An Empirical Analysis of Dividend Payout Policy
In the present paper an attempt has been made to assess the dividend payout policies of Indian Companies. For the purpose of study BSE Sensex -30 companies have been selected as sample for the study. To study impact of profitability, liquidity and size of business on dividend payout regression analysis were carried out. An attempt has also been made to calculate estimated dividend payout based on regression results. The result of the study indicates dividend policies of Indian companies were highly influenced by profitability and liquidity of the firm. The major companies follow conservative dividend policy.
Dividend Payout Policy; Indian Capital market.
An Empirical Analysis of Dividend Payout Policy
Dividend policy is one of the most controversial subjects in finance. Dividend policy is one of the most important financial policies, not only from the viewpoint of the company, but also from that of the shareholders, the customers, the workers, regulatory bodies and the Government. Finance scholars have engaged in extensive theorizing to explain why companies should pay or not pay dividends.
Lintner, 1956; Brittain, 1964; Modigliani and Miller, 1961; Pettit, 1972; Black and Scholes 1973, Michael, Thaler and Womack, 1995; Dhillon and Johnson, 1994; Amibud and Murgia, 1997; Charitou and Vafeas, 1998, studies has determined on the developed countries, the decision between paying dividend and retaining earnings has been taken seriously by both investors and management, and has been the subject of considerable research by economists in the last four decades.
Financial economists have therefore, acknowledged the after tax earnings of any business firm as an important internal source of investible funds and also a basis for dividend payments to shareholders. The decision to retain, reinvest or pay out after tax earnings in form of cash or stock dividend is important for the realization of corporate goal which is the maximization of the value of the firm (Soyode (1975), Oyejide (1976), Ariyo (1983).
In this study we analyse the impact of profitability, liquidity and size of the business operations of selected firms on its dividend policy of corporate firms in India. Initially, we examine the main determinants of dividend decisions of corporate firms in India using pooled cross sectional data and address shortcomings of prior studies by presenting a more comprehensive model of dividend policy.
The most primitive attempt to explain dividend behavior of companies has been credited to John Lintner (1956) who conducted his study on American Companies in the middle of 1950s. Since then there has been an ongoing debate on dividend policy in the developed markets resulting in mixed, controversial and inclusive results. Miller and Modigliani (1961) view dividend payment as irrelevant. According to them, the investor is indifferent between dividend payment and capital gains. Black (1976) poses the question again, "Why do corporations pay dividends?" In addition, he poses a second question, "Why do investors pay attention to dividends?" Although, the answers to these questions may appear obvious, he concludes that they are not. The harder we try to explain the phenomenon, the more it seems like a puzzle, with pieces that just do not fit together. After over two decades since Black's paper, the dividend puzzle persists. Dakshinamurthy and Narasimha Rao (1978) has conducted empirical research and he has tested Speed of Adjustment (Dividend) model in Indian Chemical Industry for the period of 1960-1973 and he finds that the Cash Flow Model explains better the corporate dividend behaviour in the Indian Chemical Industry as against the basic Linter’s model.
There are other factors influencing a firm's dividend policy. For example, some studies suggest that dividend policy...
References: Akhigbe, Aigbe, Stephen F. Borde, and Jeff Madura (1993), "Dividend Policy and Signaling by Insurance Companies," The Journal of Risk and Insurance, vol. 60, September, pp. 413-428.
Belsley, D.A., E. Kuh, and R.E. Welsch (1980), Regression Diagnostics, Identifying Influential Data and Sources of Collinearity, Wiley, New York, Chapter 3.
Bhat, R. and I.M. Pandey (1994), “Dividend Decision: A Study of Managers’ Perceptions”, Decision, Vol. 21, No.s 1 & 2, January-June 1994, pp. 67-86.
Collins, M. Cary, Atul K. Saxena, and James W. Wansley (1996), "The Role of Insiders and Dividend Policy: A Comparison of Regulated and Unregulated Firms," Journal of Financial and Strategic Decisions, vol. 9, no. 2, Summer, pp. 1-9.
Crutchley, Claire, and Robert Hansen (1989), "A Test of the Agency Theory of Managerial Ownership, Corporate Leverage, and Corporate Dividends", Financial Management, vol. 18, Winter, pp. 36-46.
Damodaran Aswath (1999), Applied Corporate Finance, John Wiley and Sons, Inc, New York.
Easterbrook, Frank H. (1984), "Two Agency-Cost Explanations of Dividends,"American Economic Review, vol. 74, no. 4, September, pp. 221-230.
George R. and Kumudha A., (2005), “A Study on Dividend Policy of Hindustan Construction Co. Ltd. With special Reference to Linter’s Model”, Synergy, Vol. 4, No.1, pp. 86-96.
Gupta N.C. and Sharma G.L. (1991), “Dividend Behaviour in Tea Industry in India: A Case Study of Selected Firms”, ASCI Journal of Management, Vol. 20, No.4, pp. 274-283.
