurance companies, effect model was used to identify the effect of each explanatory variable on
Macro-economic factor, the dividend payout of Ethiopian private insurance companies. The result
Ethiopia. showed that profitability, liquidity, and firm size were found significant
factors in dividend payout. Contrary to the predictions, the remaining
variables-firm age, leverage, growth, GDP, and Inflation found to be
insignificant. Thus, profitability, liquidity, and firm size have a positive and
significant effect on dividend payout as predicted. Therefore, Ethiopian
private insurance company managers should prioritize profitability, liquidity,
and firm size when making dividend payout decisions.
© 2023 International Journal of Advanced Research in Science and Technology (IJARST). All rights reserved.

1. INTRODUCTION: much earnings could be paid out as dividends and how

much could be retained is the concern of the dividend
Dividend payout policy plays a significant role in
policy decision (Marfo et al., 2011).
deciding what proportion of the income should be
reinvested and what proportion should be divided to Researchers have declared that firms use dividends as a
shareholders as a return on their investment. structure for financial signaling to outsiders with regard
Management should consider dividend policy decisions to the stability and growth prospects of the firm. Paying
because if a firm resolves to pay more dividends, it out more cash dividends will lead to increase in the price
retains fewer funds for investment purposes, and the of the stock. However, increasing cash dividends refers
company may be forced to return to capital markets to to that less money is available for reinvestment.
earn funds (Baker and Powell, 2000). Reinvesting back fewer earnings into the business will
under the expected growth rate (Masum, 2014).
Dividend policy can be varied through different
companies. In addition, it has different meanings as the Even though much research conducted by several
shareholders need. High divination does not imply that researchers, the issue of the dividend policy factor
having high profit as a low percentage of dividends does remains unresolved. Beary and Myers (2005) listed
not show the loss of the insurance companies. For this issuing dividends as one of the top ten important
reason, the dividend is the most complicated issue to unresolved issues in the field of advanced corporate
decide. It determines other performance and objectives finance. Black and Scholes (1974) concluded that
(Chigazie, 2010). Dividend policy is one of the crucial dividends are the inital puzzle in the economics of
decisions in corporate finance. The dividend is the finance. Black (1976, p.5) wrote that "the harder we look
issuing of profit to the shareholders. Corporate dividend at the dividend picture, the more it seems like a puzzle,
policy has been examined by financial managers, and with pieces that just do not fit together". Alternatively,
firms at massive. Firms are faced with the dilemma, of earnings retained are the major internal sources of
sharing dividends to stockholders and retaining their financing the growth of the firm. In practice, every firm
earnings with the view to reinvesting it back into the follows some kind of dividend policy, which holds a
business to promote growth of the business. As the portion of the net earnings in such a manner that it will
business extended, the earning flow of the stockholders not constitute a threat to dividend payment (Chigazie,
grows over time. The decision of the firm regarding how 2010).

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 Int. J. Adv. Res. Sci. Technol. Volume 12, Issue 8, 2023, pp.1064-1070.
Even now, researchers produce considerable attention profitability, cash flow, and tax but negatively related to
and thought to solve the dividend puzzle, resulting in a growth and risk. Over time, factors that affect the
large number of conflicting hypotheses, theories, and dividend policy of a company have increased
explanations. Researchers have initially focused on substantially and opened a wide discussion among
developed markets; however, additional insight into the investors and researchers. This has determined the
dividend policy debate can be gained by an investigation researchers to go deeper into the issue and try to examine
of developing countries, such as Ethiopia which is the influencing factors that might be considered by the
currently lacking in the literature. management of Ethiopian insurance companies in
deciding the appropriate dividend policy. As far as the
To this end, this study examined the determinants of
researcher's knowledge the dividend policy issue in
dividend payout of insurance companies in Ethiopia. In
Ethiopia has been studied by (Dagnaw, 2009; Kinfe,
addition, based on the result of the investigation
2011; Nuredin, 2012; Simegn, 2013; and Mitiku, 2015).
