Dividend Analysis of Banking Industry

Topics: Causality, Granger causality, Empiricism Pages: 20 (5957 words) Published: December 28, 2008
Leading Determinants of Dividend Policy: A Case Study of Indian Banking Industry

ABSTRACT: Dividend policy is a critical decision area in the field of finance. The subject of corporate dividend policy has captivated finance scholars for a long time, resulting in intensive theoretical modeling and empirical investigation. But several questions related to dividend decisions remain perplexing because of diverse and conflicting theories and evermore due to diverse empirical results. This paper attempts to give a focused overview of the important dividend theories and identify the leading factors that determine the dividend behavior in the corporate financial management. Dividend behavior of Indian Banking Industry has been analyzed using various econometric techniques. It may be concluded that lagged dividend, PAT, interest are the most important factors affecting dividend decisions of the industry whereas capital expenditure is not. However, Target payout ratio of the industry has decreased to 44% in 2005-06 from 71% in 1996-97. The paper may serve as ready reference for future researches in this field of corporate finance vis-à-vis Dividend Decision Policy. Key Words: Dividend Decisions; Lintner's Model; Agency Cost; Information Asymmetry; Free Cash Flow Hypothesis; Granger Causality Test; Determinants of Dividend Policy; Dividend Decisions in Developing Countries, Indian Banking Industry.

INTRODUCTION: Banking is an integral part of Indian financial system as it plays very important role in mobilizing savings from various sectors, which is the foundation for growth and development of an economy. Indian policymakers at the national level deliberately shifted for a series of economic reforms in the wake of a serious balance-of-payments crisis in 1991. To start with the reforms process, the central plank was to carry out reforms in the financial sector with the banking being the mainstay of financial intermediation. The objective of the banking sector reforms was to promote a diversified, efficient and competitive banking and financial system with the ultimate objective of improving the competence of resources. There are a number of decisions that have to be taken for efficient performance and attainment of objectives. Among the entire corporate decisions one is dividend decision. The area of corporate dividend policy has mesmerized financial scholars and economists for a long time, resulting in intensive theoretical modeling and empirical examinations. Dividend Policy is one of the most complex aspects in finance. Three decades ago, Black (1976, 5) wrote, "The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don't fit together". Brealey and Myers (2002) have enlisted dividend policy as one of the top ten puzzles in finance. A number of conflicting theoretical models, all lacking strong empirical support, define recent attempts by research in finance to explain the dividend phenomenon. But to come out with concrete conclusion, intensive study of all theoretical models together with empirical proof is mandatory. In the Indian context, a few studies have analyzed the dividend behavior of corporate firms. Krishnamurty and Sastry (1971), Mahapatra and Sahu (1993), Bhat and Pandey (1994), Narasimhan and Asha (1997) and Narasimhan and Vijayalakshmi (2002) are the good examples of empirical research carried out in India in the field of dividend decisions. However, it is still not clear as to what is the dividend payment pattern of firms in India and why do they initiate and omit dividend payments or reduce or increase dividend payments. This paper analyzes the dividend payout of Banking Industry in India and presents the dividend initiations and omissions and determinants of dividends. The efficiency and performance of banking industry is improving in all conducts. Say, e.g. for public and private sectors ACGR of Business per employee are 29.97 and 40.29 respectively during last 5...

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