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Finance, Accounting and Business Analysis 
Volume 7 Issue 1, 2025 

http://faba.bg/       
ISSN  2603-5324 

DOI: https://doi.org/10.37075/FABA.2025.1.10 

 

FACTORS THAT INFLUENCE DIVIDEND POLICY: DO 

MACROECONOMIC FACTORS MATTER? 
 

Emmanuel Kwame Doffour 1* , Emmanuel Boye Asamoah2 , Isaac Kwadwo Anim3 , 

Eric Agyenim-Boateng4  
  
Department of Accounting, University of Cape Coast, Cape Coast, Ghana1 

Department of Accounting, University of Cape Coast, Cape Coast, Ghana2 

Department of Accounting, University of Cape Coast, Cape Coast, Ghana3 

Directorate of Finance, University of Cape Coast, Cape Coast, Ghana4 

* Corresponding author 

 

Info Articles   Abstract 
 

History Article: 

Submitted  14 March 2025 

Revised   11 May 2025 

Accepted  29 May 2025 

 Purpose: This research examines the effects of macroeconomic variables 

(money supply, interest rates, inflation, and exchange rates) on the 

dividend policies of firms in the Ghana Stock Exchange. 

Design/Methodology/Approach: The study employed panel data from 

23 Ghanaian firms from 2010 to 2022. To overcome endogeneity and 

unobserved heterogeneity, a dynamic two-step difference Generalized 

Method of Moments (GMM) was used, employing Stata 15 for the 

analysis. 

Findings: The findings also show that money supply, interest rates and 

inflation have a positive and significant effect on the dividend payout 

ratio, while exchange rates have a significant inverse effect on the 

dividend payout ratio. 

Practical Implications: These results reveal that macroeconomic factors 

play a significant part in determining dividend policies in Ghanaian 

firms. The study has significant implications for corporate managers in 

the formulation of dividend policy, investors in evaluating the dividend 

prospects, and policymakers in the realisation of the effects of 

macroeconomic policies on corporate finance. 

Originality/Value: This research provides significant information on 

the relationship between macroeconomic variables and firms’ dividend 

decisions in Ghana. It builds on the existing literature by including a 

wider set of macroeconomic variables, unlike most previous Ghanaian 

studies that mainly focused on firm-specific factors. 

Paper Type: Research Paper 

 

Keywords:  

Dividend Policy, 

Macroeconomic Factors, 

Generalized Method of 

Moments  
 

 

JEL: G35, L25  

* Address Correspondence:   

E-mail:  emmanueldoffour15@gmail.com1 

emeritus.asamoah@gmail.com2 

ianim@ucc.edu.gh3 

eagyenim-boateng@ucc.edu.gh4 

 

 

  

http://faba.bg/
https://doi.org/10.37075/FABA.2025.1.10
https://orcid.org/0000-0001-7285-5575
https://orcid.org/0009-0001-6163-5021
https://orcid.org/0000-0002-5138-2307
https://orcid.org/0009-0000-7264-3599


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INTRODUCTION 
 

The rationale for establishing a business focuses on clear objectives, notably enhancing shareholders' 

wealth by increasing market value (Jensen and Meckling 1976). Shareholder wealth can grow through 

dividends and capital appreciation, with dividend policies influencing how profits are distributed. Various 

approaches exist, such as fixed payout ratios and regular dividends with special payments (Brigham and 

Houston 2013). Research shows that higher risk-averse investor populations correlate with lower dividends 

(Akyildirim et al. 2014), while factors like profitability, growth prospects, and external influences like 

economic policies also play significant roles (Khan et al. 2018). Recent macroeconomic changes driven by 

globalisation and technology are crucial for decision-making in firms, as stock values fluctuate with interest 

and inflation rates (Fredrick 2021), affecting both immediate returns and future growth (Kanwal and 

Nadeem 2013). Black (1976) highlighted the lack of strict guidelines on dividend payments versus 

reinvestment, leaving ongoing questions about dividend policies.  

