Impact of Dividend Policy on Firm Performance of Shariah-Compliant Firms: Evidence from Pakistan

Abstract

This research aims to explore the relationship between dividend policy and firm performance in Shariah-compliant (SC), non-financial firms listed on the Pakistan Stock Exchange from 2016 to 2021. A dynamic panel of 66 SC firms was identified using Karachi Meezan index screening criteria, and fixed-effects regression models were selected based on BPLM and Hausman tests. Firm performance is measured through return on assets (ROA), and return on equity (ROE), whereas dividend policy is represented by the dividend payout ratio (DPO), dividend per share (DPS), and dividend yield (DY). The empirical findings indicate that DPO has a positive and significant impact on both ROA and ROE, supporting signaling and agency cost theories. In contrast, DPS showed a weak positive association with ROA, and an insignificant relationship with ROE, while DY remains insignificant in both models. The F-statistics and moderate R² values confirm the overall robustness and explanatory strength of the models. These results provide practical knowledge to corporate managers and investors who aim to ensure that their financial decisions are aligned with profitability and ethical observance. This study fills the gap in the literature on Islamic corporate finance, as it has empirically validated the significance of dividend policy as a key determinant of performance under the SC framework. The findings may not be generalizable to other Islamic markets or conventional firms; however, they contribute fresh, statistically reliable evidence on how dividend behavior influences firm performance in an emerging Islamic market.