Inflation and Dividend Behavior of Pakistani Firms: An Empirical Investigation Using ARDL

  •  Abdul Ghafoor    
  •  Muhammad Asif Khan    
  •  Syed Asim Shah    
  •  Habib Hussain Khan    


The purpose of this study is to examine the dividends behavior of Pakistani firms by taking a macroeconomicperspective. In doing that inflation and real growth are also considered. The paper examines the relationshipbetween dividend yield, return on equity, real growth and inflation in the Pakistan by applying ARDL approachwhich is used to examine the relationship in the long run. Moreover, VECM is also applied to capture the shortrun impact. Results of ARDL revealed a positive relationship between inflation and dividend payments, whichcan be interpreted in two ways. First, inflation affects revenues and variable cost not the fixed cost; it simplyincreases the nominal value of corporate earnings and therefore dividend payouts, and second is that managersmay try to pursue a dividend policy, which is considered to be optimal, believing that there is a desirable level ofreal dividend income to be paid to their investors. The results of ARDL approach show that inflation, in longterm as well as in short run have positive relationship with dividends while return on equity and real growth ratesshowed insignificant relationship with dividend yield in both long and short run. The estimated equation remainsstable over the period of study as indicated by CUSUM and CUSUMQ stability tests. This study is helpful forvarious investors in deciding for investment when they have fear of considerable acceleration of inflationarypressure. For example they can protect themselves against accelerating inflation rates when buying the stocks.While formulating an optimal dividend policy of the firm, managers should carefully examine the inflationaryenvironment.

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