Application of the Dividend Discount Model to Determine the Financial Flexibility of Selected Iraqi Banks

Abstract

The Dividend Discount Model (DDM) remains a fundamental technique applied in the estimation of a stock’s intrinsic value, with lots of advantages along with a few drawbacks. While various studies have been conducted earlier to investigate the financial flexibility of Iraqi banks through different measures, no study has made use of the DDM model to determine the financial flexibility. Thus, the current study is a first attempt to analyse the relationship between the Dividend Discount Model and financial stability in five Iraqi banks listed on the Iraq Stock Exchange during the period 2017–2023. For this descriptive analytical study, the Dividend Discount Model was considered as the independent variable, while financial flexibility (dependent variable) constructs such as the equity multiplier, debt­to­equity ratio, cash balance ratio and deposit to loan ratio were considered. A total of five banks listed on the Iraqi stock exchange were selected based on the availability of the information required for the analysis for seven years, i.e., the study period was between 2017 and 2023. The analysis was conducted to determine the growth rate of the dividend per share, dividend earnings per share, cost of equity, equity multiplier, Debt­to­Equity ratio, Cash Balance Ratio and Deposit­to­Loans ratio. The analytical findings revealed that conservative strategy, expansion strategy and a balanced strategy that maintained stable ratios despite increased financial risks, were followed by the banks to ensure their financial flexibility with varied findings in the discounted dividend model. While the study findings proved that there is a significant relationship between the discounted dividend model and financial flexibility measures. The study provided a few suggestions for future researchers to explore in this domain to fulfil the limitations of the study, such as a limited timeframe and sample size, and the application of new models for estimating the stock returns.