The Determinants of Corporate Dividend Policy †Free Samples

Question: Discuss about the Determinants of Corporate Dividend Policy. Answer: Data and Research Methodology Sample and Data Selection The essential data that is collected is attained from Prowess Database of Centre for Monitoring Indian Economy (CIME). The selected organizations that are taken as sample are chosen from the huge base of BSE 500 Index. The tenure of the research is 7 years and it initiates from the year 1st January 2001 to 31st December 2007. The researcher has only added the organizations in the sample that has been paying off dividend on a continuous basis during the research period and has not added the financial organizations and the companies that are owned by the government. It is seen that only the final dividends that are paid in cash by the organizations have been taken into consideration as in general, it is seen that the Indian organizations pay only one dividend annually (Krishnan, Kozhikode 2015). The research has even overlooked the stock repurchases and the stock dividends by the selected organizations and has assessed only the dividends that are paid in cash. This mechanism has been able to provide a final sample of 150 organizations that have been chosen from a total of 16 industries. Explanation of the Variables During the past few years of researches, the researchers have incorporated several financial variables that can have extensive level of impact on the dividend policy (A framework has been given in Annexure 1 of this paper). The variables that have been determined earlier, the current research paper looks to select fifteen variables in order to assess their impact on the decisions related to dividend (Patel, Rayner 2015). The validation for selecting these variables are explained as follows. Liquidity is a key element for the decisions related to dividend. The dividend payment and the liquidity attitude of an organization have a relationship that is direct in nature. In case an organization has sufficient cash flows, the organization would look to dispense the dividend received as cash in order to satisfy the shareholders. Furthermore, the organizations needs to undertake their payment of the dividends with the help of cash and therefore the organization has to be sufficiently liquid in order to distribute the dividends and even to stay solvent (Abraham et al., 2015). The cash from the operations and the current ratio are the indicators that address the liquidity scenario of an organization. Therefore, the cash from operations and the current ratio have been chosen as the first two variables for this research. The other key factor that is determined is the leverage. A company that has higher leverage explains that the huge fixed payments for the purpose of external financing is initiated which, is actually an alternate for the payment of the dividends (Baker et al., 2017). The extent of high leverage leads to a rise in the cost of transaction and even the risk of an organization. On the other hand, the extent of increased retention rate lowers the potentiality for the outward borrowings and vice-versa. Therefore, the research has selected debt-to-equity ratio (DER) and the retained earnings to equity ratio (REE) as the substitutions for financial leverage that displays an association that is negative in nature in accordance to the dividend decision. Therefore, retained earnings to equity ratio and debt-to-equity ratio have been chosen as the third and the fourth variable. Additionally, the relationship among the dividend payment attitude and the model of ownership of a company is even appreciated. The management and the supervision of the company may be levied on the promoters or the directors, the organization or the foreign based investors. The insiders would like to restrict the additional dividend payment and on the other hand the institutional owners are generally are much more dividend demanding (Arora, Sharma 2016). Therefore, the shareholding of the promoters, organizational shareholding and the foreign organizational investor shareholding are taken as the fifth, sixth and seventh variables. The extent of profit has been always taken into consideration as the most effective element for the disbursement of the dividend as the rise in the extent of profit indicates more amounts of dividends (Kengatharan, 2018). It is significant to look at the variables for the purpose of long term and short term profitability of an organization. The paper has chosen Return on Investment, (ROI) and Net Profit Ratio (NPR) and the profit ratio prior to the interest and taxes to their overall assets (PTA) as the substitutes and hence, they are chosen as the eighth, ninth and tenth variables. Furthermore, the opportunities for development have an essential role to play in this research. The rise in the operational development and the developments in the profits of an organization would indicate the rise in the payment of dividends by an organization. The developmental factor is shown by the annual sales growth (ASG), earnings per share (EPS) and return on the net worth (NONW) (Chaklader, Gulati 2015). The rate of growth of the above addressed variables is considered as the eleventh, twelfth and thirteenth variables for the research. Market Capitalization matches with the firm size and therefore is taken as the fourteenth variable. The impact of tax is another key indicator as the taxation rates have an impact on the desire of dividend by the investors. The investors who are paying increased level of tax would like to delay gaining the dividend and therefore would like to preserve their incomes and earnings with the company in order to evade the extensive level of taxes and on the other hand, the investors who are falling within the lower tax bracket would look to have increased level of dividends (Muttakin, Subramaniam 2015). It is because of this purpose, the research has taken the corporate ratio to profit after tax (T) which is an alternative and is the fifteenth variable. A comprehensive explanation of all the variables is provided