The anchor theory, based on the bird-in-hand theory, suggests that economic uncertainty may drive 

investors to prefer immediate returns (Frankfurter and Wood 2002). Additionally, the Arbitrage Pricing 

Theory, introduced by Ross (1976), emphasises that multiple factors can influence investment return 

strategies. Ghana's economy has shifted from agriculture to a more diverse post-colonial landscape, with 

growth in manufacturing, services, and finance since the Ghana Stock Exchange's inception in 1990 

(Kolavalli et al. 2012; Bokpin 2011). In developing countries like Ghana, dividends are key for reliable 

income and financial stability, especially in economic instability (Marfo-Yiadom and Agyei 2011). Macro-

environmental factors, often beyond a company's control, such as high inflation and rising interest rates, can 

negatively affect corporate earnings and dividends (Adelegan 2009; Ghafoor et al. 2014). The capital market 

is influenced by GDP growth, inflation, and trade (Kaimba 2010). International firms face challenges from 

exchange rate fluctuations, impacting costs and stock returns (Zghidi et al. 2016).  

Taxation and government spending also affect profits and dividend capacity (Appiah-Kubi et al. 

2021), while political fluctuations lead to reduced dividends during uncertainty (Montes and Nogueira 

2022). Dividends are critical for firms and shareholder returns, particularly in Ghana, where limited 

investment opportunities create challenges in balancing regular dividends and reinvestment for growth 

(Bossman et al. 2022; Enyan 2009). Although research on global dividend policies is extensive (Rój 2019; 

Kaźmierska-Jóźwiak 2015), the specific impacts of macroeconomic factors in Ghana remain under-

explored, especially regarding high inflation, exchange rates, and rising interest rates, which can constrain 

dividend capacity (Abor and Bokpin 2010). 

This study uniquely analyses the effects of macroeconomic factors, namely, money supply, exchange 

rates, interest rates, and inflation, on dividend policy for financial and non-financial firms in Ghana, as these 

factors exert cross-sectoral impacts that affect firms regardless of industry or sector. Also, both were 

incorporated to increase data variation and sample size which enhances statistical power and robustness in 

a GMM analysis as well as generalisation. The research aims to fill a gap in understanding the impact of 

these variables, with specific objectives to assess how each factor influences dividend policy.. 

 

LITERATURE REVIEW 

 

Theoretical Review 
Bird-in-hand theory 

The dividend irrelevance argument is contested by the Bird-in-Hand Theory, which was first proposed 

by Gordon and Lintner in the 1960s. It highlights that investors would rather have the assurance of dividends 

than the uncertainty of potential capital appreciation (Gordon 1963). According to Baker and Powell (1999), 

this uncertainty makes shareholders value an amount of anticipated dividends more highly than a dollar of 

anticipated stock appreciation. Additionally, the theory posits that dividend payments reduce investor 

uncertainty, leading to a lower discount rate for dividends compared to potential capital gains (Gordon and 

Shapiro 1956). The theory suggests that a higher dividend payout ratio corresponds with increased stock 

valuations, as investors favour the immediate certainty of dividends (Gordon 1959). Moreover, it highlights 

that macroeconomic volatility heightens the preference for immediate cash returns, influencing corporate 

dividend decisions during unstable times (Frankfurter and Wood 2002). Thus, firms may strategically 

increase the dividend payout ratio when facing greater economic uncertainty. 

 
Arbitrage pricing theory (APT) 

APT, established by Ross in 1976, explains asset returns as a linear function of multiple 

macroeconomic factors. This theory posits that investment returns are influenced by various factors related 

to future dividends and discount rates (Shrestha and Subedi 2014). It assumes that systematic risk 

characterises project portfolios and that while some risks can be diversified, pure risks do not exist in this 



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process. However, the model has limitations, including uncertainty about which factors determine 

individual assets (Ross 2013). It assumes a perfect market, which is unrealistic in practice (Dhrymes et al. 

1984), and acknowledges that different stocks may respond differently to various risks (Chen et al. 1986). 

The APT correlates investment returns with discount rates and future dividends (Mukherjee and Naka 1995), 

while also providing an understanding of corporate planning (Burmeister and Wall 1986). APT includes 

multiple macroeconomic factors that significantly influence return on securities (Ross 1976) unlike CAPM 

which includes only market risk (Roll and Ross 1980). This theory can be used to explain how these factors 

affect dividends paid as a return on share securities. 

 

Conceptual Review 
Money supply 

According to Agarwal et al. (2018), money supply represents the total amount of monetary 

instruments in an economy, including cash and demand deposits. It is a crucial macroeconomic indicator 

influencing spending, inflation, and investment. An increase in money supply typically leads to lower 

interest rates, making borrowing cheaper, which can boost corporate profits and dividend distributions. 

