The moderating effect of audit quality and COVID-19 on the dividend payout-firm performance relationship: Egypt evidence

Abstract

This study examines the moderating influence of audit quality on the relationship between dividend payout and corporate financial performance in emerging markets. Further, it investigates if the COVID-19 pandemic influences the relationship between dividend payout and corporate financial performance. This study uses a sample of non-financial firms listed on the Egyptian Stock Exchange’s EGX 100 Index during 2015–2021, which was beneficial to capture the influences brought about by the COVID-19 pandemic that broke out in late 2019. Pooled Ordinary Least Square (OLS), fixed effect regressions with Robust Standard Errors, and the system GMM estimations are used to examine the research hypotheses. We found that dividend payout has a significant positive influence on corporate financial performance. However, the interaction term between dividend payout and audit quality has an insignificant influence on financial performance, which indicates the low quality of audits conducted in emerging markets. Finally, consistent with the widely reported economic consequences of the latest pandemic, the interaction term between dividend payout and COVID-19 has a significant negative effect on financial performance. This study contributes to the literature by examining the moderating influence of audit quality on the association between dividend payout and financial performance in an emerging African market.

IMPACT STATEMENT

By considering the role that can be played by determinants or moderating factors such as audit quality and the COVID-19 pandemic, investors could be better equipped to project corporate dividend policies and their implications for companies’ performance and devise their investment strategy effectively.

Keywords:

• Dividend payout
• financial performance
• audit quality
• COVID-19
• Egypt

REVIEWING EDITOR:

• Collins Ntim, University of Southampton, United Kingdom of Great Britain and Northern Ireland

JEL CLASSIFICATIONS:

• M41
• M42

1. Introduction

Dividend payout is the level of a company’s earnings paid out as dividends to shareholders (see Nissim & Ziv, 2001). Dividend payout is crucial because it not only represents payments to shareholders but also can indicate or signal to investors concerning the present and future corporate performance (Lintner, 1956; Farrukh et al., 2017; Bossman et al., 2022). However, dividend payout is one of the highly debatable problems in the corporate finance literature (Amidu, 2007). While some studies negated its influence on corporate performance (Chen et al., 2002; Irum et al., 2012), others have supported its possible impact on corporate performance (DeAngelo & DeAngelo, 2006; Kim et al., 2021). Further, other scholars have tried to identify the determinants of dividend payout and its implications (Kaźmierska-Jóźwiak, 2015). However, still, we do not have a universally accepted explanation of the dividend behaviour of firms working in developing markets and the factors that can influence such behaviour (Samuel & Edward, 2011; Farrukh et al., 2017).

Dividend payout can be influenced by various organizational factors, including financing restrictions, investment opportunities, corporate size, shareholders’ pressures, and regulatory regimes (Kaźmierska-Jóźwiak, 2015). However, it is also vital to address other factors beyond the organizational ones to fully view the variables that can influence dividend payout and derive its implications. In this regard, some studies focused on the impact of governance mechanisms (Jiraporn et al., 2011; Mehrani et al., 2011; Gyapong et al., 2021; Elmagrhi et al., 2017), and others studied the influence of the financial crisis of 2008/2009 (Hauser, 2013; Lim, 2016). However, a few studies examined the impact of audit quality (Bakri, 2021; Sarhan et al., 2019; Kamaludin et al., 2023) and recent global health crises, especially the COVID-19 pandemic (Zheng, 2022; Ali et al., 2022), where this study contributes to the literature. In particular, the current work examines the moderating influences of audit quality and the COVID-19 pandemic on the association between dividend payout and corporate financial performance.

This study argues that audit quality can play a part concerning dividend payout and its impact on corporate financial performance. This argument is based on the view that, from an agency perspective, external audits can work as a monitoring device, protecting the interests of minority shareholders from insiders’ harmful practices (Sawicki, 2009). Audit quality can work as a control mechanism over corporate management behaviour, which may ultimately influence dividend payout decisions (Jiraporn et al., 2011). As higher audit quality can result in higher levels of financial reporting transparency (Sayyar et al., 2015; Fu et al., 2015), as per the signalling theory, it is anticipated that this audit quality, along with the concomitant reporting transparency can result in more dividends to signal a promising firm performance (Bakri, 2021).

Additionally, we argue that recent crises, such as the latest COVID-19 pandemic, can have implications for dividend payout because of the expected serious impacts of such crises on business performance (Donthu & Gustafsson, 2020). The new implications brought about by COVID-19 had significant influences on governmental policies (Roziqin et al., 2021) and corporate policies and conduct (OECD., 2020a), including dividend-related policies (Ali et al., 2022). However, the literature concentrates on the influences of government responses and policies concerning the COVID-19 pandemic, with very few studies focusing on the impact of this recent pandemic on corporate policies such as dividend-related policies. Considering the above, the present work seeks to answer three related questions to comprehend the moderating influences of audit quality and the COVID-19 pandemic on the association between dividend payout and firm performance in an emerging market: (1) What is the influence of dividend payout on firms’ performance? (2) Does audit quality have a moderating influence on the association between dividend payout and firms’ financial performance? (3) Does the COVID-19 pandemic have a moderating influence on the association between dividend payout and firms’ financial performance?

Because dividend-related policies differ across contexts, particularly between developed and developing markets (Amidu, 2007), it is crucial to examine dividend payout and its implications in emerging markets where a limited number of studies are available compared to the case of developed ones (e.g. Ramcharran, 2001). In the present study, we focus on a developing market—the Egyptian stock market. Egypt is selected as the context of this study because of its unique features compared to other developed and developing countries, which can affect dividend payout and its implications. In particular, Egypt is a code law country where various issues are centrally developed by the state, including accounting regulations (El-Sayed Ebaid, 2012). Also, as an emerging market, the Egyptian market still suffers from a weak legal environment, weak investor protection, and a lack of enforcement of control mechanisms (Bremer & Elias, 2007; Mostafa, 2016; Diab et al., 2021). In response to these issues, recent audit-related reforms were introduced in the country, such as updating the corporate governance code in 2016 and establishing the Egyptian Financial Supervisory Authority (EFSA) that urged nonfinancial firms to have audit committees with independent auditors representing the majority of these committee’s members. These institutional characteristics could influence the quality of financial reporting and audit engagements and their implications for organisational practices and policies, including dividend payout (see El-Sayed Ebaid, 2012; Diab et al., 2022).

By testing the study hypotheses, we found that dividend payout has a significant positive impact on firm financial performance. However, the interaction term between dividend payout and audit quality has an insignificant influence on corporate financial performance. Yet, the interaction term between dividend payout and the COVID-19 pandemic negatively influences corporate performance. Our results contribute to the literature by, firstly, highlighting the impact of external audits and recent global crises on dividend payout and its implications for firm performance (Brown & Caylor, 2006). Secondly, the current results indicate that emerging market investors, by paying higher attention to determinants or moderating factors such as audit quality and the COVID-19 pandemic, would be better equipped to project dividend payout and corporate performance and devise their investment strategy accordingly. Finally, this study gives a view of the audit process in developing markets, such as the Egyptian audit environment, and its implications for corporate financial performance.