suggestions and recommendations will be made for
All of the above research was focused on the banking
stakeholders of insurance companies for their better
sector but (Nuredin, 2012; Henok 2016; Samuel, 2017;
decision.
and Habtamu, 2019) the researchers' conclusion has a big
1.1. Statement of Problem difference in some variables for instance the variable
firm size and leverage are insignificant in the study of
Dividend policy is controversial. Many doubtful reasons
(Samuel, 2017; Habtamu, 2019; and Nuredin, 2012) but
are given for why dividend policy might be significant, they are significant in the study of Henok (2016). In
and many of the declares made about dividend policies addition, liquidity has a positive effect on the dividend
are economically illogical. Even, in the real world of
payout ratio in the study of (Samuel, 2017; Habtamu,
corporate finance, determining the most related dividend
2019; and Nuredin, 2012) but it has a negative impact in
policy is considered an important issue (Ross 2003,
the study of Henok (2019). Generally, there are literature
p.633). Dividend policy has been the subject of
gaps in the studies.
considerable debate since Miller and Modigliani (1961)
illustrated under the condition of perfect capital market Therefore, further research is required to study the
and zero taxes, dividends were irrelevant. dividend policy of firms in developing countries. This
study presented results about the determinants of
But financial researchers and practitioners have
dividend payouts of Ethiopian insurance companies and
disagreed with Miller and Modigliani's proposal and
the results will contribute to filling the literature gap that
have argued that they based their proposal on perfect
occurs in developing country context. Furthermore, the
capital market assumptions; assumptions that do not desire of this study is to identify the major factors that
exist in the real world. At the same time, Gordon (1962) determine Ethiopian insurance companies' dividend
and Walter (1963), proved dividends to be related to the
payout.
valuation of the firm and hence the shareholders are seen
to be not at all disinterested as to the payment of 2. Objective of the study
dividends and retention of profits.
The main objective of this study is to examine the
The above debate has changed into much controversy determinants of dividend payout of insurance companies
after Black (1976) called it a “Puzzle” whose pieces do in Ethiopia by considering both internal and external
not fit together. Since then, the amount of empirical and factors.
theoretical research on dividend policy has increased
3. Research Methodology
dramatically (Baker, 1999). However, Allen et al. (2000,
p.2499) put it in a nutshell “Although several theories To achieve this purpose explanatory research design was
have been put forward in the literature to explain their used for the study. The explanatory type of research
pervasive presence, dividends endure one of the thorniest design helps to identify and evaluate the causal
puzzles in corporate finance”. Recently, Brealey et al. relationships between the different variables under
(2008) claim that even if numerous researchers have consideration (Marczyk et al., 2005). Explanatory
attempted to solve the "dividend puzzle" identified in research determining the relationship between the
Black (1976), these studies have not yet come to an dependent variable (Dividend Payout Ratio) with firm-
unequivocal solution. specific independent variables (profitability, liquidity,
leverage, growth opportunity, firm size, and firm age)
Research into dividend policy has seen not only that a
and External factors inflation and GDP. The study
general theory of dividend policy remains elusive, but
described the results by comparing them with empirical
also that corporate dividend practices differ over time,
evidence. Hypotheses were formulated and tested based
among firms and across countries. Moreover, the
on empirical reviews.
empirical results on dividend policy are inconclusive.
Existing studies appear to focus on the dividend In this study, the quantitative approach was used. The
behaviors of companies in developed economies, but the quantitative approach is often concerned with
proof from developing economies is very limited. establishing relationships between variables (Theobald,
Therefore, examining the dividend policies of firms in et al., 2002). According to Patel and Davidsson (2003),
developing countries like Ethiopia will offer more a quantitative method means that measurements going to
insights into the factors that influence corporate dividend be done when collecting data. This will be followed by
decisions. statistical analysis and processing procedure that is based
on the collected data. Aliaga and Gunderson, (2002)
According to Amidu and Abor, (2006) who investigated
defined, in contrast, that quantitative research is
the determinants of dividend payouts in Ghana, found
that the payout ratios are positively related to

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 Int. J. Adv. Res. Sci. Technol. Volume 12, Issue 8, 2023, pp.1064-1070.