Conversely, a decrease in money supply raises interest rates, reduces spending, and negatively impacts 

earnings, forcing firms to retain earnings for uncertain economic conditions (Mankiw 2021; Mishkin 2007). 

Friedman and Schwartz (2008) argue that money supply is essential for economic growth; a higher money 

supply correlates with growth, while a decrease signals a slowdown. The link between money supply and 

dividend policy is mediated by factors like liquidity, capital structure, and economic conditions. When 

monetary policy favours abundant money and low interest rates, firms can finance growth and enhance 

dividends (Blanchard and Johnson 2017). Research by Tran et al. (2019) and Mbaka (2022) indicates that 

changes in money supply significantly impact firms’ dividend decisions, with expansions allowing for 

increased dividends and contractions leading to reductions 

 
Interest rates 

Interest rates are a crucial factor in economic activity, affecting the cost of savings and investment. 

High interest rates lead to high capital costs and reduced capital expenditures, while low rates encourage 

borrowing and investment. For firms, interest rates heavily influence funding costs and potential returns on 

investment (Buckley 2013). Additionally, interest rates signal economic conditions, inflation expectations, 

and monetary policy shifts (Blanchard et al. 2015). High rates can decrease profitability as firms often lower 

dividends, whereas lower rates reduce capital costs, stimulate economic growth, and allow for higher 

dividends (Baker and Wurgler 2013). 

 
Exchange rate 

Exchange rates are crucial for currency conversion and significantly impact import and export prices 

as well as international investments (Madura 2018). They consist of a base (local) currency and a foreign 

currency; for example, in the USD/EUR, USD is the base currency. Exchange rate systems fall into two 

categories: floating and fixed. In a floating system, currency values change according to supply and demand, 

as noted by Krugman and Obstfeld (2009). Conversely, a fixed exchange rate ties a currency to another 

currency or commodity (like gold) and requires central banks to maintain constant rates, providing stability 

for international transactions but necessitating large foreign exchange reserves (Frankel 1999). The choice 

between systems depends on an economy’s characteristics and monetary policy goals. Floating rates offer 

flexibility, while fixed rates provide stability. Research by Pan et al. (2007) shows that exchange rate and 

stock price volatility can vary based on the adopted system, affecting firms' risk management strategies. 

 
Inflation 

Inflation, as described by Salim (2019), refers to the overall rise in prices of products and services, 

often driven by rising expenses like wages and raw material costs, as well as heightened demand exceeding 

supply. High inflation can impact a company's dividend strategy by decreasing the purchasing power of 

money, which in turn affects costs and revenues (Basse and Reddemann 2011). Increased operating expenses 

can reduce gross profits, leading firms to retain more earnings for reinvestment rather than distribute 

dividends. During periods of low inflation, companies may pay higher dividends (Kauffman et al. 2016) due 

to fewer high-return investment opportunities Theissen et al. 2023). Ultimately, firms must consider both 

current and expected inflation rates when formulating their dividend policies to maintain shareholder 

confidence, as noted by Basse and Reddemann (2011). 

 
Dividend policy 

According to Samrotun (2015), dividend policy involves the trade-off between the dividend payout 

ratio to investors and retaining earnings for control over funds. While management may lower dividends to 



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retain more capital, investors often perceive high dividends as a sign of firm efficiency (Sutrisno 2009). The 

dividend signalling theory suggests that higher dividends indicate better company performance, influencing 

investor perception (Pamungkas et al. 2017; Jogiyanto 2003). Ultimately, dividend policy outlines the 

amount of the total earnings distributed versus reinvested (Brealey et al. 2014). Balancing a high dividend 

payout ratio with sufficient retained earnings for reinvestment is a key challenge for firms. 

 

Empirical Review 

Rinanda (2022) studied the impact of macroeconomic factors on the dividend policies of 

manufacturing companies listed on the Indonesian Stock Market (IDX) during the global health crisis. 

Focusing on food and beverage firms with reports from 2012 to 2016, the research used multiple linear 

regression through EVIEWS software. Surprisingly, changes in currency exchange rates, inflation rates, and 

interest rates did not significantly affect the firms' dividend policies. Also, Mbaka (2022) examined the 

influence of macroeconomic factors on dividend distribution among companies in Nairobi from 1987 to 

2021, analysing the data with SPSS. The results showed money supply and exchange rates had a significant 

direct effect (β = 0.310 and β = 0.317, p = 0.000 < 0.05), but inflation had a positive yet insignificant effect 

(β = 0.009, p = 0.501 > 0.05). 