The paper is organised as follows. Section 2 presents a contextual background of the study. Section 3 introduces the theoretical perspective and literature review. Section 4 outlines the methods used to conduct this research. Finally, sections 5 and 6 clarify the research findings and conclude the paper.

2. A Contextual background

In Egypt, the COVID-19 pandemic represented an enormous shock for the economy, which faced significant capital outflows of more than $15 billion during early 2020 as investors pulled out of emerging markets in a flight to safety. However, Egypt was one of the few developing markets that had a positive growth level in 2020 due to the short period of lockdown and the country’s diversified economy (OECD., 2020b; International Monetary Fund, 2021). Thus, it is interesting to examine how the COVID-19 pandemic had implications for various corporate issues, inducing corporate performance, audit practices, and corporate policies such as dividend payout (Cejnek et al., 2021; Ali et al., 2022).

This is especially important considering the unique situation of the audit profession in Egypt. In particular, the audit profession in Egypt is noted to be the responsibility of three main parties: the Egyptian Society of Accountants and Auditors initiated in 1946, the Central Auditing Organization developed in 1964 and the EFSA developed in 2009. Auditors working in Egypt should comply with the Egyptian auditing standards in addition to any international auditing standards relating to other aspects of the audit function (Soliman & Abdel Salam, 2013). However, Egypt has a unique and complex auditing market that can influence audit quality (El-Dyasty & Elamer, 2021). In particular, there is no mandatory auditor rotation in the Egyptian market, which results in different audit firms following variant auditor rotation policies (Anis, 2014). Further, the Egyptian publicly-held companies are allowed to have joint audits—that is, to engage more than one auditing company, whether local or foreign. These unique features motivated us to test the influence of audit quality as a factor that can affect the relationship between dividend payout and firm performance.

3. Literature review and hypotheses development

Miller and Modigliani (1961) view the dividend payout policy as irrelevant to affecting shareholder wealth. They believe that it is the corporate earnings that might affect shareholder wealth. In contrast, according to the dividend relevance theory, dividend payout can be perceived as a positive sign of the corporate image. According to the dividend relevance theory, dividends are more than just a distribution of profits. Instead, dividends are perceived as a mechanism to enhance shareholders’ wealth (Pandey, 1999). Hence, corporate management should pay more attention to their dividend payout policy to better achieve shareholders’ interests (Baker et al., 2002). By effectively determining what funds to allocate to investors and what funds to be retained in the business for investment, dividend payout can provide or signal information about corporate performance (Foong et al., 2014). In contrast, not paying dividends might indicate a situation of uncertainty and higher risks to investors.

Similarly, from the signalling theory perspective, dividend payout convoys positive information about the firm to the market constituents (Chaabouni, 2017), which could be perceived as a positive signal of higher financial performance (Farrukh et al., 2017). From this perspective, an announcement of a dividend payout is used by managers to communicate private information to investors (Baker et al., 2002). This can indicate the ability of the company to generate cash, which ultimately can result in favourable corporate consequences such as enhancing the company’s reputation and shareholder wealth (Al-Hasan et al., 2013; Kim et al., 2021).

From the agency theory perspective concerned with the conflict of interests between managers and owners or investors (Jensen & Meckling, 1976), an excess cash flow could result in an agency issue in the company. This is because corporate management might not utilize this extra cash in the most profitable investments; instead, they could utilize it in a way that primarily serves their interests. Thus, it is believed that having a consistent dividend payout policy could serve as a monitoring mechanism over corporate management behaviours—that is, it can help decrease agency issues and hence, the agency cost (Farrukh et al., 2017).

3.1. Dividend payout and firm performance

From the agency perspective, managers might invest in projects with negative net present value rather than paying dividends to investors (Jensen, 1986). In contrast, dividend payout is anticipated to enhance investment efficiency or reduce over or under-investments by decreasing the level of excess cash available to management discretion (Easterbrook, 1984). This is also based on the idea that dividend payout forces companies to resort to the stock market for more equity capital, which, in turn, enhances the monitoring and scrutiny activities of the stock market over these companies, which can reduce the agency problem (Moin et al., 2020).

Some scholars did not support the association between the dividend payout and corporate performance or firm value (Chen et al., 2002; Irum et al., 2012). In this regard, DeAngelo et al. (2004), for instance, did not see a correlation between dividend payout and future earnings. Amidu (2007) found no significant association between dividend payout and Tobin’s Q coefficient. As per Amidu (2007), the aforementioned positive effects of the signalling view apply only to high-quality firms rather than poor-quality ones due to the dissipative signalling costs like transaction cost of external financing, tax penalty on dividends, and distortion of investment decisions. Malombe (2011) found an insignificant effect of dividend payout on Kenyan firms’ financial performance. Focusing on Nigeria, Osamwonyi and Lola-Ebueku (2016) reported an inverse relationship between dividend payout and corporate earnings. Focusing on Malaysian firms, Bakri (2021) revealed that dividend payout harms corporate value.

In contrast, consistent with the signalling view, some studies supported the relevance of dividend policies to influence firm performance (Rigar & Mansouri, 2003; DeAngelo & DeAngelo, 2006; Nwamaka & Ezeabasili, 2017; Kim et al., 2021). For instance, Uwuigbe et al. (2012) revealed that dividend payout is related to higher performance of Nigerian companies. In the same context, by focusing on Nigerian public companies, Ozuomba et al. (2016) reported a positive relationship between dividend payout and shares’ market value (Iminza, 1997; Shah & Mehta, 2016; Chaabouni, 2017). These studies support the role of the information content of dividends in indicating the company’s capability to generate future earnings (Iminza, 1997). In this regard, focusing on the Chinese market, Wang et al. (2013) found that cash dividends are positively associated with firm value. Focusing on the hospitality sector in Sri Lanka, Priya and Nimalathasan (2013) found that dividend payout significantly affects corporate performance ratios. Focusing on Pakistan firms, Farrukh et al. (2017) found that dividend payout positively influences shareholder wealth. Along with this view, considering the emerging nature of the Egyptian market, we believe that dividend payout can work as a control mechanism to improve companies’ performance. Thus, we set the first hypothesis as follows:

• H1: Dividend payout is significantly and positively associated with corporate performance.

3.2. The moderating effect of audit quality

From the agency theory perspective, good monitoring and control mechanisms can work as checks and balances between investors or owners and management, reducing agency conflicts between them (Renders & Gaeremynck, 2012). From this perspective, it is believed that an effective monitoring mechanism would force corporate management to distribute more cash, which decreases the excess cash left for management opportunistic behaviours (Sawicki, 2009). This invites us to address the effect of external audit quality as a beneficial monitoring or control mechanism over corporate management behaviours and practices (Khelil, 2023; Khelil et al., 2023).

