The corporate finance


The dividend enunciations are conceded as one of the most of import issues in the corporate finance, and it has been the topic of considerable research by economic experts in the last four decennaries.

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The remainder of the survey is divided into five parts. Section two presents a reappraisal of bing literatures while in subdivision three the research methodological analysis is discussed, the theoretical account used is specified and the variables are defined. Section four provides the analysis of findings while the 5th subdivision presents the drumhead and decision.

Literature reappraisal

Since the construct of the dividend mystifier has been introduced different empirical grounds had been made to look into the factors that might play a function in act uponing the dividend behaviour and policy. One of the major attempts in explicating the dividend behaviour was conducted by Johan lintner ( 1956 ) , who used both empirical and study research methodological analysis by questioning corporate directors of American companies. His empirical survey finds that dividend stableness is an of import concern for houses in general, besides he noticed that net incomes is a major determiner of any alteration in dividends, furthermore he conclude that the dividend policy is the first policy to be set and so other policies is adjusted, covering with the dividend policy as given. Lintner modeled his findings utilizing “partial accommodation model” besides called “dividend alteration model” , in which the alteration in dividends is regressed on a changeless, the anterior twelvemonth dividends and earning of current twelvemonth ( step of net income ) as flow:

His consequences showed that the theoretical account was able to explicate 85 % of the dividends alterations in his sample, which support his statement that dividend alteration determination must be based on the current net incomes degree. Additionally, Lintner finds that that the mark dividend payout ratio and the dividend policy is determined harmonizing to the ability of the corporation to prolong its capital investing and long-term mark growing. Lintner besides points out that corporation in general tend to follow a sticky and stable dividend policy that satisfy the investors ‘ outlooks and besides he pointed that directors do non be given to diminish the dividends even if there is downswings in net incomes, while an addition in dividends dose non occur unless the director are certain that there is a lasting addition in net incomes.

Simi-larly, lintner ‘s theoretical account has been adapted by several writers where a figure of new explanatory variables have been introduced. Drling ( 1957 ) , Fama and babiak ( 1968 ) , and Turnsovsky ( 1967 ) tried to happen the determiners of dividend payment by single houses. They found that the lintner theoretical account clasp but it can be improved by adding other explanatory variables, such as net incomes from the old times and expected future net incomes.

While a batch of surveies was able to supply grounds in support of a positive and important insouciant relationship dividend to gaining others were able to happen the opposite such as fariso and etal ( 2004 ) . In their paper “The relationship between dividend and earnings” farzado fariso, Amanda geary and justin moser tried to supply a review of these surveies and turn out the antonym by speculating that no important relationship holds between net incomes and dividends in the long tally. They besides argue that all other surveies that were able to happen a relation are based on short periods of clip and are hence misdirecting to investors. Friso and etal suggest that in pattern, in some periods an addition in the dividend payout might followed by an addition in future earning, but in other periods similar addition might be followed by a diminution in the future net incomes, Which support the thought of no important relation between dividends and net incomes in the long tally. In order to clear up this position firso and etal presented four instances that can explicate the different possible realations between dividend and future net incomes: The first instance suggests that an addition in dividends in a certain one-fourth might be the consequence of good public presentation in the old quarters which may be followed by future net incomes.

The 2nd instance suggests that an addition in dividend might be related to a direction policy to maintain the stock holders from selling their stocks when future net incomes are expected to worsen or current losingss expected to go on, an illustration of that is when IBM direction decided to increase the dividend wage out in the 1990s while they where losing money at the clip, This was a instance of increasing in dividend followed by worsening net incomes. The 3rd instance suggests that an addition in dividend might be a consequence of an addition in gaining in old quarters that may non prolong in future periods. The 4th instance suggests that an addition in dividend in a certain one-fourth will do a decrease in the financess that have been set to be reinvested and therefore do a diminution in future net incomes. As a decision for all instances firso and etal stated that in pattern you might happen a positive insouciant relationship between net incomes and dividends ( 1st instance ) but besides you might acquire a negative relationship every bit good ( 2nd, 3rd and 4th instance ) which support their hypothesis that overall long-run relationship should be undistinguished.

Following their logical grounds firso and etal presented an empirical analysis based on quarterly informations for the S & A ; P 500 index over 1988-2002 period includeing Dickey-fuller trial, a simple arrested development trial and the farmer causality trial, the consequences strongly support their hypothesis which lead them to reason that investing determination must non be based on the dividend/earnings relationship and investors must ever analyse all possible dealingss between dividend and net incomes before doing their investing determinations.

