The relationship between capital structure and dividend policy: Evidence from Euronext Lisbon companies

Abstract

Both the capital structure and the dividend policy themes have been the subject of intensive study, but without major conclusions. There are several studies that assume the exogenous relationship between the capital structure and the respective explanatory variables, and the same is verified for the dividend policy. Recently, academics have been questioning the hypotheses of the relationship between capital structure and dividend policy being endogenous, meaning capital structure decisions influence dividend policy ones and vice-versa.

The main objective of this paper is to find evidence to confirm an eventual relationship between the capital structure and the dividend policy. Therefore, an econometric model as built, based on two different methodologies, to allow the confirmation, or not, of the objective previously described, as well as understand which factors are determinants in the capital structure theme and in the dividend policy puzzle.

This study, as far as we know, is the first to try out this analysis between the two themes, considering the economic and business context of Portugal. Thus, no evidence was found to confirm the existence between the capital structure and the dividend policy of the Euronext Lisbon companies. However, evidence was found that allows the conclusion that the pecking order theory is the most adequate in the explanation of the capital structure theme and evidence was found of the non-acceptance of the irrelevance hypothesis of dividends.