Having effective monitoring and control mechanisms is especially needed in countries with ineffectual control institutions and modest levels of investors’ protection, as in many developing countries like Egypt, the empirical context of this study. The unique institutional context in these countries might have different implications for audit quality, compared to the case in developed markets (Awadallah, 2020). For example, Abor and Fiador (2013) found that governance measures have inverse effects on dividend payout in Nigeria. However, in Ghana, they revealed that higher dividend payout is related to effective governance and control measures, which contributed to maintaining investors’ rights.

The anticipated positive effects of audit quality are based on their possible role in reducing information asymmetry, mitigating financing costs, decreasing management’s opportunistic behaviour, and convoying positive information to shareholders (Huguet & Gandía, 2016). Further, an audit quality indicates that financial statements fairly represent the company’s economic events (Fu et al., 2015). This is because the professional expertise of auditors could increase trust in financial reporting and practices in a way that can influence corporate financial decisions, including dividend payout-related decisions (Zahid et al., 2022; Zahid & Simga-Mugan, 2022). In other words, the presence of auditors, as a monitoring mechanism over management with their experience and rigour, could influence corporate financial performance and hence the ability of the company to distribute dividends (see Deshmukh, 2003; Mitton, 2004; Zahid et al., 2022).

From this perspective, companies with robust monitoring and control mechanisms, especially external audit quality, are anticipated to have higher dividend payouts (Adjaoud & Ben-Amar, 2010; Erdas & Simoes, 2020). In this regard, Deshmukh (2003) noted that higher information asymmetry brought about by ineffective audits results in lower dividend payout. Using Australian data, Farooque et al. (2021) noted that Big 4 audit companies have a significant and positive effect on dividend payout. Bakri (2021) found that the audit quality of Malaysian-listed firms has moderated the reported negative association between dividend payout and corporate value. Using U.S. data, Hendijani Zadeh (2022) found that high-quality audits are negatively related to low corporate cash reserves, indicating the existence of more dividend payout. Along with these studies, we believe that audit quality can affect the relationship between dividend payout and corporate performance. Hence, we set the second hypothesis as follows:

• H2: Audit quality moderates the association between the dividend payout and corporate financial performance.

3.3. The moderating effect of the COVID-19 pandemic

The occurrence of crises is anticipated to affect the willingness of firms to distribute dividends (Kilincarslan, 2021). This is due to the possible (negative) effects of such a crisis on companies’ investment, activities, earnings, and financing activities, i.e. due to the concomitant uncertain economic circumstances and financial constraints that can reduce the free cash available for dividend payout (Tinungki et al., 2022; Zheng, 2022). Some studies have examined the influence of the 2008 global financial crisis on dividend payout (Batuman et al., 2022). For instance, focusing on Southeast Asia, Sawicki (2009) reported a significant reduction in dividends during the financial crisis to maintain the cash and liquidity levels that became essential during this difficult time. Reddemann et al. (2010) reported a negative effect of the financial crisis on dividends. Hauser (2013) noted a reduction in the willingness to pay dividends in the U.S. during the financial crisis period. Lim (2016) found that dividend levels decreased in the U.S., Germany, Australia, China, Japan, and South Korea during the financial crisis because maintaining cash levels during this time was considered crucial for business operations’ stability.

Regarding the impact of the recent global health crisis of COVID-19, Krieger et al. (2021) observed apparent dividend cuts by U.S. companies in late 2020 compared to the 2008 financial crisis. Likewise, Hardy (2021) reported a reduction in dividend payout because of the severe influence of the COVID-19 pandemic on the U.S. banking sector, which was considered necessary to finance primary activities and achieve bank stability. Similarly, Krieger et al. (2021) noted a reduction in dividend levels by U.S. companies during the pandemic. Also, using European data, Cejnek et al. (2021) found a significant increase in the firms that decreased dividend payout during the pandemic. Using U.S. data, Zheng (2022) indicated that the COVID-19 pandemic could negatively influence dividend payout. Focusing on the Pakistani context, Ali et al. (2022) noted that the percentage of dividend cuts has risen considerably during the pandemic. Focusing on South Africa, Buertey et al. (2023) found that COVID-19 negatively influences dividend payout.

The above-mentioned view supports the importance of maintaining cash holdings during significant crises, i.e. when the market circumstances are severe (Zheng, 2022), in contrast to the previously mentioned signalling view that supports higher dividend payout, which may be appropriate at normal times. However, some scholars supported the signaling view during the pandemic (e.g. Mazur et al., 2021 in the U.S. market; Tinungki et al., 2022 in Indonesia; Ali et al., 2022 in Pakistan). For instance, Ali (2022) indicated that companies could maintain their dividend payout during this critical time to convey to investors the earnings potential of their businesses. Supporting this view, Abdulkadir et al. (2015) found that dividend reduction during global crises had a negative signal concerning Nigerian firms’ performance. Hence, according to this view, by maintaining or increasing their dividend rates during the pandemic, firms can send positive signals to investors to support trading in the stock market (Tinungki et al., 2022). Additionally, in contrast to the above noted results, by concentrating on the hospitality sector in Indonesia, Purnamasari and Fauziah (2022) did not observe a significant association between dividend payout and firm value during 2019-2020, i.e. following the COVID-19 pandemic.

The mixed findings of these studies, which are conducted in various contexts, indicate the context dependence on the influence of crises on dividend payout or the necessity of understanding the dividend dynamics concerning the context in which they are applied. In the present work, we examine the dividend payout-firm performance relationship by focusing on the developing Egyptian market. In Egypt, due to the pandemic, as indicated in section 2, the debt-to-GDP ratio jumped to 35% in 2020 compared to 15% in 2010, and the external debt jumped from $115 billion in 2019 to $130 billion in 2020 with an increase of 14% (El Mahdy, 2022). It is reported that firms with higher debt levels, such as Egypt, faced further liquidity risks during the recent crisis as they were highly vulnerable to economic and financial uncertainties (El Mahdy, 2022). These negative economic consequences might indicate the unavailability of cash during the pandemic or the preservation of cash to face this pandemic’s negative financial and economic influences. Hence, considering the inverse economic effects of the pandemic on the emerging Egyptian market and the financial performance and liquidity of Egyptian firms, we believe that the COVID-19 pandemic might have an inverse moderating influence on the dividend payout-firm performance relationship. Thus, we formatted the last hypothesis as follows:

• H3: The COVID-19 pandemic moderates the association between the Dividend payout and corporate financial performance.