explaining phenomena by collecting numerical data that To achieve the aim of this study, the Random effect
are analyzed using mathematically based methods. panel data regression model was used. Panel data
involves the pooling of observations on a cross-section
The study aims to generalize the facts established in the
of units over several periods and provides findings that
sampled Ethiopian insurance companies as regards the
are simply not detectable in pure cross-sections or pure
determinants of dividend payout. This generalization
time series studies (Freeman et al., 1982). The general
under the quantitative method can be collected through a
form of the panel data model can be specified as:
systematic way of seeking facts and causes of
phenomena, focusing on the analysis of numerical data, Yi,t=αi+βXi,t + εi,t
uses of controlled measurements, and statistical analysis
𝑫𝑷𝑶 = 𝜷𝟎 + 𝜷1INFit + 𝜷2GROit + 𝜷3𝑷𝑹F𝐢𝐭 +
to test the stated hypotheses. The researcher gathered
𝜷4𝑳𝑰𝑸𝐢, 𝐭 + 𝜷5𝑳𝑬𝑽𝐢𝐭 + 𝜷6SIZ𝐢𝐭 + 𝜷7GDP𝐢𝐭 +
numerical data of variables from financial reports of ten
consecutive years from ten Ethiopian insurance 𝜷8AGE𝐢𝐭 + Є𝐢, 𝐭
companies. The study followed a quantitative approach Where;-
to analyze those phenomena of a company that appear to
affect the dividend payout decision. DPO: Dividend Payout Ratio = Dividend / Net Profit

Quantitative and secondary data type was used for this INF: inflation= (the price index the year-the price index
research for panel data analysis. These data were from of the previous year)/the price index of the previous
financial statements of selected companies which were year X 100
collected from headquarters and, GDP and inflation- PRO: Profitability = Net Profit / total asset
related data from NBE from the year 2010 to 2020 of 10
insurance companies. Brook, (2008), also stated that a SIZ: Firm size= Natural logarithm of total assets
panel data set has two major advantages; first, it can GRO: Growth = (current year net income – previous
address a broader range of issues and tackle more year net income) / previous year net income
complex problems than pure time series or pure cross-
sectional data alone, and by appropriately structuring the LIQ: Liquidity = Current Assets/ Current Liability
model, the researcher can withdraw the impact of certain LEV: Financial Leverage = Total Liability/ Total assets
forms of omitted variable bias in the regression result.
Second, it is often examined how the relationships GDP: Growth Domestic Product annual real GDP
between variables change. Hence, by merging cross- growth rate.
sectional data and time series data, the researcher can AGE: Firm age
increase the number of degrees of freedom, and thus the
power of the test, by employing information on the βo: Constant term
dynamic behavior of a large number of entities at the β1, 2, 3, …..8 are parameters to be estimated;
same time. Furthermore, Hsiao, (2003) narrates a panel
or a longitudinal data set as one that follows a given Є : is the error component for the company i at time t
sample of individuals over time, and thus provides assumed to have to mean zero
multiple experiences on each individual in the sample. E [Є it] =0
The target population of the study was all insurance i = Insurance company i = 1, . . .10; and t = the index of
companies operating in Ethiopia. Currently, there are 18 time periods and t = 1, . . . 11
insurance and one reinsurer companies in Ethiopia. Of
these, only one is a government-owned company and
others are private companies. This study used 10 4. RESULT AND DISCUSSION
insurance companies out of 19 insurance companies. To
discuss dividend policies it needs companies that have Before running the regression, the data sets were
more than 10 years' dividend history. Based on this, the checked for certain diagnosis tests. Normality, Multi-
selected Insurance companies were; Nyala Insurance collinearity, heteroscedasticity, Omitted variable, and
Share Company, Awash Insurance Share Company, Nile autocorrelation tests have been made to fit the Classical
Insurance Share Company, Lion Insurance Share linear regression Model (CLRM) assumptions and to
Company, National Insurance Corporation Share assure that the model is applicable.