Hansen, Robert S., Raman Kumar, and Dilip K. Shome (1994), "Dividend Policy and Corporate Monitoring: Evidence from the Regulated Electric Utility Industry," Financial Management, vol. 23, Spring, pp. 16-22.
Jensen, M.C. (1986), "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, May, pp. 323-330.
Jensen, M.C. and W.H. Meckling (1976), "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," Journal of Financial Economics, vol. 3, October, pp. 305-360.
Jensen, Gerald R., Donald P. Solberg, and Thomas S. Zorn (1992), "Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies," Journal of Financial and Quantitative Analysis, vol. 27, June, pp. 247-263.
John, Kose, and Joseph Williams (1985), "Dividends, Dilution, and Taxes: A Signaling Equilibrium," Journal of Finance, vol. 40, September, pp. 1053-1070.
Kennedy, Peter (1985), A Guide to Econometrics, 2nd edition, Basil Blackwell Ltd., Oxford, UK,.
Kevin, S. (1992), “Dividend Policy: an Analysis of Some Determinants”, Finance India, Vol. VI, No. 2, June, pp. 253-259.
Mahapatra, R.P. and P.K. Sahu (1993), “A Note on Determinants of Corporate Dividend Behaviour in India – An Econometric Analysis”, Decision, Vol. 20, No. 1, January-March, pp. 1-22.
Miller, Merton, and Franco Modigliani (1961), "Dividend Policy, Growth and The Valuation of Shares," Journal of Business, vol. 34, October, pp. 411-433.
Miller, Merton, and Kevin Rock (1985), "Dividend Policy Under Asymmetric Information," Journal of Finance, vol. 40, September, pp. 1031-1051.
Mishra, C. and V. Narender (1996), “Dividend Policies of SoEs in India – An Analysis”, Finance India, Vol. X, No. 3, September, pp. 633-645
Moyer, R. Charles, Robert E. Chatfield, and Phillip M. Sisneros (1989), "Security Analyst Monitoring Activity: Agency Costs and Information Demands," Journal of Financial and Quantitative Analysis, vol. 24, December, pp. 503-512.
Moyer, R. Charles, Ramesh Rao, and Niranjan Tripathy (1992), "Dividend Policy and Regulatory Risk: A Test of the Smith Hypothesis," Journal of Economics and Business, vol. 44, May, pp. 127-134.
Myers, Steward C., and Nicholas Majluf (1984), "Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have," Journal of Financial Economics, vol. 13, June, pp. 187-221.
Narasimhan,M.S.and C. Asha (1997),“Implications of Dividend Tax on Corporate Financial Policies”,The ICFAI Journal of Applied Finance, Vol.3, No.2, July, pp.11-28.
Narasimhan, M.S. and S. Vijayalakshmi (2002), “Impact of Agency Cost on Leverage and Dividend Policies”, The ICFAI Journal of Applied Finance, Vol. 8, No. 2, March, pp. 16-25.
Oza H., (2004), “Dividend Decision: A managerial Approach, A Survey of Selected Enterprises”, Executive Company Secretary, November, pp. 40-45.
Rao, Ramesh, and R. Charles Moyer (1994), "Regulatory Climate and Electric Utility Capital Structure Decisions," The Financial Review, vol. 29, February, pp. 97-124.
Reddy Y., (2004), “Dividend Policy of Indian Corporate Firms: An Analysis of Trends and Determinants” http://www.nse-india.com/content/research/paper71.
Rozeff, Michael S. (1982), "Growth, Beta and Agency Costs as Determinants of Dividend Payout Ratios," Journal of Financial Research, vol. 5, Fall, pp. 249-259.
Singhania Monica (2007), “Dividend Policy of India Companies”, The Icfai Journal of Applied Finance, vol. 13, No.3, pp. 5-30.
Smith, Jr., Clifford W. (1986), "Investment Banking and the Capital Acquisition Process," Journal of Financial Economics, vol. 15, January/February, pp. 2-29.
Smith, Clifford W., and Ross Watts (1992), "The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation," Journal of Financial Economics, vol. 32, December, pp. 263-292.
Sur D. (2005), “Dividend Payout Trends in the Post-liberalisation Era: A case Study of Colgate Palmolive (India) Ltd.” The Management Accountant, March, pp. 201-206.
Woolridge, J. Randall and Chinmoy Ghosh (1988), "An Analysis of Shareholder Reaction to Dividend Cuts and Omissions," Journal of Financial Research, vol. 11, no. 4, pp. 281-294.
Woolridge, J. Randall and Chinmoy Ghosh (1991), "Dividend Omissions and Stock Market Rationality," The Journal of Business Finance and Accounting, vol. 18, no. 3, pp. 315-330.
Please join StudyMode to read the full document