4. Methodology, data, and model specification

4.1. Sample selection

The sample population comprises non-financial companies listed on the Egyptian Stock Exchange’s (ESE) EGX 100 index that includes the most active 100 listed firms in the Egyptian stock market. Thus, the financial and insurance sector companies (21 companies) were deleted from the sample due to being subject to variant regulatory requirements, which makes them incompatible with other industries (Abdelazim et al., 2022). The study period spanned from 2015 to 2021, which enabled the researchers to capture the influences brought about by the COVID-19 pandemic that broke out in late 2019. Companies with missing data or incomplete annual reports (14 companies) were eliminated. This study’s final sample consists of 455 observations from 65 non-financial public listed firms on the ESE from 11 industries. Table 1 contains information about these firms.

Table 1. The sample structure.

N	Industry sector	No. of firms	No. of observations	%
1	Food and beverages	12	84	18.5
2	Constructions and building materials	9	63	14
3	Industrial and Car products and services	6	42	9.5
4	Tourism and entertainment	7	49	10.5
5	Housing and real estate	8	56	12.4
6	Chemicals	4	28	6.2
7	Basic Resources	5	35	7.5
8	Textiles and durable goods	4	28	6.2
9	IT & Communication Services	3	21	4.5
10	Trade & Distributors	4	28	6.2
11	Healthcare	3	21	4.5
	Total	65	455	100%

4.2. Variables measurement

4.2.1. The dependent variable: Tobin’s Q

Firm performance is the dependent variable, with Tobin’s Q used as a proxy to gauge firm performance. Tobin’s Q is one of the most widely used indicators in previous studies to estimate firm performance (Barth et al., 2017). This proxy is measured as the market value of equity plus the book value of liabilities divided by the firm’s total assets (Bakri, 2021; Dang et al., 2021).

4.2.2. The independent variable: Dividend payout ratio

The current study uses the dividend payout ratio as an indicator of dividend payout. The dividend payout ratio is measured as total dividend payments divided by the firm’s total assets (Herdhayinta et al., 2021; Trinh et al., 2022).

4.2.3. Moderating variables

The current study has two moderating variables: audit quality and the COVID-19 pandemic. Firstly, to proxy for audit quality, the current study utilizes two main proxies. The Big Four audit companies are used as the first measure of audit quality: a company audited by the Big Four audit firms is given a value of 1 and 0 otherwise. Further, following previous studies like Abu Afifa et al. (2023), we use the specialization of audit firms in particular industries as another measure of audit quality, where a score is assigned based on whether or not the firm is audited by a specialist firm in the industry. The more the knowledge and skills of the auditor in a particular industry, the higher the audit quality. Secondly, in Egypt, according to the World Health Organization, the COVID-19 pandemic broke out in January 2020 and its effects continued in 2021¹. Thus, in this study, the COVID-19 pandemic variable is measured as a nominal variable, taking the value of 1 during 2020 and 2021, and 0 otherwise (Ali et al., 2022).

4.2.4. Control variables

This study controls for firm size measured as the natural logarithm of total assets. We also control for financial leverage calculated as the ratio of total debt to total assets (Bakri, 2021; Dakhli, 2022). Table 2 shows the operational definitions of this study’s dependent, independent, moderating, and control variables.

Table 2. Variables calculation and expected signs.

Variables	Types of variables	Variable Code	Calculating method	Expected signs
Firm performance	Dependent	Tobin’s Q	(Total market value of equity + net debts) / Total book value of assets.	–
		ROA	Net income divided by total assets
Dividend Payout Ratio	Independent	DIV	Total dividend payments / Total outstanding assets	(+)
Audit quality	Moderator	AQBIG4	It is a nominal variable that a company audited by the Big Four audit firms would take the value of 1 and 0 otherwise.	(+)
		AQSPEC	The measurement of whether a company is audited by an industry-specialist audit firm is represented as a binary variable. It takes on a value of one if the auditing firm has a market share equal to or greater than 10% in the client sector, and zero if not.
COVID	Moderator	COVID 19	It is a nominal variable that takes the value of 1 during the years 2020 and 2021 and 0 otherwise.	(−)
Leverage	Controlled	LEV	% of total liabilities to total assets	(−)
Firm Size	Controlled	SIZE	The natural logarithm of total assets	(+)

4.3. Research models

To test the hypotheses in this study, Pooled Ordinary Least Square (OLS) and fixed effect (FE) regressions with Robust Standard Errors have been applied to mitigate the concerns of heteroscedasticity and autocorrelation. We regressed the dividend payout ratio on firm performance, the control variables (SIZE and LEV), the two moderating variables (audit quality and COVID), and for industry and year-fixed effects to examine this study’s hypotheses, as per the following regression models: (1) $$\mathit{\text{Tobin}}\text{'}s\hspace{0.17em}{Q}_{\mathit{\text{it}}}={\beta }_0+{\beta }_1\mathit{\text{DI}}{V}_{\mathit{\text{it}}}+{\beta }_2\mathit{\text{SIZ}}{E}_{\mathit{\text{it}}}+{\beta }_3\mathit{\text{LE}}{V}_{\mathit{\text{it}}}+{\beta }_t+\hspace{0.17em}{\beta }_{\mathit{\text{ind}}}+\hspace{0.17em}{\epsilon }_{\mathit{\text{it}}}$$(1) (2.A) $$\mathit{\text{Tobin}}\text{'}s\hspace{0.17em}{Q}_{\mathit{\text{it}}}={\beta }_0+{\beta }_1\mathit{\text{DI}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_2\mathit{\text{SIZ}}{E}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_3\mathit{\text{LE}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_4\mathit{\text{AQBIG}}{4}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_5\left(\mathit{\text{DIV}}*\hspace{0.17em}\mathit{\text{AQBIG}}{4}_{\mathit{\text{it}}}\right)+{\beta }_t+{\beta }_{\mathit{\text{ind}}}+{\epsilon }_{\mathit{\text{it}}}$$(2.A) (2.B) $$\mathit{\text{Tobin}}\text{'}s\hspace{0.17em}{Q}_{\mathit{\text{it}}}={\beta }_0+{\beta }_1\mathit{\text{DI}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_2\mathit{\text{SIZ}}{E}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_3\mathit{\text{LE}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_4\mathit{\text{AQSPE}}{C}_{}{}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_5\left(\mathit{\text{DIV}}*\mathit{\text{AQSPE}}{C}_{\mathit{\text{it}}}\right)+{\beta }_t+{\beta }_{\mathit{\text{ind}}}+{\epsilon }_{\mathit{\text{it}}}$$(2.B) (3) $$\mathit{\text{Tobin}}\text{'}s\hspace{0.17em}{Q}_{\mathit{\text{it}}}={\beta }_0+\hspace{0.17em}{\beta }_1\mathit{\text{DI}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_2\mathit{\text{SIZ}}{E}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_3\mathit{\text{LE}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_4\mathit{\text{COVI}}{D}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_5\left(\mathit{\text{DIV}}*\mathit{\text{COVI}}{D}_{\mathit{\text{it}}}\right)+{\beta }_t+\hspace{0.17em}{\beta }_{\mathit{\text{ind}}}+\hspace{0.17em}{\epsilon }_{\mathit{\text{it}}}$$(3)

Where: Tobin’s Q is firm market performance, DIV is the dividend payout ratio, LEV is financial leverage, SIZE is firm size, AQBIG4 is big four audit firms, AQSPEC is an industry-specialist audit firm, COVID_itis the COVID-19 pandemic, (DIV*AQBIG4_it, DIV*AQSPEC_it)is the interaction term between dividend payout ratio and audit quality, DIV*COVID_itis the interaction term between dividend payout ratio and the COVID-19 pandemic, β_t is time-fixed effects, β_ind is industry-fixed effects.