Khan et al. (2018) used annual data from 2001 to 2017 to analyse macroeconomic indicators and 

dividend payout ratio with OLS. They found that exchange rates positively correlated with the dividend 

payout ratio, while interest rates and inflation had a negative relationship. Tran et al. (2019) also studied 

money supply and dividend policies in Vietnamese non-financial companies between 2008 and 2017. Their 

findings indicated that money supply positively impacted dividend policies, especially during the global 

financial crisis. 

Yakubu (2019) studied factors influencing the dividend policies of listed banks in Ghana from 2006 

to 2015. The analysis revealed that domestic macroeconomic instability, indicated by inflation, had an 

insignificant direct impact on these policies. Basse and Reddemann (2011) analysed dividend policies in the 

U.S. Their results suggested a positive effect of inflation on dividends paid out. Romus et al. (2020) studied 

how macroeconomic factors, particularly GDP and the interest rate, influence dividend policies. They 

measured firm performance through ROA and analysed a sample of 10 out of 48 companies in real estate 

on the IDX. The study found that GDP growth positively affected firm performance and dividend policy, 

while the interest rate had no significant impact. Moreover, firm performance positively influenced dividend 

policy. 

The empirical studies discussed in this paper give a general picture of the macro environment and 

dividend policies in various countries and at different periods. Rinanda (2022) noted that macroeconomic 

factors had a limited impact on Indonesian dividend policies, while Mbaka (2022) found a direct association 

between money supply, exchange rates, and dividend payments in Kenya. Khan et al. (2018) reported that 

exchange rates positively affected Pakistan's dividend policies, but interest and inflation rates had negative 

effects. Tran et al. (2019) similarly showed that money supply positively influenced dividend policies in 

Vietnam. 

 

Conceptual Framework 
Figure 1 shows the impact of macroeconomic factors on a firm's dividend policy. The dependent 

variable, dividend policy, is influenced by these macroeconomic variables. The study also accounts for 

various firm-specific factors, including size, age, profitability (measured by ROA and ROE), retained 

earnings, and cash reserves, as these elements also play a substantial part in shaping the company's dividend 

policy. (Rinanda 2022; Yakubu 2019; Marfo-Yiadom and Agyei 2011; Ghafoor et al. 2014; Tran et al. 2019) 

 



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Source: Authors’ Compilation 

Figure 1. Conceptual framework  

 

RESEARCH METHODS 

 
The study examined a sample of 10 financial and 13 non-financial companies listed in Ghana that 

provided annual statements from 2013 to 2022. A quantitative approach was employed to gather 

secondary data. Data on macroeconomic variables were obtained from the annual reports of the Bank of 

Ghana, while information regarding the dividend payout policy was obtained from the statements of the 

firms in focus. 

The dependent variable was dividend policy. The independent variable, encompassing 

macroeconomic variables, was assessed through money supply, inflation, exchange rates, and interest rates. 

The analysis also controlled for firm-specific variables, including firm size and age, as well as leverage, 

profitability (measured by ROA and ROE), retained earnings, and cash holdings. A summary of the 

variables, their measurements, and empirical justifications is presented in Table 1. 
 

Table 1. Measurement of variables 

Variable Measurement Justification 

Dividend Policy Dividend payout ratio, calculated as 

dividends divided by earnings 

Haider et al. (2012), Ajide and Aderemi 

(2014), and Marfo-Yiadom and Agyei 

(2011) 

Money Supply The average annual monetary base 

(M2+) 

Nyamu (2016) 

Interest Rate  Rate of  government treasury notes  Issahaku et al. (2013) 

Inflation Rate Consumer price index (CPI) Baba and Nasieku (2016) and Issahaku et 

al. (2013) 

Exchange Rate  Exchange rate of  the local currency 

per United States dollar 

Willy (2012) and Issahaku et al. (2013) 

Firm Size Natural logarithm of  a firm’s total 

assets 

Elamer and Benyazid (2018) 

Firm Age Number of  years since the 

company's founding date 

Nzekwe et al. (2021) 

Return on Assets Profit before interest and tax over 

average total assets. 

