Determinants of Dividend Policy of Cement Industy of Pakistan

Topics: Dividend, Investment, Dividend yield Pages: 5 (1555 words) Published: November 25, 2012
Dr. Ahmed Faisal Imtiaz Siddiqi
Submitted By:
Muhammad Waqar Akram
ID #
MS-Finance Batch-02

Dividend Policy refers to the explicit or implicit decision of the Board of Directors regarding the amount of residual earnings (past or present) that should be distributed to the shareholders of the corporation This decision is considered a financing decision because the profits of the corporation are an important source of financing available to the firm. Dividend policy is a one of the most debated topics and a core theory of corporate finance which still keeps its prominent place. Many researchers presented various theories and uncountable empirical evidences, but the issue is still unresolved and open for further discussion. It is among top ten unresolved problems in the finance literature and we have not an adequate explanation for the observed dividend behavior of the firms There are several reasons whether firms should pay dividends or not. The “dividend puzzle” why firms pay dividends and stock holders pay attention to dividends and still unresolved. Many hypotheses have been drawn to shed some light on this puzzle but the problem still exists. Normally a firm faces the problem of allocation of earnings, whether to distribute among shareholders or retaining for reinvestment and promote the firm growth. Retained earnings are a main internal source of financing, but higher retained earning mean fewer dividends and vice versa. The cement sector is a prominent sector of Pakistan and works as an engine of economic growth in the economy. It provides employment to a large number of people (directly & indirectly). Cement production capacity in Pakistan is 44 million tons annually while local demand is only 24 million tons, leaving a surplus of 20 million tons. Cement manufactured in Pakistan is being exported to Afghanistan and Central Asian States below cost. During FY-11 cement industry exported over 4 million tons to these markets and the industry is optimistic that exports to Afghanistan and Central Asian States shall increase further since these countries are landlocked and Pakistan is the only country which is able to supply cement at competitive rates. So, it is important to find the factors that determine and affecting the dividend payout policy of this sector. LITERTURE REVIEW

Over the past 50 years a great attention was given to determine the factors influencing dividend payout policy. A vast literature is available in this regard, however, the puzzle is still unresolved and open for further discussion. “Why do firms pay dividends?” further he raises a second question, “Why do investors pay attention to dividends?” although, the answers may appear clear, (Black 1998)but Black concludes that they are not. As we try to explain the fact, the more it seems like a puzzle, with pieces that just do not fit together. Various factors can be considered as the determinants of dividend payout policy and a number of logics for dividend payout policy have been declared in the literature, however, the researchers are not agreed on a single point. In developed economies, the decision whether paying dividends or keep as retained earnings has been taken very carefully by both investors and the management of the firm.(Adaoglu 2000) By paying a sufficient amount of dividend firms can prevent from the agency problem. The dividend payouts are helpful to keep firms in the market, where monitoring of managers is available at low cost. The managers make financial policy trade-offs to control agency cost in an effective way(Amidu and Abor 2006) A free cash flow is helpful for a firm to share it with stockholders as dividends and pay the debt in order to reduce the possibility of these funds being wasted on unprofitable projects(Pettit 1972) Firms’ investment policies have a significant impact on...
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