Dividend Policy Determinants

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This part of the article review contains a brief review of dividend theories along with the major empirical evidence for and against the dividend theories, a brief summary of the results of empirical analysis of determinants of dividend policy by country. Theoretical and empirical backgrounds of the article cover the last fifty years research outcomes on firm value and dividend policy of the firm. Summarizing all these works, there are three dominating views. The first, Gordon (1963), and Lintner (1962) suggest that an increase in dividend payout affects positively the market value of the firm. The second, Lintzenberger and Ramaswamy (1979) argue that a positive change in the dividend decreases the firm's value. The third, Miller and Modigliani (1961) claim that dividend policy does not affect the market value of the firm. The summary of the major theoretical works on dividend policy are presented in Table 1. Table – 1. Major theoretical studies on dividend policy.

Authors| Name of the theory| Explanation of the theory|
Gordon and Walter (1963)| The bird in the hand theory| Investors always wish for cash in hand rather than a hope of capital gain in the future in order to minimize risk.| Higgins (1972) and Fama (1974)| Transaction cost | The firms with higher levels of financial leverage face a higher level of transaction costs, which leads those firms to pay lower levels of dividends because of the cost of external financing. | Jensen and Meckling (1976)| The agency theory| The difference of interests between managers and shareholder and the percentage of equity controlled by insider ownership should influence the dividend policy.| Miller and Scholes (1978)| Tax clientele | The effect of tax preferences on clientele and conclude different tax rates on dividends and capital gain lead to different clientele.| Bhattacharya (1980) and John Williams (1985)| The signalling theory| Dividends lessen information asymmetric between managers and shareholders by delivering inside information of firm future prospects.| Lease et al. (2000) and Fama and French (2001)| Life cycle Theory| The firms should follow a life cycle and reflect management's assessment of the importance of market imperfection and factors including taxes to equity holders, agency cost asymmetric information, floating cost and transaction costs.| Baker and Wurgler (2004)| Catering theory| The managers for providing incentives to the investor according to their needs and wants and in this way cater the investors by paying smooth dividends when the investors put stock price premium on payers and by not paying when investors prefer non payers.| As we mentioned above we analyzed previous empirical studies on determinants of dividend policy by country. Adaoglu (2000) analyzes determinants of dividend policy of the listed firms in Turkey and concludes that Turkish firms pay dividend based on unstable cash dividend policy and earning of the firms is the main factor for determining the amount of dividend. Mollah et al. (2000) concludes that there is a strong influence of agency cost and transaction cost theories on dividend policy of the listed companies on the Dhaka Stock Exchange. Moreover, the coefficients of debt-equity ratio and investment opportunity variable negatively, and firm size positively related to dividend pay-out. Talla M. Al-Deehani (2003) analyzes 41 companies which are listed on Kuwait Stock Exchange and concludes that clientele effect is more important for managers. Omet (2004) analyzes Amman’s listed firms and comes to the same conclusion as Adaoglu and tax imposition on dividend does not impact significantly on the dividend behaviour of the listed firms. According to Eriotis (2005), the Greek firms give out dividend each year based on their target payout ratio, which is determined by size of these firms and distributed earnings. Naceur et al. (2006) conclude that in Tunisia the lucrative firms...
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