Zyadat (2016); Jan et al. (2019); and 

Buallay (2019) 

Return on Equity Profit after tax over average 

shareholders' equity 

Zyadat (2016); Jan et al. (2019); and 

Buallay (2019) 

Leverage Total liabilities to total assets  Sumaira and Amjad (2013) 

Retained Earnings  Retained earnings to total assets Tran et al. (2019) 

Cash Holdings Cash and cash equivalents to net 

total assets 

Marfo-Yiadom and Agyei (2011) and 

Tran et al. (2019) 

Source: Authors’ Compilation  

Macroeconomic Variables 
Money Supply 

Interest Rate 

Inflation Rate 

Exchange Rate 

Control Variables 

Firm Age 

Firm Size 

 Leverage 

 Return on Assets 

 Return on Equity 

 Cash Holdings 

 Retained Earnings 

Dividend Policy 



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The study adopted a panel design because the data structure was of time series (years) and cross-

sectional (firms). Based on this structure, the two-step system GMM by Blundell and Bond (1998) was 

used. The model used is as follows: 

 

Dividend Policyit=β0it+B1Money Supplyit+B2Interest Rateit+B3Exchange Rateit+

B4Inflation Rateit+B5Firm Ageit+B6Firm Sizeit+B7Return on Assetsit+B8Return on Equity it+

B9Leverageit+B10Retained Earningsit +B11Cash Holdingsit+Ɛit 

(1) 

 

Where: 

β = Regression coefficient 

i= each Firm 

t= time dimension (years) 

Ɛ = Error term 

 

RESULTS AND DISCUSSION 

 
The descriptive analysis of the data gives a general outlook of the major variables of interest 

(macroeconomic factors, dividend policy and firm-specific factors). 

 

Table 2. Descriptive statistics  

Variable Obs. Mean Std. Dev (SD) Min Max 

 Dividend Payout Ratio 299 0.234 1.455 -20.29 13.166 

 Money Supply 299 4.716 0.338 4.136 5.256 

 Interest Rate 299 0.191 0.061 0.113 0.361 

 Inflation 299 0.151 0.117 0.079 0.541 

 Exchange Rate 299 0.323 0.183 0.117 0.679 

 Firm Size 299 5.907 1.092 2.762 8.396 

 Firm Age 299 46.565 24.427 6 126 

 Leverage 299 0.747 0.251 0.049 1.947 

 Return on Assets 299 0.056 0.115 -0.603 0.635 

 Return on Equity 299 1.032 17.317 -14.96 298.516 

 Cash Holdings 299 0.116 0.096 0 0.456 

 Retained Earnings 299 0.016 0.344 -1.572 0.821 

Source: Authors’ Compilation 

 

Descriptive Statistics 
The average of the dividend payout ratio variable is 0.234, which shows that, on average, firms remit 

a small proportion of their earnings as cash as dividends. The high standard deviation (SD) of 1.455 indicates 

a high volatility in the dividend behaviour of firms, with the highest payout being 13.166. The minimum 

value is negative (-20.29), which indicates that some firms paid dividends even in the years that they realised 

losses. Money supply showed an average of 4.716 with an SD of 0.338, ranging from 4.136 to 5.256. The 

interest rate averages 19.1% with a standard deviation of 0.061, ranging between 11.3% and 36.1%. The 

inflation rate has a mean of 15.1%, which indicates a moderately inflationary environment with a standard 

deviation of 0.117, ranging between 7.9% and 54.1%. The exchange rate variable showed an average of 

0.323 and an SD of 0.183, which ranges from 0.117 to 0.679.  

Regarding the analysis of the firm size, the mean value is 5.907 with an SD of 1.092. The mean firm 

age is 46.565 years, meaning that most of the firms in the sample are established firms and have been in 

operation for a long time. The SD of 24.427 demonstrates a high variation in the ages of firms, from the 

youngest being 6 years to the oldest being 126 years. The leverage variable has a mean of 0.747 with an SD 

of 0.251, implying some variation in the level of debt, although the leverage ratio varies between 0.049 and 

1.947.  



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The mean for the ROA is 5.6% with an SD of 0.115, ranging between -0.603 and 0.635. The ROE 

showed an average of 1.032 and an SD as high as 17.317, ranging between -14.96 and 298.516. Cash holdings 

has a mean of 11.6% of total assets with an SD of 0.096. Lastly, retained earnings have a mean of 0.016 and 

a standard deviation of 0.344, ranging from -1.572 to 0.821. 