in the Annexure 2. Research Methodology The current research paper reassesses several factors that affect the decisions related to dividend of a company by making use of the two-step multivariate mechanism. The research has even recognized a total of fifteen variables from the aspect of the literature that is taken into consideration while constructing a dividend policy. While undertaking the initial step, the paper will initiate factor analysis on the collected data in order to bring out the key factors out the chosen fifteen variables. In the next step, the research would undertake multiple regression on the factors that have been determined. Results: Factor Analysis The process of factor assessment explains the highlighted factors that address the correlation between the variables that have been observed. The research paper makes use of the Principle Component Analysis (PCA) as the key process of extraction factor in order to recognize the specific groups of the recognized variables. The extensive factors are additionally exposed to the equamax orthogonal rotation. The table below indicates the results attained from Kaiser-Meyer-Olkin (KMO) and the Barletts Test (MEHTA, Joshi 2016). The KMO system of sampling competence addresses the researcher about whether to minimize the variables into the extensive factors or not. The value that is lower than 0.50 addresses that factor analysis would not establish specific and authentic factors and conversely, any kind of value that is near one would specifically address that this process of assessment would be effective and supportive with the data. The outcome attained in this paper provides a value of 0. 554 and this explains that the correlation trend between the variables is comparatively dense and therefore Factor Analysis is able to generate authentic and specific extensive factors. The Barletts Test of Sphericity examines in order to find out whether the actual matrix of correlation is an identity matrix or not. The outcomes that have been attained in this paper explains that Barletts test has discovered a Chi-Square value of 1.500E3 which is essential for p0.01 and thereby approving that the factor analysis for this paper is valid and authentic. Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .554 Bartletts Test of Sphericity Approx. Chi-Square 1.500E3 Df 105 Sig. .000 Table 1: KMO and Barletts Test It is seen that Table 2 provides the Rotated Factor Matrix by making use of the Equamax Orthogonal Transformation, which is a factor loading factor for every variable on each of the factors. The factor loadings that are lower than 0.30 have been compressed and have not been displayed. The institutional shareholdings have been found to be 0.853 and on the other hand the shareholding of the foreign organizational investors is 0.735 and is correlated positively and on the other hand the shareholding of the promoters is -0.824 and therefore is correlated negatively to the first factor, which is known as the ownership framework. The dividend payout leads to a fall in the worth of the stock and therefore an interest conflict takes place for the insiders. An organization that has increased insider ownership recommends for a lower cash dividend payout. However, the institutional proprietors are interested in influencing the increased payouts so as to improve the power over the management for administering and supervising their matters associated to peripheral finance. The results that are attained in this paper strongly assist the results that are observed in the literature. Conversely, there exists a point that has to be noted to the fact that the personal shareholdings for the promoters, organizations and the investors of the foreign companies in association to the overall shareholdings of an organization have not been regarded. This is an essential aspect with respect to which future researches that can be undertaken. It is seen that factor 2 has increasingly negative loadings as the value is seen to be for debt-equity ratio is -0.756, taxation has a value of -0.704 and the earnings per share has been -0.384 and on the other hand the positive loadings for the return on investment is seen to be 0.759 and the return on the net worth is 0.577. This factor has been termed as leverage. This recommends that the company would look to pay increasing amount of dividends if they are making use of their retained earnings, which has the lowest amount of attached risk in comparison to the external financing. In some other word, increased amount of payment of interest, which is known as fixed charge will lead to lower amount of payment of the dividend. Hence, the outcome of the analysis indicates that there is a converse relationship among the rate of dividend and leverage. The third extensive factor is addressed as Profitability. It is incisive of the net profit ratio that attains a value of 0.809 and the market capitalization, which has a value of 0.789. This factor in this research is coined as liquidity. An organization that has increased level of external financing would be in need of cash flow availability, which means the requirement of strong position of liquidity in order to satisfy their financial responsibilities. Thus, in order to raise the level of liquidity, the company needs to lower their dividend payout and conversely, the bigger the company size is, the more is the accessibility of the independent cash flows and the better will be the amount of the dividend payout (Dhanesh, 2015). A company that has better unit of shareholders is anticipated to give out increased amount of dividends so as to satisfy their shareholders. There has been a discovery that increased amount of retained earnings to the equity ratio, which explains the inclinat ion to payout the dividend would make sure that the accessibility of the free cash flow or the cash flow that is residual within the organization. Hence, one would anticipate a direct and a better relationship among the dividend payout and liquidity. The next or the fifth factor is called Growth. It is inclusive of the annual sales growth