4.4. Data appropriateness

We conducted multiple examinations to verify the adequacy of the data for statistical analysis and to ensure its freedom from statistical errors that may result in statistical concerns such as bias (Hair et al., 2010). To investigate the problems of heteroscedasticity and autocorrelation, we used Breusch–Pagan/Cook–Weisberg and Wooldridge tests. The findings of the Breusch-Pagan/Cook-Weisberg test revealed the presence of heteroscedasticity (p-value = 0.000), while the results of the Wooldridge test show the presence of an autocorrelation in the regression models (p-value = 0.000). Hence, we adopted the robust estimating approach for standard errors to address the problems of heteroscedasticity and autocorrelation, as it represents an effective method of dealing with these issues.

Concerning the multicollinearity problem, the correlation matrix is presented in Table 4, where the coefficients are within the average limit (0.40 and 0.50), indicating no multicollinearity among independent variables. Furthermore, multicollinearity can be revealed using the variance inflation factor (VIF): if its value is more than 10, the multicollinearity issue will be considerable (Gujarati & Porter, 2009). Our data revealed no multicollinearity concern.

Table 4. Correlation matrix and VIF results.

Variables	Tobin’s Q	DIV	SIZE	LEV	AQBIG4	AQSPEC	COVID-19	VIF	1/VIF
Tobin’s Q	1							–	–
DIV	0.370***	1						1.23	0.815
SIZE	0.103**	0.280***	1					1.40	0.714
LEV	−0.153***	−0.230***	−0.079*	1				1.12	0.891
AQBIG4	0.123***	0.034	0.455***	−0.107**	1			2.92	0.342
AQSPEC	0.359***	0.070	0.320***	−0.049	0.771***	1		2.52	0.396
COVID	−0.082*	−0.046	0.039	0.032	−0.019	−0.001	1	1.01	0.991
Mean VIF								1.70

Notes: ***, **, and *denote Correlation is significant at the 1, 5, and 10 percent levels. ROA, the firm performance; DIV, the dividend payout ratio; LEV, leverage; SIZE, firm size; AQBIG4, the big four audit firms; AQSPEC, the specialisation of audit firms; COVID, COVID-19 pandemic.

In addition, an examination was conducted using the Breusch and Pagan’s Lagrange multiplier (LM) test to compare the pooled OLS model with the random-effects model. The findings of the test showed that the null hypothesis needs to be rejected in favour of the random-effects model. Subsequently, we used the Hausman test to distinguish between the random and fixed-effects models. The statistically significant findings (prob > chi2 < 0.05) implied that the assumptions for the random-effects estimation were violated. Hence, we believe that employing fixed effects would yield more consistent and efficient outcomes when executing all the regression models.

5. Analyses and findings

5.1. Descriptive statistics

Table 3 summarises descriptive statistics. The average (median) of Tobin’s Q value is 1.17 (0.99), and the average (median) dividend payout ratio as a percentage of assets is 3 percent (0.3 percent). The mean (median) of leverage (LEV) and firm size (SIZE) are 0.43 (0.44) and 20.75 (20.82), respectively. Table 3 also shows the mean of audit quality (BIG4) (0.46), meaning that 46 percent of targeted firms were audited by a big-4 audit firm (210 observations), whereas 54 percent of those companies were audited by other audit firms (245 observations). The mean of audit quality (SPEC) (0.33), means that 33 percent of targeted companies were audited by an industry-specialist audit company (150 observations). Finally, the mean of the COVID-19 pandemic (COVID-19) is 0.286 (130 observations).

Table 3. Descriptive statistics.

Variables	n	Minimum	Maximum	Mean	Median	Std. Deviation
Tobin’s Q	455	0.41	2.90	1.17	0.99	0.62
DIV	455	0.00	0.11	0.03	0.00	0.04
SIZE	455	18.25	23.47	20.75	20.82	1.44
LEV	455	0.04	0.83	0.43	0.44	0.21
AQBIG4	455	0.00	1.00	0.46	0.00	0.47
AQSPEC	455	0.00	1.00	0.33	0.00	0.50
COVID	455	0.00	1.00	0.286	0.00	0.45

Notes: Tobin’s Q, the firm market performance; DIV, the dividend payout ratio; LEV, leverage; SIZE, firm size; AQBIG4, the audit quality; AQSPEC, the specialization of audit firms; COVID, COVID-19 pandemic.

The correlation matrix is presented in Table 4 (Pearson correlation analysis). Overall, the coefficients are within the average limit (0.40 and 0.50), indicating no multicollinearity among independent variables. Furthermore, multicollinearity was detected using the variance inflation factor (VIF): if its value is more than 10, the multicollinearity issue will be considerable (Gujarati & Porter, 2009). Our data proved that there is no multicollinearity concern. The findings also show that corporate performance (Tobin’s Q) was significantly and positively associated with the dividend payout ratio (DIV) as the coefficient of Pearson correlation (0.370) was significant at P = 0.01. In addition, the results showed that (Tobin’s Q) was positively and significantly related to SIZE, with the coefficients of Pearson correlation (0.103) being significant at P = 0.05. Also, the results showed that (Tobin’s Q) was negatively and significantly related to LEV and COVID-19, with the coefficients of Pearson correlation (-0.153, -0.082) being significant at P = 0.01 and 0.10, respectively. Finally, Table 4 revealed that (Tobin’s Q) was positively and significantly associated with BIG4 and SPEC, with the coefficients of Pearson correlation (0.123, 0.359) being significant at P = 0.01.

5.2. Regression results

5.2.1. The relationship between dividend payout and firm performance

As shown in Table 5, we addressed the significance of the relationship between dividend payout ratio and corporate performance, summarising the outcomes of Model 1. The model was considered fit and statistically significant, with an F. value of 41.47 in Pooled (OLS) regression and 10.67 in FE regression, and a P value < 0.01 in both regressions. This suggests that the firm’s performance (Tobin’s Q) model was statistically valid. According to the R Square value, the variations in the independent variables explain almost 12.5% and 7.5% of the variation in the dependent variable in both regressions, respectively. This finding indicates that the regression equation statistically explains the variation in the firm’s performance (Tobin’s Q). Model 1 reveals that DIV is positively and significantly related to Tobin’s Q in both regressions. According to these statistics, we accept the study’s first research hypothesis (H1), meaning that the dividend payout ratio is relevant for firm performance as measured by Tobin’s Q (Baker & Kapoor, 2015).