 

Correlation Analysis 
The correlation investigates the strength and direction of relationships between dividend payout ratio 

and various macroeconomic and firm-specific variables while ensuring there are no multicollinearity issues. 

The correlation between the dividend payout ratio and money supply is a weak negative at -0.049. The 

relationship with interest rates is slightly positive at 0.056, while inflation has a modestly stronger positive 

correlation at 0.087. The exchange rate shows a weak positive correlation of 0.064. For firm-specific 

variables, firm size shows a negligible correlation with a dividend payout ratio of 0.004 and firm age at 0.021. 

Leverage has a low negative correlation of -0.040, while ROA has a weak positive correlation of 0.044. 

Interestingly, ROE shows a near-zero negative relationship at -0.007. Cash holdings correlate positively with 

the dividend payout ratio at 0.073, and retained earnings show a low positive correlation of 0.100. 

Among macroeconomic variables, money supply has a strong inverse correlation with the exchange 

rate at -0.949. The relationship between interest rates and inflation is high at 0.874, indicating that rising 

inflation tends to lead to higher interest rates, supporting central bank policies. Money supply and inflation 

correlate positively at 0.472. In firm-specific variables, leverage shows a significant negative correlation with 

ROA at -0.521, while retained earnings and leverage have a negative correlation of -0.699. Conversely, 

retained earnings and ROA correlate positively at 0.569, implying profitable firms can retain more earnings 

for growth or dividends. The pairwise correlation matrix reveals that no correlation coefficients among the 

independent variables exceed 0.90 (except for money supply and exchange rate), demonstrating that 

multicollinearity is not an issue in this analysis. Also, the study separates the macroeconomic variables in 

different models to help mitigate multicollinearity issues.



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Table 3. Pairwise correlations  

Variables Dividend 

Payout 

Ratio 

Money 

Supply 

Interest 

Rate 

Inflation Exchange 

Rate 

Firm 

Size 

Firm 

Age 

Leverage Return on 

Assets 

Return on 

Equity 

Cash 

Holdings 

Retained 

Earnings 

Dividend Payout 

Ratio 

1.000            

Money Supply -0.049 1.000           

Interest Rate 0.056 0.444 1.000          

Inflation 0.087 0.472 0.874 1.000         

Exchange Rate 0.064 -0.949 -0.451 -0.398 1.000        

Firm Size 0.004 0.245 0.111 0.120 -0.235 1.000       

Firm Age 0.021 0.153 0.064 0.070 -0.143 -0.041 1.000      

Leverage -0.040 0.147 0.105 0.111 -0.133 0.157 -0.121 1.000     

Return on Assets 0.044 -0.142 -0.065 -0.052 0.162 -0.085 0.174 -0.521 1.000    

Return on Equity -0.007 -0.019 0.024 0.001 -0.011 -0.007 -0.026 0.071 -0.025 1.000   

Cash Holdings 0.073 0.139 0.092 0.083 -0.135 0.284 0.150 -0.039 0.172 -0.051 1.000  

Retained 

Earnings 

0.100 -0.165 -0.094 -0.109 0.152 -0.058 0.265 -0.699 0.569 -0.066 0.277 1.000 

Source: Authors’ Compilation  



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Regression Results 
The GMM analysis covers four different models, and each model includes different macroeconomic 

variables to explain their impact on dividend payout, controlling for firm characteristics. The following 

observations can be made. 

 

Table 4. Dynamic panel-data estimation, two-step difference GMM 

 (1) (2) (3) (4) 

VARIABLES Dividend 

Payout Ratio 

Dividend 

Payout Ratio 

Dividend 

Payout Ratio 

Dividend 

Payout Ratio 

L.Dividend Payout Ratio -0.420*** -0.508*** -0.557*** -0.421*** 

 (0.0484) (0.0546) (0.0574) (0.0277) 

Money Supply 39.84***    

 (13.33)    

Interest Rate  7.612**   

  (3.254)   

Inflation   4.168**  

   (1.911)  

Exchange Rate    -15.61*** 

    (3.389) 

Control Variables     

Firm Size 19.08* 32.92*** 29.91*** 10.87** 

 (10.09) (11.25) (9.100) (5.270) 

Firm Age -4.805*** -2.261*** -2.030*** -0.997*** 

 (1.547) (0.513) (0.350) (0.363) 

Leverage 17.79 18.75 16.07 36.10*** 

 (13.65) (17.78) (18.84) (11.37) 

