Dividend Policy

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International Research Journal of Finance and Economics ISSN 1450-2887 Issue 80 (2011) © EuroJournals Publishing, Inc. 2011 http://www.internationalresearchjournaloffinanceandeconomics.com

An Empirical Study on the Determinants of Dividend Policy in the UK Badar Khalid Al Shabibi Faculty, Accounting & Finance, Department of Business Studies Ibra College of Technology, Sultanate of Oman E-mail: baderkh14@hotmail.com Tel: +968-95142254; Fax: +968-25587950 G Ramesh Faculty, Accounting & Finance, Department of Business Studies Ibra College of Technology, Sultanate of Oman E-mail: drrameshg@gmail.com Tel: +968-96149365; Fax: +968-25587950 Abstract This research aims to examine the factors which affect dividend policy for nonfinancial UK companies in the year 2007. In particular, the research examines the extent to which corporate governance factors affect corporate dividend policy. The factors are classified into two parts which are corporate governance factors and firm characteristics. Corporate governance factors include board size, board independence and audit type. On the other hand, firm characteristics are firm size, profitability, debt level, growth, risk, industry type and tangibility. The sources used to collect the data for this study are the Forecasting Analysis and Modelling Environment (FAME) database and annual reports. Multiple regression model is used to analyze the data. Based on the sample of 90 nonfinancial UK companies, it is found that corporate governance factors do affect the dividend policy. It seems that board independence is one of the important factors which drive firms to pay dividends. Furthermore, some of the firm characteristics have also influenced the dividend policy decision among the non-financial UK firms.

Keywords: Dividend Policy, Dividend Decision, Payout Policy, Payout Decision, Determinants of Dividend, Dividend Factors JEL Classification Code: G35

Introduction
There is a continuous debate about what drives companies to pay dividends. The first theory for dividends was initiated by Miller and Modigliani (1961) who emphasized that dividend policy was irrelevant. Since then, controversial judgment has been raised to determine the factors which affect dividend policy in companies (Al-Malkawi, 2007). He added that the economists have presented great efforts for more than fifty years to test the determinants of dividend policy. Most studies in this area have reported certain factors which have an impact on dividend policy decisions. It is known that the agency problem is considered to be one of the main problems between management and shareholders

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(Douglas, 2009). Dividend is used by managers as a tool to reduce this problem (Jirapon, 2004). It has been noticed that dividend payout is highly associated with the type of the governance in the company (Mehar, 2005). It is cited by Jiraporn et al. (2008) that one of the essential theories explaining the dividend policy is the agency cost theory. Agency cost emphasizes reducing the agency cost between two parties, namely the investors (owners) and the managers (the control) (Jiraporn, 2004). It has been argued that the company might use dividends to alleviate the agency problem between managers and shareholders (Jensen, 1986). Researchers have examined many factors which have an impact on reducing agency cost problems. These factors include outside directorship, insider ownership and asymmetric information (see Al-Najjar & Hussainey, 2009a; Mitton, 2004). Further, there are many studies of firm characteristics which have an impact on the dividend policy. These include profitability, liquidity, firm size, debt level, risk, industry type, tangibility (see Danis et al., 2008; Al-Najjar & Hussainey, 2009a). This study is designed to examine corporate governance’s influence on dividend policy.

Objectives of the Study
The aim of this research is to find...
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