Research Papers Dividend Policy Theories

Various factors influencing a firms’ dividend policy have been evaluated by researchers.The outcome of these studies has not entirely resolved the controversies linked to dividend decision.

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Investors can get a return on their investment through dividends (current income).

Alternatively, if a company has a lucrative investment opportunity available, it may not distribute its profits.

This sectoral influence is mainly because firms belonging to a sector have similar earnings prospects, investment prospects, and accessibility of resources.

As a result of these similarities, firms in the same sector have similar dividend policies (Michel 1979; Baker 1988; Dempsey et al. However, very limited studies have evaluated the variances in dividend policy behavior across sectors.

Nevertheless, researchers have reported that determinants of dividends vary across countries and over different periods of time e.g., (Ramcharran 2001). Hence, it is necessary to evaluate the dividend paying behavior of emerging market firms in further detail.

Studies have also reported that variations in dividends across countries occur because of differences in economic policy for each country, including corporate governance policy (Mitton 2004; Sawicki 2009) and pertinent laws applicable (La Porta et al. Emerging and developed markets also differ in many ways. (1995) report that dividends in emerging market firms are more volatile than U. Lintner (1956) postulates that sectors influence the dividend policy.Dividends can be distributed out of profits, and require the existence of free cash flows; hence, the payment of dividends provides a positive signal to investors (Bhattacharya 1979; Miller and Rock 1985).According to Jensen (1986), the agency cost of the free cash flow model predicts that companies with larger free cash flows tend to distribute higher dividends rather than investing in projects with a lower net present value (NPV).All investors expect a certain amount of return on their investment for the risk taken.Firms can allocate profits to their stockholders either through dividends or share repurchases.As a result of this, even firms with higher growth opportunities and lower cash flows continue to pay dividends.We also find evidence that dividend policies vary significantly across industrial sectors in India.Hence, it is not astonishing that “dividend controversy” has been listed by Brealey and Myers (2002) as one among ten of the most important unsolved corporate finance problems. firms, higher dividends are paid by emerging market firms, which itself is puzzling.Also, the determinants of dividend decision are not uniform across firms. (2003b) find that country-specific factors have an impact in determining dividend policies in emerging markets. Reddy and Rath (2005) have also reiterated that dividend behavior in emerging markets has not been evaluated extensively.We find that size, profitability, and interest coverage ratios have a significant positive relation to dividend policy.Furthermore, business risk and debt reveal a significantly negative relation with dividends.


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    REFERENCES. Testing for Market Efficiency in Emerging Markets A Case Study of the Karachi Stock Market. The Lahore Journal of Economics, 12 1, 119-140 Naeem, S. and Nasr, M. 2007. Dividend policy of Pakistani Firms; Trends and Determinants. International Review of Business Research Papers, 3 3, 242-254.…

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