Abstract Purpose This study investigates the interplay between dividend policy and capital structure decisions within the distinct institutional framework of Gulf Cooperation Council (GCC) non-financial firms. It seeks to resolve conflicting empirical evidence by examining how regional characteristics—such as market opacity and ownership concentration—reshape standard financial theories. Design/methodology/approach Leveraging an unbalanced panel of 1,396 firm-year observations (2012–2022) across six GCC countries, the analysis employs fixed effects and System Generalized Method of Moments (GMM) estimators. This dual approach controls for unobserved heterogeneity and rigorously addresses endogeneity concerns prevalent in dynamic financial modeling. The study further tests the moderating role of profitability to identify conditional effects on leverage decisions. Findings Empirical evidence reveals a positive significant relationship between dividend payout ratios and leverage, contradicting the Pecking Order Theory typically observed in developed economies. Instead, the results support Signaling Theory, suggesting that in low-transparency markets, concurrent high dividends and debt signal managerial confidence. However, moderation analysis indicates a nuanced boundary condition: High-profitability firms tend to reduce leverage when paying dividends, whereas low-profitability firms exhibit a weaker relationship, relying more on external debt to sustain payouts. Originality/value This research advances corporate finance literature in three specific ways. First, it validates Signaling Theory within an emerging market context characterized by information asymmetry, challenging the universal dominance of Pecking Order assumptions. Second, it uniquely identifies profitability as a critical moderator that reverses the dividend–leverage nexus, offering a granular view of financial behavior often overlooked in regional studies. Third, by applying System GMM to a comprehensive GCC dataset, the study provides robust causal inferences that address endogeneity issues frequently ignored in prior regional finance literature.
Halim et al. (Tue,) studied this question.