Table 5. Findings of Pooled (OLS) and FE regression analysis.

Dependent variable: Tobin’s Q
	Model 1		Model 2. A		Model 2. B		Model 3
	Pooled (OLS)	FE	Pooled (OLS)	FE	Pooled (OLS)	FE	Pooled (OLS)	FE
Predictor	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)
DIV	4.806 (5.54***)	4.088 (4.07***)	5.537 (4.11***)	3.412 (2.61**)	5.067 (4.67***)	4.025 (3.53***)	5.512 (4.79***)	4.825 (4.16***)
AQBIG4	–	–	0.498 (3.06***)	0.808 (4.01***)	–	–	–	–
DIV* AQBIG4	–	–	0.734 (0.37)	2.291 (1.36)	–	–	–	–
AQSPEC	–	–	–	–	0.711 (5.41***)	0.778 (5.64***)	–	–
DIV* AQSPEC	–	–	–	–	2.080 (1.05)	1.930 (0.93)	–	–
COVID	–	–	–	–	–	–	−0.013 (−0.16)	−0.018 (−0.23)
DIV* COVID	–	–	–	–	–	–	−2.859 (−1.69*)	−3.561 (−2.10**)
SIZE	0.015 (0.44)	0.174 (1.47)	0.050 (1.17)	0.164 (1.63)	0.046 (1.40)	0.109 (1.08)	0.026 (0.77)	0.267 (2.50**)
LEV	−0.493 (−2.37**)	−1.022 (−3.07**)	−0.336 (−1.56)	−0.595 (−1.78*)	−0.427 (−2.25**)	−0.798 (−2.60**)	−0.515 (−2.36**)	−1.101 (−3.23***)
Constant	0.947 (1.39)	−2.11 (−0.88)	1.998 (2.47**)	−2.465 (−1.21)	1.966 (2.97***)	−1.103 (−0.54)	0.736 (1.07)	−3.999 (−1.86*)
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
R^2	0.125	0.072	0.114	0.054	0.239	0.172	0.129	0.059
F-value	41.47***	10.67***	62.23***	18.66***	115.18***	23.97***	44.42***	9.87***
Obs.	455	455	455	455	455	455	455	455

Notes: ***, **, and *denote statistical significance at the 1, 5, and 10 percent levels.

This result supports the signalling theory implying that dividend payout conveys positive information about the firm to the market constituents, which could be perceived as a positive signal of higher financial performance (Farrukh et al., 2017). Further, this finding supports the monitoring role that can be played by dividend payout concerning corporate behaviour and future performance, which, untimely, can reduce the agency problem. This finding supports previous studies reporting positive effects of dividend payout on firm value in various contexts, like Anton (2016) in Romania, Murekefu and Ouma (2012) in Kenya, Gul et al. (2012) in Pakistan, Wang et al. (2013) in China, Budagaga (2017) in Turkey, and Dang et al. (2021) in Vietnam. It is also consistent with studies supporting the relevance of dividend policies to firm performance (Nissim & Ziv, 2001; Rigar & Mansouri, 2003; DeAngelo & DeAngelo, 2006; Uwuigbe et al., 2012; Kim et al., 2021). The current result also agrees with research reporting a positive association between dividend payout and shares’ market value, such as Iminza (1997), Shah and Mehta (2016), Chaabouni (2017), and Farrukh et al. (2017). However, the present finding differs from other studies that showed a negative relationship between dividend payouts and firm performance or corporate earnings, such as Osamwonyi and Lola-Ebueku (2016) and Bakri (2021). It is also different from other studies reporting no significant association between dividend payout and firm financial performance in developing countries, such as Amidu (2007), who focused on Ghana, and Malombe (2011), who focused on Kenya.

5.2.2. Examining the moderating effect of audit quality

Table 5 also displays the regression result of model 2. A and 2.B. Model 2. A addressed the moderating influence of audit quality (AQBIG4) on the relationship between dividend payout ratio and firm performance. According to this model, the interaction term between dividend payout ratio (DIV) and audit quality (AQBIG4) is represented as DIV*AQBIG4. The model is fit and statistically significant at p < 0.01, and the R Square of 11.4% and 5.4% in both Pooled (OLS) and FE regressions. The statistical outcomes show that audit quality (AQBIG4), on its own, has a positive and significant impact on corporate performance (Tobin’s Q). However, we found an insignificant positive effect of the interactional variable (DIV*AQBIG4) on the relationship between the dividend payout ratio and corporate performance. In Model 2. B, we addressed the moderating influence of audit quality (AQSPEC) on the relationship between dividend payout ratio and corporate performance. According to this model, the interaction term between dividend payout ratio (DIV) and audit quality (AQSPEC) is represented as DIV*AQSPEC. The model is fit and statistically significant at p < 0.01, and the R Square of 23.9% and 17.2% in both regressions. The statistical outcomes show that audit quality (AQSPEC), on its own, has a positive and significant impact on firm performance (Tobin’s Q). However, we also found an insignificant positive effect of the interactional variable (DIV*AQSPEC) on the association between the dividend payout ratio and corporate performance. Therefore, H2 is not accepted. This finding indicates the low quality of audits conducted in developing countries like Egypt.

This result varies from previous research supporting the positive moderating role of audit quality concerning the association between dividend payout and firm performance, such as Bakri (2021), who found that the audit quality of Malaysian listed companies moderated the reported negative association between dividend-payout policy and corporate value. It also differs from studies reporting that higher audit quality leads to more dividend payout, such as Deshmukh (2003) and Mitton (2004). This unique finding supports the research done in the Egyptian audit environment indicating the lack of independent auditors and experienced professionals needed to support and regulate the audit profession (Mohamed & Habib, 2013), the low compliance with auditing standards (Soliman & Abdel Salam, 2013), and the lack of enforcement of audit rotation regulations (Anis, 2014). These issues negatively affect the quality of the audit process in Egypt and, hence, its implications for organizational practices, including dividend payout policy and financial performance.

5.2.3. Examining the moderating effect of COVID-19

Table 5 also displays the regression result of Model 3, which addressed the moderating influence of the COVID-19 pandemic on the association between dividend payout ratio and corporate performance. According to this model, the interaction term between the dividend payout ratio (DIV) and the COVID-19 pandemic is represented as DIV*COVID. The model is fit and statistically significant at p < 0.01, and R Square of 12.9% and 5.9% in both regressions. The statistical outcomes showed that COVID-19, on its own, has a negative and insignificant impact on corporate performance (Tobin’s Q). However, we found a significant and negative effect of the interactional variable (DIV*COVID) on the association between the dividend payout ratio and corporate performance in both regressions. Therefore, H3 is accepted. This finding indicates the negative influences of the COVID-19 pandemic on the business climate in developing countries like as Egypt.