A batch of surveies attempted to foreground the factors impacting the dividend policy and the dividend alterations, some surveies attempt to foretell dividend utilizing hard currency flow ( brittain, 1966 ; Hagerman and hunfer, 1980 ; and curm, et al. , 1988 ) . Simon ( 1994 ) used the hard currency flow as a variable in the dividend alteration theoretical account, taking on consideration different conditions and different steps. His survey consists a sample of US companies covers a period 1983-84 and 1984-85, chosen to stand for a cross-section of dividends alterations. Simon tried to analyze weather cash-availability can add incremental information to the dividend alteration theoretical account which already includes old dividends and net incomes, He besides tried to prove whether additions and lessenings in cash-availability affect alterations in dividends otherwise. Three steps of cash-availability ( CA ) were tested: hard currency flow from operations ( CFOP ) , net current operating financess ( NCOF ) and entire hard currency flow before dividends ( TCF ) . The findings of Simon ( 1994 ) suggest that none of the cash-availability ( CA ) measures add incremental value to the Johan lintner ( 1956 ) theoretical account in explicating the alterations in dividends. Simon concludes that: “ … . even at this degree of complexness, the relationship between dividends and hard currency flow remains elusive.”

More late Charitou and vafeas ( 1998 ) argued that Simon ‘s survey can be enhanced for two grounds: First, the sample size is reasonably little. Second, the consequence might hold been clip dependent since it includes observation for two old ages. Despite the sweetening that has been done, they were unable to happen a considerable relationship between dividend alteration and operating hard currency flow. So they extended their survey by presenting two appropriate factors that might be able to ease the dividend-cash flow relationship. First, they considered the presence of non-liner relationship between dividends and hard currency flow with greater prognostic aptitude for hard currency flows when the magnitude of entire accumulations is lower ( where operating hard currency flow is lower ) , their logical thinking for that is: houses liquidity place plays a important function in its ability to set the dividend policy. The dividend policy will be set harmonizing to the house public presentation when the available hard currency flow is equal, it may increase the dividend payout ratio due to good public presentation ( high net incomes ) and frailty versa. On the other manus if the available hard currency flow is unequal the house will non be able to change its dividend policy harmonizing its public presentation, hence when runing hard currency flows are low, hard currency flows are expected to play a important function in puting dividend policy. When hard currency flow is high compared to net incomes the house may non increase its dividend but alternatively house will hold the pick to put its dividend policy in response to its public presentation ( net incomes ) which might be high or low. In drumhead Charitou and vafeas ( 1998 ) hypothesis that “Given net incomes, the relationship between runing hard currency flows and dividend alterations is significantly positive for houses with low runing hard currency flows.”

Second, they assume that the relationship between hard currency flows and dividends alterations depend on the growing chances of the houses. Their logical thinking for that is: houses are more likely to reinvest its money back instead than paying it out as dividend when there is a future outlook for growing because the expected return on investing is higher as steadfast outlook for growing alleged to be more valuable. On the other manus as growing chance diminution, the expected return on investing lessenings and house will be more favourable in utilizing hard currency flows to pay dividends. Another account introduced by Charitou and vafeas ( 1998 ) of the function of growing in dividend policy is based on the free hard currency flow hypothesis developed by Jensen ( 1986 ) which suggests that director ‘s have inducement to reinvest the operating hard currency flow instead than paying it as dividends even when house outlook for growing is low. This is based on the thought that overinvestment will do to enlargement in the concern which, in bend give the directors the chance of running larger concern which will include higher fringe benefits and wages ( bureau job ) , Opposing to the first account on the function of growing in dividend, Jensen hypothesis suggest that even when growing outlook are low directors will prefer puting instead than paying out dividends, which leads to take down hard currency flow coefficient for lower growing house.

Despite Charitou and vafeas ( 1998 ) using a larger sample and a wider proving horizon the trials showed consequences which are similar to those reported in anterior surveies ( Simons, 1994 ) . These consequences show no important relationship between dividend alterations and runing hard currency flows, given net incomes. Besides they found that given net incomes, low runing hard currency flows limit dividend payout alterations but high operating hard currency flows do non help dividend payout alterations. Furthermore they found that the relationship between hard currency flows and dividend alterations depends well on growing chances.

