A company’s dividend policy is determined not just by its strategy but also by the qualities of its managers, particularly overconfidence. As a result, the purpose of this study is to explore the impact of CEO overconfidence on dividend policy using the dividend payout ratio and dividend yield ratio.
The study’s sample includes 170 non-financial enterprises listed on the Pakistan Stock Exchange between 2011 and 2022. Furthermore, we used corporate governance and firm-specific factors as control variables. The fixed effect model based on the Hausman test result and dynamic system GMM estimation technique was employed in the analysis. Furthermore, the dividend dummy variable and alternative proxies of dividend payments are used to ensure the results are robust.
The findings indicate that CEOs’ overconfidence positively impacts dividend payout and dividend yield ratios. Further analysis reveals that board size and remuneration committee significantly impact dividend payment among corporate governance control variables, while block holding has a negative effect. Among firm-specific control variables, the results suggest that firm size, profitability, and market-to-book ratio are significantly positively associated. In contrast, the coefficient of variation and debt ratio are inversely associated with dividend payments.
Managerial overconfidence benefits shareholders by increasing dividend payouts, but firms may struggle in the long run if they do not have adequate retained earnings to meet capital requirements. Dividends and retained earnings must be balanced to make enough funds available for long-term investment in capital-intensive projects.
Although little previous research has focused on the managerial overconfidence-dividend policy relationship, the authors believe this is the first study to test this relationship generally in emerging markets, particularly Pakistan.
