The inter-relationship between capital structure and dividend policy: empirical evidence from Jordanian data

The study investigates the under-researched relationship between capital structure and dividend policy in emerging markets with regard to the Jordanian market. The empirical analysis focuses on the estimation of both single equation models and structure equation models using the reduced form equations to examine the joint determinants of capital structure and dividend policy. The study investigates whether capital structure and dividend policy theories can explain the financial decisions in emerging market such as the Jordanian market. Namely, the study examines agency theory, signalling theory, pecking order theory and bankruptcy theory. The results indicate that there is a positive relationship between debt-to-asset ratio on the one hand, and asset tangibility, profitability, market-to-book, liquidity, firm size, and industry classification on the other hand. Also, there is a negative relationship between debt-to-asset ratio and profitability. In addition, there is a positive relationship between dividend payout ratio on the one hand, and profitability, asset tangibility, market-to-book and industry classification on the other hand. Finally, the results of the reduced form equations show that capital structure and dividend policy have the following common factors: profitability; asset tangibility; market-to-book; industry classification; and limited evidence of institutional ownership. Therefore, the determinants of capital structure and dividend policy in emerging markets such as the Jordanian market share the same set of suggested factors with the developed markets.