What are the Determinants of Dividend Payouts?

Solution Preview

---

Lintner( 1962, 1956) was among the early researchers of dividend payout determinants 1962). Firms in USA were examined by Lintner. Lintner surmised in his study that dividend payouts are influenced by previous year dividends and present profitability of the firm.

The Lintner model was tested by Fama and Babiak(1968). The carried out the study on firms in North America,for the period 1946-1964. They concluded bya supporting the Lintner model as it did explain dividend changes in these firms. However Wolmaran(2003) in his study of firms in South Africa, did not find support for this model.
(Miller & Modigliani,1961) put forth the dividend irrelevance concept. According to M & M, when the market is perfect and there are no transaction costs as well as taxes dividend choices are not important as as they have no effect on the company's worth . Their theory states that the shareholder equally emphasizes dividend returns as well as capital gains provided the dividend policy does not influence the firm's investment policy.

Pettit ( 1977) looked at how dividend payouts are affected by investor profile. . Pettit uncovered the fact that high earning share holders preferred low dividend payouts while retired investors preferred dividend payouts which is cash income.

Kania and Bacon (2005) conducted a study on Dividend policy decisions by studying more than 10,000 publicly traded companies. The analysis was done using the method of OLS (Ordinary Least Squares). The study showed that ROE, increase in asset expenditure revenue development, risk, liquidity, and owner managers and had a strong influence on Dividend decision.

Ho (2003) studied firms in Australia and Japan with regard to their Dividend policies. Ho analyzed the predictor variables using regression. Ho study discovered some key variables; In Australia size of the firm was important and in Japan it was found that liquidity had a significant influence . Debt had a negative impact only in Japan. Also the study showed influence of industry type in both countries.

A study by Aivazian, Gatchev and Spindt(2007) showed that liquid stocks( stocks that can be sold easily in the stock market) had less Dividend returns and vice versa.

US firms were studied for their dividend behaviour(Gill, Biger & Tibrewala,2010). The study establishes the influence of profits, sales, debt-equity ratio and taxes had an impact on dividends. For service companies the major determinants were risk, profitability and increase in revenues. For manufacturing companies, apart from profitability, the market value versus book value of the firm's stocks as well as the tax rates also influenced dividend policy.

Olantundun (2006) undertook a study in Nigeria on dividend payouts. Olantundun used the the Lintner-Brittain model for this study. The time period involved was 1984-1994. The OLS method was used to analyse the data. The study submits that the promise of good growth, company size and gearing are important indicators of dividend payouts.

Kumar (2003) in their study explored the determinants that impact dividends.Kumar put forth that while firm earnings and past investments are positively associated with dividend policy, a higher debt was negatively associated with dividend policy.

A study was carried out in Jordan between 1989 and 200 (Malkawi, 2007). This study found strong support for the pecking order and agency costs theories. The age of firms, their profitability and size were positively related to Dividends.

Anil and Kapoor (2008) analyzed dividend policy in the Indian IT space. The study uncovered that the IT sector seemed to behave differently in this respect. Factors like money movement, government taxes, company revenue increase and the ratio of market stock value and book value of stocks have no impact Information Technology sector. However current asset level as well as risk positively correlated to dividend decisions.

Kuwari (2009) explored the dividend determinants in GCC countries. Kuwari established that in these countries firms keep changing their policy regularly. Their aim was to reduce the agency problem and was strongly influenced by government control.

A study by Ahmed and Javid (2009) looked at the Dividend decisions of firms in Karachi for the period 2001 to 2006. The Lintner theory was borne out in this study and both earnings and past dividends affected dividend policy. The study showed that market capitalization and firm size negatively impacted dividend payout, demonstrating that companies prefer to plough back earnings into their own company by increasing their assets rather than payout dividends to shareholders.

A study in Malaysia (Twaijry, 2007) established that both past as well as future events affect dividend policy. In this study it was found that age of the company and the industry did not have any impact on dividend per share. Also past or future earnings had no impact on dividend policy. However the company's market capitalization strongly influence dividend policy.

Appannan & Sim (2011) carried out another study among Malaysia food industry firms. Debt to equity ratio and past dividends were strong influencers. After tax profits while strongly related to dividends was however not a predictor of dividend decisions.

Denis & Osobov (2008) found a similarity in factors between different nations with regard to dividend norms. The major causes are firm size, profit margins,, opportunities for expansion and the mix of earned and contributed equity. The study finds larger companies, profits and earnings as important positive contributors. This study is a prime example to show empirically the the criticality of capital mix. Denis and Osobov also indicate a trend in recent years for newly listed firms across the six countries to have more conservative dividend policies. This study is also supportive of a stages of development model . As per this model older firms, with higher earnings as compared to contributed equity experience higher retention cost of cash. This propels them to increase their payouts. Thus the surplus money of these large mature firms is distributed as dividends.

A study was carried out study the effect of the major global economic disaster in 2008 on determinants of Swedish firms (Svensson & Thorén, 2015). This study used concepts such as Irrelevance, Life cycle, Pecking order, Signaling, Bird-in-hand, Catering and Agency. The Dividend Policy of the Swedish firms was found to be significantly impacted by profitability, size, retained earnings, firm value and risk. The Signalling or the Irrelevance theory did not find any support in the findings of this study. Interestingly the 2008 financial crisis was found to have no impact at all.

Various dividend models in the emerging economy of Pakistan were explored by Ahmed & Javid (2009). The Lintner, Fama and Babiak models were used in the study. The study showed that key determinants of Dividends paid were the magnitude of dividend paid for every share and the EPS. Out of the two however the influence was weighted more by current earning than by previous dividends. The study demonstrates the positive effect of stable earnings, bigger free cash flows, market liquidity and ownership concentration on larger dividends.

This study looks at the dividend payout decisions of firms in UAE (Mehta, 2012). Firms belonging to different sectors were studied from the year 2005 to the year 2009. Various statistical tools were used to analyze the data. The result corroborated with similar studies that large firms give large dividend payouts. The study shows that risk, size and profitability explained 42% of Dividend Policy variation in the department.

Gordon (1959, 1963) proposed a theory called the "bird in hand" theory. The model propounds that, dividend paying stocks will have higher stock price as compared to non dividend paying stocks. This is because shareholders would prefer to buy stocks which are currently paying dividends.

Lasher (2000) in his study submits that the signaling theory is supported in his study. Investors of stocks are more affected by how the payout is going to affect the outlook of the firm and its share price than by the payout rate itself. A decrease in dividend is taken as disastrous informationA fall in dividend payout usually follows a sustained fall in earnings and this information warns the investors that the firm is failing. is not. Brigham, Gapenski and Ehrhardt (1999) in their study on the signaling effect submit that it is often not easy to tell if the signaling effect alone affects share performance or if dividend preferences of investors also is a factor. Pettit (1977) also supports the signaling effect of Dividend policies. Nissan and Ziv (2001) and Bali (2003) also in their studies have found enough evidence ...