Relationship between Dividend Payout Ratio and Earnings Growth: A Test of the Stock Market in Egypt

Abstract

Stock dividend puzzles have been studied for many years. Conventional theory suggests that future earnings growth is largely supported by the percentage of retained earnings that is reinvested in the same corporation and not paid out as dividends. For the first time, this paper investigates the relationship between payout ratios and earnings growth in the Egyptian Stock Market during the period from 2005 to 2010. We found that there is a statistically significant positive correlation between payout ratio and earnings growth (i.e., the greater the payout ratio, the greater the future earnings growth) in the Egyptian Stock Market contrary to conventional theory in both aggregate level and company level as well. The following reasons represent a beginning effort to explain this relationship: management confidence, corporate managers’ loath to cut dividends, management attempts to build empire, overinvestment on the part of low-payout companies, sticky dividends.

This paper is uniquely discuss the impact of its findings on areas did not proceed by any other paper before. The finding of this paper has a significant impact on stock options, mutual funds investment strategies and shareholders’ value.

The findings of this paper and its impact on vital areas of financial management, contributes to the future growth of corporate earnings, and thus increase the companies’ market capitalization and the development of shareholder equity, as well as increasing the efficiency of investment policies for investment funds, and market options contracts.