Dividend policy and religion: International evidence from firms with Islamic Label
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Ghouma, Hatem H.
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This paper builds on prior research and argues that religion, as an informal cultural institution, may impose constraints on corporations. The framework of Shariah-compliant firms presents a unique opportunity to investigate this assertion and checks whether firms with Islamic label pay out more or less dividend. Since Islamic Law narrows the investment opportunity sets for Shariah-compliant firms, one would expect Shariah-compliant firms to pay out more dividends to shareholders (investment constraint hypothesis). On the other hand, the prohibition of interest-bearing financing, make of retained earnings an appealing alternative to finance projects, hence resulting in lower dividend payouts (financing constraint hypothesis). Tests on a sample of 13,249 firm-year observations from 17 Islamic countries support the investment constraint hypothesis: Shariah-compliant firms pay out more dividends than non-Shariah compliant ones. Our results are robust to various specifications and after controlling for different variables and addressing potential endogeneity concerns. 2021 Elsevier B.V.
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