Dividend Payout Ration - Case Study

Topics: Regression analysis, Dividend, Linear regression Pages: 13 (4474 words) Published: May 9, 2011
International Research Journal of Finance and Economics ISSN 1450-2887 Issue 15 (2008) © EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.htm

Determinants of Dividend Payout Ratios-A Study of Indian Information Technology Sector Kanwal Anil Jaypee Business School, Noida, India Sujata Kapoor Institute of Management Studies, Ghaziabad, India Abstract Profitability has always been considered as a primary indicator of dividend payout ratio. There are numerous other factors other than profitability also that affect dividend decisions of an organization namely cash flows, corporate tax, sales growth and market to book value ratio. Available literature suggests that dividend payout ratio is positively related to profits, cash flows and it has inverse relationship with corporate taxes, sales growth and market to book value ratio. This paper is an attempt to empirically analyze the determinants of dividend payout ratio of Indian Information Technology sector. The paper also focuses on identifying whether various factors available as per literature influence dividend payout ratio in IT sector in India in existing scenario or not. Statistical techniques of correlation and regression have been used to explore the relationship between key variables. Thus, the main theme of this study is to identify the various factors that influence the dividend payout policy decisions of IT firms in India. Keywords: Dividends, determinants, IT sector

1. Inroduction
Dividend payout has been an issue of interest in financial literature. Academicians & researchers have developed many theoretical models describing the factors that managers should consider when making dividend policy decisions. By dividend policy, we mean the payout policy that managers follow in deciding the size and pattern of cash distribution to shareholders over time. In seminal paper, Miller and Modigliani (M&M) (1961) argue that given perfect capital markets, the dividend decision does not affect the firm value and is, therefore, irrelevant. Most financial practitioners and many academics greeted this conclusion with surprise because the conventional wisdom at the time suggested that a properly managed dividend policy had an impact on share prices and shareholder wealth. Since the M& M study, other researchers have relaxed the assumption of perfect capital markets and offered theories about how dividend affects the firm value and how managers should formulate dividend policy decisions. Over time, the number of factors identified in the literature as being important to be considered in making dividend decisions increased substantially. Thus, extensive studies were done to find out various factors affecting dividend payout ratio of a firm. The setting of corporate dividend policy remains a controversial issue and involves ocean deep judgment by decision makers. There has been emerging consensus that there is no single explanation of dividends. Previous empirical studies have focused mainly on developed economies. The undertaken study examines the relationship between determinants of dividend payout ratios from the context of a

International Research Journal of Finance and Economics - Issue 15 (2008)


developing country like India. The study looks at the issue from emerging markets perspective by focusing specifically on Indian Information Technology sector. The primary objective of this study is to find out whether several factors as per available literature influence the dividend payout ratio of Indian Information Technology sector. This article now proceeds as follows: Section2 gives brief overview of IT sector in India. Section 3 briefly reviews the existing literature. Section 4 presents the data and variable constructions. The methodology used and the obtained results are presented in section 5. Finally, some concluding remarks are presented in section 6.

2. Backdrop of Indian Information Technology Industry
The Indian IT industry has a...
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