Company, Nib Insurance Share Company, Global
There are two frequently used models for the estimation
Insurance Share Company, United Insurance Share
of panel data analysis. These are the Fixed Effect Model
Company, Africa Insurance Share Company, and
(FEM) and the Random Effect Model (REM) (Gujarati,
Oromia insurance share company. The study used a
2004. The choice of a fixed effect model over a random
purposive sampling technique based on the years of
effect model or vice versa is based on the use of
operation and availability of data.
Haussmann’s test. The Haussmann’s test, a model
3.1. Model Specification specification test was engaged for this study to conclude
the more appropriate model from the fixed effect model
According to William et al., (2010), model construction (FEM) and Random Effect Model (REM). Based on the
includes specifying relationships between two or more Haussmann test Random effect model was used.
variables; perhaps extending to the development of
predictive or descriptive equations.

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 Int. J. Adv. Res. Sci. Technol. Volume 12, Issue 8, 2023, pp.1064-1070.
Table 1: Random Effect Regression Result However; it contradicts the finding of (Temesgen, 2016;
Anupam, 2012; Baker & Gandhi, 2007; and Christopher
and Rim, 2014).
In addition, the finding is consistent with the agency cost
and free cash flow hypothesis, where managers want to
minimize the agency cost to shareholders. Insurers, that
earn a higher annual profit, tend to pay a higher dividend
to the shareholders. One of the reasons for this can be the
lack of profitable investment opportunities in the
country. This may suggest that Ethiopian insurers pay
dividends by considering the level of profit.
Liquidity (LIQ) and Dividend Payout Ratio (DPO)
Source: STATA 15 from annual reports of sampled Liquidity is found to be a positive and statistically
insurers significant determinant of the dividend payout ratio
across the sampled Ethiopian private insurance
From the random effect regression; the result companies. From the regression result, the coefficient
independent variables firm size, liquidity, and and probability of liquidity were 0.32 and 0.015
profitability of insurers have an important effect on the respectively. This showed that cash position is one of the
dependent variable, a dividend payout ratio of the important factors for the decision of dividend payment.
insurers at a 5% significance level. While the firm's age, This finding goes in line with the agency theory of
growth, leverage inflation and GDP have an insignificant Jansen (1986) which stated that companies with greater
effect on the dividend payout of the insurers at a 5% free cash flow have higher dividend payout ratios. Based
significance level. The R-squared value was 43.5% on this theory, firms that have higher liquid assets are
indicating that 43.5% of the variation in the result of more open to agency problems than a firm with lesser
dividend payout ratio was caused by variability of the liquid assets.
independent variables used in the model. Furthermore,
the Wald chi2(8) was 71.46 and the probability of not Haimanot and Ravi (2019), and Temesgen (2016) stated
rejecting the null hypothesis that there is no statistically in their finding that liquidity had a significant and
important relationship existing between the dependent positive effect on the dividend payment of private
variable (DPO) and the independent variables, is insurance companies in Ethiopia. In addition, the
0.000000 indicating that the overall model is highly findings of Werkineh (2021), and Bayelign and Ayalew
important at 1% and that all the independent variables (2022), on private commercial banks of Ethiopia showed
are collectively significant in result in variation in the same, liquidity had a significant and positive effect
dividend payout. on dividend payout decisions.
Profitability (PRF) and Dividend payout (DPO) This result supports the signaling theory of Gupta and
Banga (2010) Firms with higher cash accessibility can
Profitability is found to be a positive and statistically pay higher dividends than firms with lower cash levels.
significant determinant of the dividend payout ratio in The finding is also consistent with agency theory, that
private insurers of Ethiopia during the study period. firms with high cash and cash equivalent asset flows pay
The findings are in line with the hypothesis formulated higher dividends to diminish the agency conflict between
by the researcher regarding the significance and the sign. their managers and shareholders (Jensen, 1986).