This result agrees with the literature supporting the negative effect of the COVID-19 pandemic on firms’ dividend payout, such as Hardy (2021) and Krieger et al. (2021) in the U.S. context, and Ali et al. (2022) in Pakistan (see also Cejnek et al., 2021; Zheng, 2022). However, this finding differs from other studies showing that many companies maintained or increased their dividend rates during the pandemic such as Mazur et al. (2021) in the U.S. and Tinungki et al. (2022) in Indonesia. By doing so, these firms were seeking to send positive signals to investors and enhance the stock market’s weak trade condition during the pandemic (Tinungki et al., 2022). The mixed results of these studies indicate the context-dependent nature of the impact of COVID-19 on corporate dividend policies and their implications.

5.3. Robustness analysis

5.3.1. An alternate measurement of the dependent variable

Our analysis was reproduced using an alternate measure of firm performance (ROA), an accounting-based indicator measured as net income divided by total assets (Aboud & Diab, 2018). To further analyse how dividend payout affects firm performance, we reformulated the previous models as follows: (4) $$\mathit{\text{RO}}{A}_{\mathit{\text{it}}}={\beta }_0+{\beta }_1\mathit{\text{DI}}{V}_{\mathit{\text{it}}}+{\beta }_2\mathit{\text{SIZ}}{E}_{\mathit{\text{it}}}+{\beta }_3\mathit{\text{LE}}{V}_{\mathit{\text{it}}}+e_{\mathit{\text{it}}}$$(4) (5.A) $${\text{ROA}}_{\text{it}}={\beta }_0+{\beta }_1{\text{DIV}}_{\text{it}}+{\beta }_2{\text{SIZE}}_{\text{it}}+{\beta }_3{\text{LEV}}_{\text{it}}+{\beta }_4{\text{AQBIG}4}_{\text{it}}+{\beta }_5\left(\text{DIV}*{\text{AQBIG}4}_{\text{it}}\right)+{\beta }_{\mathrm{t}}+{\beta }_{\text{ind}}+{\epsilon }_{\text{it}}$$(5.A) (5.B)(6) $$\begin{array}{c}\mathit{\text{RO}}{A}_{\mathit{\text{it}}}={\beta }_0+{\beta }_1\mathit{\text{DI}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_2\mathit{\text{SIZ}}{E}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_3\mathit{\text{LE}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_4\mathit{\text{AQSPE}}{C}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_5\left(\mathit{\text{DIV}}*\mathit{\text{AQSPE}}{C}_{\mathit{\text{it}}}\right)\\ +{\beta }_t+{\beta }_{\mathit{\text{ind}}}+{\epsilon }_{\mathit{\text{it}}}\\ \\ \mathit{\text{RO}}{A}_{\mathit{\text{it}}}=\hspace{0.17em}{\beta }_0+\hspace{0.17em}{B}_1\mathit{\text{DI}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_2\mathit{\text{SIZ}}{E}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_3\mathit{\text{LE}}{V}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_4\mathit{\text{COVI}}{D}_{\mathit{\text{it}}}+\hspace{0.17em}{\beta }_5\left(\mathit{\text{DIV}}*\mathit{\text{COVI}}{D}_{\mathit{\text{it}}}\right)\hspace{0.17em}+\hspace{0.17em}{e}_{\mathit{\text{it}}}\end{array}$$(5.B)(6)

Where:

ROA_it is an accounting-based indictor of firm performance

DIV is the dividend payout ratio.

LEV is financial leverage.

SIZE is firm size

AQ is audit quality (BIG4 and SPEC)

COVID_it is the COVID-19 pandemic

DIV*AQ_it is the interaction term between the dividend payout ratio and audit quality.

DIV*COVID_it is the interaction term between dividend payout ratio and the COVID-19 pandemic

Table 6 shows the outcome of sensitivity tests used to assess the sensitivity of the results to changes in firm performance measurement by introducing an alternative dependent variable (ROA). The findings are robust to using this alternative measure of firm performance, as the findings of Models 4, 5, and 6 were consistent with the prior findings.

Table 6. Alternate measurement of the dependent variable.

Dependent variable: ROA
	Model 4		Model 5. A		Model 5. B		Model 6
	Pooled (OLS)	FE	Pooled (OLS)	FE	Pooled (OLS)	FE	Pooled (OLS)	FE
Predictor	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)
DIV	1.036 (6.03***)	0.727 (2.94***)	1.168 (5.05***)	0.726 (2.07**)	1.068 (5.41***)	0.715 (2.68***)	0.994 (5.43***)	0.725 (3.18***)
AQBIG4	–	–	0.024 (1.80*)	0.041 (2.80***)	–	–	–	–
DIV* AQBIG4	–	–	0.269 (0.85)	0.047 (0.10)	–	–	–	–
AQSPEC	–	–	–	–	0.029 (2.52**)	0.031 (2.17**)	–	–
DIV* AQSPEC	–	–	–	–	0.139 (0.50)	0.053 (0.15)	–	–
COVID	–	–	–	–	–	–	−0.026 (−0.53)	−0.027 (−1.43)
DIV* COVID	–	–	–	–	–	–	−0.114 (−3.05***)	−0.296 (−3.35***)
SIZE	0.009 (2.11**)	0.048 (2.75***)	0.006 (1.31)	0.048 (2.77***)	0.006 (1.58)	0.046 (2.75***)	0.011 (2.68***)	0.071 (4.91***)
LEV	−0.102 (−3.11***)	−0.217 (−4.23***)	−0.097 (−3.04***)	−0.196 (−3.85***)	−0.098 (−3.07***)	−0.208 (−3.97***)	−0.103 (−3.18***)	−0.227 (−5.03***)
Constant	−0.125 (−1.51)	−0.896 (−2.47**)	−0.079 (−0.89)	−0.918 (−2.56**)	−0.082 (−1.05)	−0.854 (−2.49**)	−0.167 (−1.99**)	−1.334 (−4.45***)
Year FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
industry FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
R^2	0.335	0.186	0.338	0.169	0.346	0.191	0.346	0.164
F-value	65.05***	8.37***	62.20***	5.85***	64.33***	5.44***	72.31***	18.82***
Obs.	455	455	455	455	455	455	455	455

Notes: ***, **, and *denote statistical significance at the 1, 5, and 10 percent levels.