that has a value of 0.816, return on net worth, which has a value of 0.530 and the retained earnings to equity ratio that has a value of 0.485 and this implies that the development in the level of profit and sales is a key element for paying out the dividends. The results obtained from this paper assists the discoveries of Gupta, Sharma (2014) who has recommended that the companies that are having increased amount of rate of growth distribute increased amount of dividends in order to satisfy their shareholders. Components Ownership Structure Leverage Profitability Liquidity Growth IS .843 PS -.824 FIIs .735 .385 ROI .759 .412 DER -.756 T -.704 RONW .577 .415 .530 EPS -.384 PTA .932 NPR .932 CR .546 -.431 CFO .809 MC .789 ASG .816 REE .485 Table 2: Rotated Component Matrix Regression Results In this step, the multiple regressions is undertaken in order to ascertain the effect of the selected five variables that are independent on the rate of dividend. The rate of dividend is a kind of variable that is dependent in nature and comprises of the decisions related to dividends and the five factors are discovered from the process of factor analysis and therefore the liquidity, leverage, structure of the ownership, growth and profitability are considered as the independent variables. As the features utilized in the framework of regression are attained through the orthogonall changes, they are independent from the issues related to the multi-collinearity. There have been additional tests and examinations in order to attain the results for autocorrelation, normality and heteroscedasticity and these outcomes reveal that the information is distributed on an average and there are no associated issues. The model that is given below is known as Table 3 provides the outcome of the regression framework. The R-Square for the paper is 0.244, which explains that it is around 25 percent of the variations in the rate of dividend and this is addressed by the variables that are independent are examined. The F-Statistics that is found to be 9.320 is essential at 1 percent of significance. The Durbin-Watson statistics of 2.079 addresses that autocorrelation is not existent among the variables that is independent. R-Square F Durbin-Watson 0.244 9.320 2.079 Table 3: Regression Model Summary Table 4, which is addressed below provides an outcome of the regression results. By assessing the five factors, it is seen that four factors, which are growth, leverage, ownership model and liquidity have anticipated relationships in accordance to the payout of the dividend. In cases where profitability explains a symbol that is opposing to what was anticipated. In accordance to the concerned literature, the results that are obtained in this paper reveals that the leverage scenario of an organization has an inverse and negative relationship with the rate of dividend and the figures come to -0.239, which is seen to be vital at 5% level of significance. It is seen that higher the disclosure of the company in accordance to external financing, more will be risks and threats of the organization and hence, the dividend payout value would be low. Variables Expected sign Standardized Co-efficient T Sig. Beta Dividend Rate (Constant) Dependent variable 3.840 .000 Leverage Negative -.239 -3.013 .003 Liquidity Positive .341 4.138 .000 Profitability Positive -.007 -0.086 .932 Ownership Structure Positive .091 1.113 .286 Growth Positive .041 .541 .589 Table 4: Regression Results In the same manner, liquidity has a value of 0.341 and this addresses a positive relationship with the rate of dividend at the 1% significance level. The framework of the ownership of an organization that represents the institutional entrepreneurs has a coefficient value that is positive and the value is 0.091, but it is not significant statistically. The growth ratio has a value of 0.41 addresses a coefficient that is positive and this value is not significant. Therefore, the outcome of this research explains that there are two distinct and specific elements for the purpose of making decisions related to dividend and they are liquidity and leverage. Conclusion In spite of few years of active and extensive research on several numbers of theories that looks to address the elements of the corporate dividend policy, there has not been any key answers and judgments that can be concluded. The current study reassesses the elements of the decisions related to the corporate dividends of the Indian organizations, which are listed in the Bombay Stock Exchange within the time frame of 1st January 2001 to 31st December 2007. This research makes use of Principal Component Analysis in order to assess the selected fifteen variables that have an effect over the decision related to dividend of an organization. The final outcome has provided five key factors and they are the growth, leverage, structure of ownership, profitability and liquidity. These elements were then undergone with multiple regression analysis within which the dependent variable was considered as the rate of dividend. The outcome of the regression analysis explains that growth, leverage, o wnership structure and liquidity have addressed signs and symbols whereas the extent of profit did not highlight any anticipated signs. The two factors that are mainly liquidity and leverage were discovered to hold a strong and hardy relationship with the rates of dividend of the companies that are pertinent to India. When leverage was discovered to be related negatively, liquidity on the other hand is related positively. The one point that is worthy of explaining here is that the results that have been obtained are undertaken only from the assessment of the financial factors that have an impact on the dividend policy of an Indian organization. In certain practices, certain non-financial factors like the shareholding of the foreign collaborators, behavior and the attitude of the management, policies of the organization etc may even have a posture on the decision of an organization with respect to dividends. 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