Other surveies attempt to happen the nexus between dividends policy and corporate purchase, Adedeji ( 1998 ) tried to calculate the relation between dividend payout ratio, fiscal purchase and investing. His survey covered 224 uk company over a period of 11 twelvemonth up to 1996. He assumed that that dividend payout ratio should be a map of fiscal purchase and investing, after commanding for other factors, as followers: Div=f ( FL, INV, OTHERDIV ) Where: Div is dividend payout ratio, FL is fiscal purchase and OTHERDIV are vectors of other variables that may hold an influence on dividend payout ratio, adedeji consequences showed that there is a by and large positive interrelatedness between dividend payout ratio and fiscal purchase. However, there is no important interaction between investing and fiscal purchase. Although investing has a positive influence on fiscal purchase, fiscal purchase does non hold a important influence on investing.

As stated before some surveies investigated the association between dividends and hard currency flow and net incomes, besides there were some surveies that tried to happen if any relationship clasp between the dividends and purchase. Nikolas Eriotios ( ) investigated this issue by proving a dividend policy theoretical account with the debt ratio of the house, the old twelvemonth ‘s dividend output and the alterations in net incomes of it as depended variables. The survey was conducted on a sample of 129 houses listed on the Athens Stock Exchange in 6-year period ( 1997 – 2001 ) . The dependant variable used in this survey is the dividend per portion which represents the dividend policy, and it was tested to see if it depends upon the dividend output at clip t-1, the debt ratio at clip T ( the ratio of entire debt to entire assets ) and the silent person variable of the net incomes which separate the sample into two groups one with an increasing net incomes from old twelvemonth and other with diminishing gaining from the old twelvemonth, the undermentioned theoretical account where estimated:

In his paper Eriotis used three different panel informations theoretical accounts: the sum, the fixed effects and the random effects theoretical account, best manner to depict panel informations as “repeated observations on the same set of cross-section units” ( ) After using the three theoretical accounts, Eriotios was able to happen that dividend per portion mostly depends on three variables, the debit ratio, the dividend output from old twelvemonth and the alterations on the earning of the houses ( houses that has an addition in its net incomes have a different dividend policy than one that does non confront an addition ) , besides his determination was able to turn out a positive relationship between dividend policy and the examined variables.

Other surveies such as Aivazian et Al. ( 2001 ) and Ho ( 2003 ) identified the of import of different fiscal and environmental variables that affect houses dividend policy. Aivazin, booth, and cleary ( 2001 ) used a sample from eight developing states and examined the influence of factors shown to act upon the dividend behaviour of companies in more developed states, so they compared the sample of the emerging markets houses with those for sample of USA. The factors they used are profitableness, size, debt, hazard, tangibleness, and growing. There empirical consequences found the undermentioned relationships: foremost, dividend policy is positively affected by profitableness and debt in both US and emerging markets. Second, dividend policy is negatively affected by intangibleness in the emerging markets. Third, there were non adequate grounds that concern hazard and size affect dividend policy in important or consistent manner. In general they were able to happen that same factors affect dividend policy for US and emerging markets houses, still emerging market houses are more sensitive to some variables, proposing they operate under greater fiscal restraint and state and institutional factors are clearly of import in the dividend policy.

While Aivazin, booth, and cleary ( 2001 ) worked on emerging markets ho ( 2003 ) conduct a comparative survey of dividend policy in Australia and Japan which harmonizing to 1990 statistic for “the 10 best states in the world” are the most developed in the Asia Pacific part. They examined 10-years panel informations with 2235 firm-year observation from the constitutional stocks of ASX 200 index in Australian stock market and the Nikkei 225 index of the Nipponese stock market from 1992 to 2001. Ho research was conducted in two phases foremost he looked at the micro degree to happen the basic fiscal variable that consequence houses dividend policy in both states, and so he moved to the macro degree to place the part and industry effects.

In the first phase Ho used a fixed effects theoretical account of multiple arrested development analysis [ Dinardo and Johnston, 1997, p.397 ] . He used the same explanatory variables introduced by Aivazin, booth, and cleary ( 2001 ) but he besides added liquidness to acquire the fixed effects arrested development theoretical account. The findings show that different fiscal factors affect dividend policy. In Australia dividends are affected positively by size but in Japan it is affected positively by liquidness and negatively by hazard which he linked it to the bureau, signaling, and minutess cost theories of dividend policy. Besides ho found that dividend policy is significantly influenced by the environmental variables by comparing the consequences he got from the Nipponese and Australian market.