Return on Assets -22.62*** -36.04*** -37.64*** -9.294* 

 (8.657) (8.650) (7.945) (4.899) 

Return on Equity -0.00667 -0.00717 -0.00562 -0.0100** 

 (0.00499) (0.00777) (0.00789) (0.00396) 

Retained Earnings 49.48*** 68.67*** 61.57*** 61.56*** 

 (18.22) (20.56) (20.26) (13.39) 

Cash Holdings -0.385 -19.56 -26.78* -11.53*** 

 (7.472) (13.88) (15.31) (4.251) 

Diagnostics     

Wald chi2  9043.54 960.96  949.24  2706.04  

Prob > chi2  0.000 0.000 0.000 0.000 

 AR(1) z -0.97   -0.84  -0.86  -1.14 

 AR(1) Pr > z 0.331 0.399   0.387  0.254 

 AR(2) z   1.45 1.58   1.42    1.17 

 AR(2) Pr > z 0.146 0.114 0.156 0.242 

Sargan chi2 0.88 0.52 0.57 2.24 

Sargan Prob > chi2 0.990 0.998 0.997 0.896 

Hansen  test of  overid chi2  7.15 5.24 5.03 6.87 

Hansen  test of  overid Prob > chi2 0.307 0.514 0.539 0.333 

Hansen test excluding group chi2 2.05   2.32  2.22 1.76 

Hansen test excluding group Prob > chi2 0.358 0.313 0.329 0.415 

Instruments  15 15 15 15 

Observations 253 253 253 253 

Number of Firms 23 23 23 23 

Standard errors in parentheses 

*** p<0.01, ** p<0.05, * p<0.1 

Source: Authors’ Compilation 

  

In the analysis of the four models, the lagged dividend payout ratio variable (L. Dividend Payout 

Ratio) shows a significant negative coefficient, ranging from -0.420 to -0.557. This indicates that firms with 

higher past dividend payout ratios tend to reduce current payouts, confirming at the 1% significance level (p 

< 0.01) that past behaviour influences current dividend policies. In Model 1, the coefficient for money supply 

is positive (39.84, p < 0.01), suggesting that increased liquidity leads to higher dividends. Model 2 shows a 



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positive and significant coefficient for interest rates (7.612, p < 0.05), indicating that rising interest rates 

compel firms to offer higher dividends to attract investors. Model 3 reveals a positive and significant 

coefficient for inflation (4.168, p < 0.05), suggesting that firms may increase dividends to counteract 

inflation's impact on purchasing power. Model 4 displays a negative coefficient for the exchange rate (-15.61, 

p < 0.01), indicating that currency depreciation leads to a reduced dividend payout ratio. 

Firm size has a consistently positive effect on dividends across all models, with coefficients ranging 

from 10.87 to 32.92, while younger firms show a negative correlation with dividends. Leverage is positively 

linked to dividend policy but is significant only in Model 4 (36.10, p < 0.01). ROA inversely affects dividends 

(coefficients from -9.294 to -37.64), suggesting firms retain profits for reinvestment. ROE has a significant 

negative coefficient in Model 4 (-0.0100, p < 0.05), indicating that higher returns lead to profit retention. 

Retained earnings positively impact the dividend payout ratio across all models (49.48 to 68.67), suggesting 

firms with ample retained earnings can pay dividends. Lastly, the relationship between cash holdings and 

dividends is negative and significant only in Model 4 (-11.53, p < 0.01), indicating firms favour retaining 

cash for operations rather than distributing it. 

 

Model Diagnostics 
The study results using two-step difference GMM for dynamic panel data are presented, focusing on 

model diagnostics to assess credibility and soundness. Key diagnostics include Wald Chi-square statistics, 

autocorrelation tests, and over-identification tests. The Wald Chi-square statistic indicates a good model fit 

with p-values (p < 0.001), suggesting that the variables effectively account for variations in the dividend 

payout ratio. The AR(1) and AR(2) tests reveal no significant autocorrelation, reinforcing the model's 

validity. Moreover, Sargan and Hansen's p-values greater than 0.05 indicate the instruments used are valid. 