From the above random effect regression output table 1, Firm Size (SIZ) and Dividend Payout (DPO)
the coefficient of profitability (PRF) measured by return Firm size is expressed by using the log of the total
on asset is 2.25 and its P-value is 0.001. Holding other company's assets. From the regression result above, the
independent variables constant at their average value, coefficient and probability were 0.124 and 0.021
when profitability increases by one percent, the dividend respectively showing that asset size is a significant factor
payout ratio (DPO) of sampled Ethiopian insurance in dividend payout and had a positive effect on dividend
companies will increase by 225% and be statistically payout of sampled private insurance companies of
important at a 1% significant level. Therefore, the Ethiopia.
researcher failed to reject the null hypothesis that
profitability has a significant positive effect on dividend Firms with larger sizes tend to have lower transaction
payout. This shows that there is no sufficient evidence to costs associated with acquiring new financing as
support the insignificant negative relationship between compared to small firms. This supports the agency cost
the dividend payout ratio and profitability. theory that the size of the company can be used as a
proxy for external capital market access and larger
The relationship between profitability (ROA) and insurers can manage to pay higher cash dividends
dividend payout ratio (DPO) is positive as expected and because they have fewer limitations in acquiring external
this could be attributed to the fact that more profitable funds from the capital markets and have lower costs
firms lead to paying more dividends. This finding is (Bayelign and Ayalew, 2022). The finding is consistent
similar to the finding of (Bayelign and Ayalew, 2022; with the results of (Chekole, 2016; Seifu, 2018; Birhan
Workneh, 2021; Haimanot and Ravi, 2019; Pruitt and et al., 2020; Kumar, 2021 and Heaney, 2007). On the
Gitman, 1991; Baker and Powell, 2000; Amidu & Abor, contrary, (Saje E.M., 2015) found that bank size has a
2006; Al-Malkawi et al., 2007 and Nuredin, 2012). negative impact on dividend payout ratio by stating that

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 Int. J. Adv. Res. Sci. Technol. Volume 12, Issue 8, 2023, pp.1064-1070.
the Ethiopian banking industry is in its growth stage and as an important factor of dividend payout with a negative
the relatively larger banks compete to increase their relationship in Ethiopian private commercial Banks.
market share to preserve their recent status. In addition
GDP and Dividend Payout (DPO)
to this, Medhe et al. (2010) and Desta (2021) found that
size is not a statistically significant factor for a firm's GDP which is a real annual gross domestic product of
dividend payout. the country was hypothesized to have a positive and
important effect on the dividend payout of insurance
Insurers Age (AGE) and Dividend Payout (DPO)
companies of Ethiopia. From the random regression
The relationship between firm age and dividend payout result above the coefficient and probability are -0.004
was expected to have a positive relation. From the and 0.77 respectively. This shows the reverse
regression result above, the coefficient of firm age is - relationship between dividend payout and GDP but this
0.0049 and p value 0.62 which is insignificant at a 5% effect is insignificant at a 5% significance level.
significance level but has a negative relation with
This finding is in line with the result of Werkineh (2021),
dividend payout. As a result, the researcher rejects the
who stated that GDP is an insignificant factor in dividend
hypothesis age has a positive and important effect on
payout in Ethiopian private commercial banks. On the
dividend payout.
contrary, Haimanote and Jaladi (2019) found a positive
Desta (2021) found that the age of the firm has an and significant relationship between GDP and dividend
insignificant effect on dividend payout in Ethiopian payout in Ethiopian insurance companies. The result is
private commercial banks. On the contrary, Temesgen also different from the finding of (Bragoli, 2014) who
and Vankati (2016) stated that firm age has a positive and stated the country’s economy experienced an expansion
significant effect on the dividend payout of Ethiopian during the study period which led companies to make a
insurance companies. The finding contradicts the life profit and pay more dividends because there is more cash
cycle theory that states relatively matured companies pay to pay to shareholders and (Abdul Ghafoor, 2014) who
more dividends because when companies get mature stated in his finding that increase in the GDP is assumed
interest for investment and growth decreases. to increase in the corporate earnings of different
companies, which ultimately leads to increase the
Leverage (LEV) and Dividend Payout (DPO)
dividend payout ratio.
