The Impact of Ownership Structure on Dividend Policy & Capital Structure in Pakistani Small Firms: A Mediating Role of Profitability

Abstract

The aim of this research study implicates the critical impact of ownership structure on dividend policy and capital structure in small Pakistani firms, highlighting the mediating role of profitability. Addressing a significant gap in the literature, the research focuses on small enterprises often overlooked in favour of larger firms. By analysing the secondary data from 200 small businesses listed on the Pakistan Stock Exchange (PSX) from 2016 to 2023, the study examines how ownership structure (managerial & institutional ownership) patterns influence dividend policy (dividend payout). Findings indicate that ownership structure (managerial & institutional ownership) significantly shapes financial strategies, with profitability acting as a crucial mediator. Managerial ownership is negatively associated with capital structure (leverage) and dividend policy (dividend payout), while institutional ownership shows a positive correlation. Empirical analysis using ANOVA, correlation, and Two-Stage Least Squares (2SLS) regression are used for analysis of collected data with help of EViews software reveals that institutional ownership significantly impacts financial decisions more than managerial ownership. The study's understandings are valuable for small business owners, investors, and policymakers, providing a framework for better decision-making to foster growth and sustainability in small firms in Pakistan. Future research could expand on these findings by exploring different ownership models and incorporating qualitative methods for a deeper understanding of small business financial strategies.