 

Discussion of results 
Effect of the money supply on dividend policy (Model 1) 

The positive and highly significant association between money supply and dividend payout ratio 

(coefficient: 39.84, p<0.01) observed in this study aligns with the studies done by Tran et al. (2019) and 

Mbaka (2022). A study by Tran et al. (2019) on Vietnamese firms also confirmed our findings. Likewise, 

Mbaka’s (2022) analysis of companies in Nairobi established that money supply has a direct and significant 

impact on the dividend payout ratio (β =0.310, p<0.000). Taken together, these papers imply that expansion 

in money supply results in higher dividend payments, perhaps because of enhanced liquidity in the economy. 

 
Effect of interest rates on dividend policy (Model 2) 

The positive and significant effect of interest rates on the dividend payout ratio (7.612, p<0.05) is 

somewhat different from some of the previous studies. Khan et al. (2018), in their study on Pakistani textile 

firms, also revealed that interest rates have a negative, insignificant impact. In the same way, Romus et al. 

(2020) also stated that the interest rate had no significant impact, and Rinanda (2022) also found the same 

thing. Contrary to these findings, our results indicate that in the Ghanaian context, higher interest rates may 

increase the dividend payout ratio, possibly as a way of attracting investors. This could be due to differences 

in economic environments, as those previous studies were done in Asia. 

 
Effect of inflation on dividend policy (Model 3) 

The positive and significant relationship between inflation and dividend payout ratio (4.168, p<0.05) 

observed in this study corresponds to some of the previous studies but not others. In their study of the US 

firms, Basse and Reddemann (2011) noted that inflation has a positive impact, which is consistent with this 

study. However, our findings are different from Yakubu (2019), who established that while inflation has a 

positive impact on the dividend policies of the listed banks in Ghana, the impact is insignificant. In the same 

regard, Mbaka (2022) found a positive but insignificant correlation between inflation and dividend payout 

ratio in firms in Nairobi (Kenya). It is rather surprising that our results differ from Yakubu’s (2019), given 

that both works examine Ghana, indicating that the connection between inflation and dividend policy may 

be contingent on the sector or period under consideration. Our use of GMM estimation instead of Yakubu’s 

pooled OLS and fixed/random effects models could also explain the differences in the results. Furthermore, 

Yakubu only focused on banks from the year 2006 to 2015. 

 
Effect of exchange rate on dividend policy (Model 4) 

The negative and highly significant effect of the exchange rate on the dividend payout ratio (-15.61, 

p<0.01) is in contrast to some of the earlier studies. Mbaka (2022) established a positive and significant 

correlation between exchange rates and dividend payout ratio (β=0.317, p<0.000) for companies in Nairobi 

(Kenya). In the same regard, Khan et al. (2018) found a significant and positive correlation between 

exchange rates and the dividend payout ratio in the Pakistani textile industry. Contrary to these findings, 



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130 

 

our results indicate that in the context of Ghana, currency depreciation results in lower dividend payments. 

This also differs from the findings of Rinanda (2022), whereby currency exchange rates have an insignificant 

impact on the dividend policies of Indonesian manufacturing firms during the global health crisis. 

 

CONCLUSIONS, RECOMMENDATIONS, AND IMPLICATIONS 

 

The purpose of this study was to investigate how macroeconomic variables affect the dividend policies 

of firms in Ghana. The findings indicate that these factors significantly influence the dividend payout ratio; 

specifically, money supply, interest rates, and inflation are positively related to dividend payments, while 

exchange rates have a negative impact. The positive correlation between money supply and dividends 

suggests that increased liquidity can enhance dividend distributions, indicating that monetary policy 

expansions may benefit shareholders. Conversely, higher interest rates appear to encourage firms to raise 

dividends to attract investors, countering the returns on fixed-income assets. Additionally, firms may use 

dividends as a hedge against inflation, thereby maintaining the purchasing power of shareholders to cover 

the shareholders’ purchasing power erosion to maintain the value of cash dividends. In contrast, currency 

depreciation reduces profits and limits cash available for dividends, prompting stricter dividend policies. 

This is particularly relevant for multinational corporations and foreign investors evaluating opportunities in 

Ghana amid exchange rate fluctuations. 

We recommend that corporate managers consider these macroeconomic factors when devising 

dividend policies and that investors factor them into their assessments of firms' dividend capacity. This 

research adds to the existing works on dividend policy in Africa. The study's limitation is its concentration 

solely on Ghanaian firms, which may affect the generalisability of the results. Further studies could compare 

these findings with those from other regions. Also, future research could explore how macroeconomic 

factors interact with firm characteristics and corporate governance systems to influence dividend strategies. 

 

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