Impact of Debt and Dividend Policy on Firm Performance: Empirical Insights from Ethiopia

Abstract: Debt and dividend policies are crucial financial decisions for a firm because these decisions significantly impact a firm's performance. The study aims to investigate whether debt and dividend payout decisions affect firm performance in the context of developing markets. A balanced panel data from 24 Ethiopian microfinance institutions over 2012 to 2021 was analyzed using the generalized method of moments model to address endogeneity issues. The study found mixed results regarding the relationship between debt ratio and firm performance. Specifically, the study found that debt ratio has a significant positive correlation with firm performance, as measured by ROA, while it has no significant correlation with firm performance if ROE is used as a performance indicator. The study also found that the dividend payout ratio has a statistically significant positive relationship with firm performance, as measured by ROE and ROA. This implies that paying dividends has resulted in enhancing the firm’s performance. Given the overall significance of corporate financial decisions, this study provides implications for shareholders, decision-makers, and regulatory bodies to reformulate the debt and dividend payout ratio level so that firms promote their financial decisions and, in turn, improve firm performance. Keywords: Debt Ratio, Dividend Payout Ratio, Return on Equity, Return on Assets, Firm Performance, Corporate Financial Policy