Leverage which is measured by total liability to total
Inflation (INF) and dividend Payout (DPO)
asset ratio (debt ratio) was expected to be a significant
factor in dividend payout with a negative effect. The inflation rate which is measured by the price index
According to the random effect regression finding the of all commodities was expected to have a negative and
coefficient and probability are -0.56 and 0.11 important effect on dividend payout decisions in
respectively. This is insignificant. Ethiopian insurance companies. The random effect
regression result above showed that coefficient of 0.0017
The negative relationship between leverage and dividend
and a probability of 0.48. This means Inflation has a
payout is in line with agency cost theory explained by
positive effect on dividend payout but the effect is
the companies with lower leverage ratios tend to pay
irrelavent at a 5% significance level.
more dividends and companies with higher leverage
ratios pay less dividends. Bayelign and Ayalew (2022) This result is consistent with the finding of (Workineh,
stated leverage is a significant variable in determining 2021) who found the inflation insignificant factor of
dividend payout in Ethiopian private commercial banks. dividend payout in Ethiopian private commercial banks.
On the contrary, the research of Haimanot and Jaladi This finding contradicts the results of (Haimanote and
(2019), Workneh (2021), and Temesgen and Venkati Jaladi, 2019). When inflation in one country becomes
(2016) showed that leverage is an insignificant factor in high, most firms usually maintain a large portion of their
dividend payout. earnings to avoid a drop in their balance of operation and
to compensate for the reduction in the purchasing power
The possible reason for the insignificance of leverage for
of money and firms would not be interested in paying
dividend payout can be due to the low level of long-term
more dividends (Ghafoor, 2014). According to
liability of insurers in Ethiopia. This is due to regulatory
Haimanote and Jaladi (2019), inflation has a negative
restrictions from NBE about the amount of long-term
and important effect on dividend payout.
liability.
Growth (GRO) and Dividend Payout (DPO) 5. CONCLUSION
Growth, which is calculated by the ratio of net income Dividend policy is one of the very important issues that
increment, was expected to be the significant factor of determine what funds flow to investors and what funds
dividend decisions with a negative effect. From the are retained by the firm for future reinvestment. This
regression result, growth has a coefficient of -0.075 and study aimed to identify the most important factor that
a probability of 0.18. so this is insignificant for dividend affects the dividend payout of private insurance
payout. companies operating in Ethiopia. Thus, the variables of
In the research of Temesgen and Venkati (2016), growth two categories internal factor and macroeconomic
was found to be an insignificant factor in dividend factors. Internal explanatory variables were profitability
payout in Ethiopian insurance companies. On the (ROA), liquidity (current ratio), Firm size, Firm Age,
contrary, the previous works of (Haimanot and Jaladi, Leverage, and Growth included to analyze their effects
2019; Birhan et.al, 2020; Abor and Amidu,2006; Al- on dividend payout. GDP rate and annual Inflation were
Malkawi et.al., 2007 and Nuredin, 2012) found growth the two macroeconomic explanatory variables used to
identify their effect on the dividend payout of Ethiopian
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ACKNOWLEDGEMENT
Selected Commercial Banks in Ethiopia.
I would like to thank my advisor Diriba Ayele(PhD) for International Journal of Finance and Banking
his guidance, encouragement, and support. My sincere Research. Vol. 7, No. 2, 2021, pp. 29-37.
appreciation goes to Dagim Nardos for all the support 18. Haimanote, W., and Ravi, J. (2019). Internal and
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