Data and methodological analysis

Data and variables

The current survey investigates the issue of dividend behaviour utilizing industrial index in London stock exchange for the period 1999 to 2008. The sample informations used in this research were ten old ages of balanced panel informations ; they consisted of 2235 firm-year observations from 332 houses in the London stock exchange. These houses maintained their individuality and reported their fiscal histories without any important spreads, for the period from 1999 to 2008. However, due to losing observations, the entire figure of observations in the estimated theoretical accounts is 743.

The cardinal variables of involvement are steps of dividends per portion ( DPS ) , debt ratio ( DR ) , Return on Equity ratio ( ROE ) , current ratio ( CR ) , Market to Book ratio ( MB ) and the natural logarithm of the entire assets, These variables were derived from informations collected from the DataStream information base which is provided by Thomson Financial. Dividends per portion are calculated as the entire sum of dividends divided by the figure of portions of the house I at clip T, the debt ratio as the entire debt over entire assets of the house I at clip T, the return on equity as the return of the company divided by the entire equity, the current ratio as the current assets divided by current liquidness and the market to book value as the market value of portions divided by the book value.

These variables were chosen to see how different factors affect the dividend policy and behaviour. First the debt ratio were used to detect the affect of purchase on dividends, empirical surveies such as Aivazian et al. , ( 2003 ) found a negative relationship between purchase and dividend, this means dividends with low debt ratio are willing to pay more dividends. “Firms with comparatively less debt and more touchable assets have greater fiscal slack and more able to pay and keep their dividends” ( Aivazian et al. , 2003: 380 ) . However other surveies besides showed that a positive relation can be found between dividends and purchase. “Firms with high payout ratios tend to be debt financed, while houses with low payout ratios tend to be equity financed” Chang and Rhee, 1990. Second in order to see how profitableness can impact the dividends behavior the return on equity ratio were use. a positive relationship is expected to keep between the dividends and profitableness, this is because profitable houses are willing to pay larger part of its net incomes as dividends, this can be besides supported by the signaling theory which suggests company proclamations of an addition in dividend payouts act as an index of the house possessing strong future chances. ( Battacharya, 1979 ; Chang and Rhee, 2001 ; Ho, 2003 ; Aivazian et al.,2003 )

The 3rd variable was the current ratio which is used to analyze the impact of liquidness on the distribution of hard currency dividends. Firms with higher hard currency handiness is expected to administer dividends than other houses with unequal hard currency. ( Ho, 2003 )

The Forth variable used in this survey is the market to book value which represent the growing chance of the house. The higher the growing opportunities the higher the house demand to retain net incomes in order to provide its hereafter investing, which will decrees the sum of hard currency paid as dividends. This can be shown as a negative relationship between the dividends and profitableness. ( Holder et al. , 1998 ; Gul, 1999 ; Chang and Rhee 2001 ; Ho, 2003, Aivazian et al. , 2003 ) .

Finally we used the natural logarithm of the entire assets of the house in order to capture the consequence of the house size on the dividend behaviour as it is expected that big house will hold easier entree to capital market which mean greater ability to raise financess in shorter notice and therefore will hold higher payout ratio than smaller house. ( Chang and Rhee, 1990 )

The theoretical account:

In order to unite the cross-sectional informations with time-series informations, a panel information theoretical accounts were used that is considered one of the powerful research instruments, because it can supply consequence that could non be estimated and studied if we use merely time-series or cross-section informations. Besides utilizing panel informations theoretical account we can command the single heterogeneousness, as it suggest that persons, houses, stats or states are heterogenous. Furthermore panel informations give more enlightening less collinearity among the variables, more grades of freedom and more efficiency, non to advert that it is besides better able to analyze the kineticss of accommodation.

A general theoretical account for panel informations that allows the research worker to gauge panel informations with great flexibleness and explicate the differences in the behaviour of the cross-section elements is theoretically as follows

This theoretical account is a classical arrested development theoretical account. If the matrix zi can be observed, for all persons, so the least square method gives efficient and consistent calculators. The pooled arrested development considers that zi contains merely a changeless term. In this instance the ordinary least square method provides an efficient and consistent estimation for the ? and the a coefficients. If zi is unseen and correlated with the independent variables so the least squares calculator of ? is biased and inconsistent, as a effect of an omitted variable. The fixed effects method takes those jobs into history and gives an indifferent and consistent calculator of ? and a. If the unseen single effects can be formulated, and under the premise that these observations are uncorrelated with the independent variables, the econometric theoretical account can be estimated by the random effects method.


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