5.3.2. The endogeneity issue

Endogeneity is one of the potential concerns that may arise in OLS regressions. To investigate the presence of endogeneity in the OLS model, a Durbin–Wu–Hausman test has been conducted. The resultant p-value of the Durbin–Wu–Hausman test suggests that endogeneity concerns indeed exist in all models, as the p-value is less than 0.05 (p-value = 0.000). Consequently, we re-estimated models 1, 2, and 3 drawing upon the two-step system Generalized Method of Moments (GMM) to address this issue. We executed the command ‘xtabond2’ in Stata 17 to get the estimates through the two-step system GMM. To ascertain the suitability of the GMM estimator as an appropriate econometric model, we used standard diagnostic tests such as the Hansen test and the Arellano–Bond test for first-order and second-order correlation (Bakri, 2021; Aly et al., 2023).

Table 7 shows that the p-values of the AR (2) Arellano-Bond serial correlation tests exceed 0.05 in all models. Consequently, the Arellano-Bond autocorrelation tests are satisfied, indicating the absence of serial correlation in the error terms. Besides, the Hansen J test necessitates the validation of over-identifying restrictions in the GMM model. The outcomes of the Hansen test ascertain the soundness of the instrumental variables. The p-values of the Hansen statistics surpass 0.05 in all models. The outcomes of these tests suggest that the instruments utilized in the GMM estimator are exogenous. They also indicate the absence of autocorrelation (or serial correlation) in the model, signifying the validity of using the GMM estimator. Hence, the results presented in Table 7 align with the principal results, indicating that our results are unlikely to be perplexed by endogeneity issues, i.e. they are less susceptible to endogeneity.

Table 7. Results of regression analysis using a two-step system GMM approach.

Dependent variable: Tobin’s Q
	Model 1	Model 2. A	Model 2. B	Model 3
Predictor	Coef. (t)	Coef. (t)	Coef. (t)	Coef. (t)
Tobin’s Qit-1	0.380(5.32***)	0.391(4.34***)	0.358(3.83***)	0.443(3.55***)
DIV	4.434(1.93*)	0.420(2.35**)	2.192(2.73**)	2.873(2.42**)
AQBIG4	–	0.678(2.24**)	–	–
DIV* AQBIG4	–	18.061(0.15)	–	–
AQSPEC	–	–	0.371(2.85**)	–
DIV* AQSPEC	–	–	9.802(1.24)	–
COVID	–	–	–	−0.021(−0.11)
DIV* COVID	–	–	–	−3.249(−2.48**)
SIZE	0.013(0.58)	0.063(1.32)	0.044(0.96)	0.008(0.26)
LEV	−0.848(−2.81***)	−1.070(−2.77***)	−0.869(−1.82*)	−1.021(−3.47***)
Constant	−0.054(−0.11)	−1.004(−1.04)	−0.583(−0.58)	−0.065(−0.13)
Year FE	Yes	Yes	Yes	Yes
industry FE	Yes	Yes	Yes	Yes
F-value	2296.10***	1286.85***	1264.12***	2796.17***
Obs.	455	455	455	455
AR1(p-value)	0.001	0.002	0.001	0.000
AR2(p-value)	0.400	0.734	0.676	0.794
Sargan test(p-value)	0.199	0.397	0.225	0.201
Hansen test(p-value)	0.223	0.535	0.326	0.221

Notes: ***, **, and *denote statistical significance at the 1, 5, and 10 percent levels.

6. Conclusion

This study extends the previous research concerned with the association between dividends and corporate performance in emerging markets, specifically Egypt, as previous studies concentrated on developed markets. This is done by examining the moderating influence of audit quality on the association between dividend payout and corporate performance. Further, this study investigated if the COVID-19 pandemic affects the association between dividend payout and corporate performance. We observed that dividend payout has a significant positive influence on firm performance. This finding suggests that implementing effective dividend payout policies by companies in emerging markets can uplift their performance and shareholders’ wealth. Thus, firms in this type of market are advised to apply stable dividend policies to enhance shareholders’ wealth and corporate financial performance (Bakri, 2021).

However, we found that the interaction term between dividend payout and audit quality has an insignificant influence on corporate performance. This finding supports the research conducted in the Egyptian audit environment reporting a low quality of the audit process due to various reasons such as the lack of independence of auditors, the lack of experience of professional institutions supporting and regulating the audit profession, the unproven compliance with auditing standards in many cases, and the lack of enforcement of auditor rotation regulations (Soliman & Abdel Salam, 2013; Mohamed & Habib, 2013; Anis, 2014). This finding highlights the need for regulators in Egypt to focus more on regulations that can enhance the quality of the audit profession through, for example, ensuring the independence of auditors and enforcing the auditor rotation regulations (Mohamed & Habib, 2013; Anis, 2014). We recommend that regulators of the audit profession in emerging markets such as Egypt should pay more attention to having high-quality audits, which, as per the literature, is crucial for positive organisational implications, including better corporate performance through adopting effective and appropriate dividend policies (Deshmukh, 2003; Mitton, 2004; Bakri, 2021).

Finally, the interaction term between dividend payout and the COVID-19 pandemic has a significant negative influence on firm performance, supporting the negative implications of the COVID-19 pandemic for dividend payout and its implications. This finding can guide investors in designing their investment strategies during crisis periods.

By considering the role that can be played by determinants or moderating factors such as audit quality and the COVID-19 pandemic, investors could be better equipped to project corporate dividend policies and their implications for companies’ performance and devise their investment strategy effectively. The scope of the current research, however, is limited to nonfinancial firms listed on the Egyptian Stock Exchange for the period 2015–2020. Also, considering the current study’s limited sample due to the limited data available in emerging markets, future research can extend the study sample by covering more years following the pandemic to fully understand the pandemic’s effects. Further, future research can extend the research context across various conetxts to examine if the changes in cross-country firms’ dividend policies during the COVID-19 pandemic are affected by country-level forces like the inflation level, culture, and legal institutions. Finally, a future study can expand the corporate characteristics examined in the current study by including governance mechanisms such as board size, board independence, and CEO duality for a fuller understanding of the dividend payout-corporate financial performance relationship.

Authors’ contributions

Ahmed Diab has contributed to the conception, design, and drafting of the paper. Saleh Aly has contributed to the analysis and interpretation of the data. Samir Abdelazim has contributed to revising the paper critically for intellectual content. All authors declare the final approval of the version to be published; and agree to be accountable for all aspects of the work.

Acknowledgement

The authors would like to thank Prince Sultan University for their support.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Empirical data is available upon request.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Ahmed Diab

Ahmed Diab is an associate professor of accounting at Prince Sultan University, Saudi Arabia, and an assistant professor of accounting at Beni-Suef University, Egypt.

Samir Ibrahim Abdelazim

Samir Ibrahim Abdelazim is an assistant professor of accounting at Beni-Suef University, Egypt.

Saleh Aly Saleh Aly

Saleh Aly Saleh Aly is a lecturer of accounting at Beni-Suef University, Egypt.

Notes

1 See https://covid19.who.int/region/emro/country/eg.