The Determinants Of Dividend Payout Finance Essay

This chapter indicated the work of old bookmans that are relevant to this research undertaking. This chapter has included the reappraisal of the literature, reappraisal of relevant theoretical theoretical accounts, conceptual model and hypotheses development every bit good as decision. In this research, a reappraisal of literature will be followed to measure the determiners of dividend payout. We had determined and discourse the different variables by utilizing different old researches. The variables that we will discourse are steadfast size, purchase, liquidness, profitableness and dividend payout ratio.

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2.1 Review of the Literature

2.1.1 Firm Size

Harmonizing to Federal Reserve Bank ( 2003 ) , they clearly categorized the size of bank into little size when the bank consists of less than $ 100 million in assets ; medium size consists of its assets between $ 100 million and $ 1 billion while big size consists more than $ 1billion in assets. In contrast, World Bank ( 2013 ) recognized the house size based on figure of employees. Small house consists of less than 20 employees, medium house consists of 20 to 99 employees and big house consists of greater than 99 employees. Eriotis ( 2005 ) demonstrated that the dividend payout ratio of houses listed on the Athens Stock Exchange for the period 1996 – 2001 utilizing panel sample which is measured based on the house size and house ‘s earning. Besides, he indicated that large companies are more stable and lower hazard compared to little companies, hence it is more attractive to investors.

Eriotis ( 2005 ) stated that powerful and large companies can entree into the capital market easy to raise their fund from publishing new portions capital or borrow cheaper loans in the new market, therefore they can counterbalance dividend to their investors. Furthermore, their cost of capital will be much lower compared to little house. Additionally from Eriotis ( 2005 ) , the direction squad of big companies is more willing to pay higher dividends than smaller houses which supported by Ahmed and Javid ( 2009 ) , as big more diversified house are likely to hold really low opportunity of bankruptcy and can prolong higher degree of debt.

Initially, Rafique ( 2012 ) indicated that the house size is positively associated with dividend payout through probe on 53 companies from listed non-financial houses in the Karachi Stock Exchange. Al-Kuwari ( 2009 ) studied with 191 non-financial houses which listed on the stock exchanges of Gulf Co-operation Council ( GCC ) from twelvemonth 1999-2003, has besides verified that the house size is positive associated with dividend payout. The research of Al-Shubiri ( 2011 ) proved that the house size is found to hold a positive influence on dividend payout through the probe with 60 listed houses from Amman Stock Exchange.

However, Utami and Inanga ( 2011 ) had conducted their research by utilizing 26 companies from Indonesia Stock Exchange and found that there is no important relationship between house size and dividend payout ratio. Al-Taleb ( 2012 ) adopted 60 listed houses in Amman Stock Exchange as sample and proved that there is no important relationship between house size and dividend payout. Harmonizing to the old research of Fama and French ( 2001 ) , steadfast size is expected to hold a important relationship with dividend payout but their finding consequences are dissimilar from their outlook.

Al-Kuwari ( 2009 ) indicated that the positive relationship between house size and dividend payout are supported by several old research workers such as Eddy and Seifert, ( 1998 ) ; Redding, ( 1997 ) ; Manos, ( 2002 ) ; Mollah ( 2002 ) and more. So, it can be concluded that there is a important relationship between house size and dividend payout.

2.1.2 Leverage

Leverage can be defined as the ability to finance the borrowed money with none or small of ain money to do net income. In our research, purchase is an of import instrument in determine the dividend payout of Malayan local Bankss. So, it has been introduced as an independent variable in our research.

There are some past research workers identified purchase has a negative relationship with dividend payout. Harmonizing to Fama and French ( 2002 ) , company with higher purchase tends to hold more investing. Company tends to pay lower dividend when their purchase is higher and maintained net incomes is lower. Their consequence shows a statistically important negative relationship between purchase and dividend payout. Another survey done by Ahmed and Javid ( 2009 ) , they study about the kineticss and determiners of dividend payout policy of 320 non-financial houses that listed in Karachi Stock Exchange during 2001 to 2006 by utilizing dividend theoretical account of Lintner ( 1956 ) . They found that purchase have the negative consequence on dividend payout policy. In fact, purchase influences the dividend behavior of the company. If the purchase degree is high, it indicates the company ‘s hard currency flow state of affairs is more hazardous. Then, the company retained net incomes will be low, therefore, dividend payout besides lesser. Therefore, we expect that there is a negative relationship between purchase and dividend payout.

However, there are some research workers found the consequences which are non consistent with the surveies above. Myers and Frank ( 2002 ) found that there is important positive relationship between debt to equity ratio and dividend payout. Their survey is utilizing the information of 483 houses from Multex Investor Database. While another determination of Jeong ( 2008 ) stated that the relationship between purchase and dividend payout is negative insignificant. The higher purchase will do the higher hazard in hard currency flow. A long term debt will transport negative consequence to dividend payment. A higher purchase company tend to pay lesser dividend to hedge the cost of raising external capital. These consequences indicate that the purchase is non the determiner of dividend payout policies. Therefore, these are non consistent with the old research workers ( Fama & A ; French, 2002 ; Ahmed & A ; Javid, 2009 ) and our outlook.

2.1.3 Liquid

Harmonizing to Hossain and Alam ( 2012 ) liquidness can be define as the ability of a house to change over their current assets without grant by the assets monetary value and clip. They used multilinear arrested development to analysis the relationship between the liquidness and the dividend payout. They found that there is positive relationship between liquidness and dividend payout and besides acquire their expected consequence where liquidness has important positive relationship with dividend payout. Anil and Kapoor ( 2008 ) studied the factors affect the dividend payout in Indian information engineering sector from twelvemonth 2000 to 2006. They used multilinear arrested development to analysis the relationship between dividend payout and liquidness. Result has shown that liquidness is an of import variable which will impact the dividend payout. Although Anil and Kapoor focused on engineering sector, but most of their literature reappraisals are related to fiscal sector. Therefore, the consequence of this survey can use in our survey which is on banking sector since most of their literature reappraisals are from the fiscal sector, besides they found that when the liquidness of the house is high, steadfast tend to hold more free hard currency flows, it increase the opportunity of giving high dividend payout. Besides, Ameer ( 2008 ) study the dividend payout in Malaysia Bankss and he found that when the house have free hard currency flows and does non hold any positive NPV investing, they will do the dividend payout to their stockholder to do them happy instead than blow the free hard currency flow, beside that paying dividend to stockholder can assist to cut down the hazard of monetary value volatility.

Harmonizing to Benito and Young ( 2001 ) studied the dividend skip and dividend cut in UK fiscal house and consequence is consistent with the old survey which they found out that there is a direct relationship between the liquidness and dividend payment behavior. When the house have equal hard currency flows, they will administer the dividend to their stockholders in order to fulfill their stockholders involvement. Furthermore, Ahmed and Javid ( 2009 ) studied the dividend policy in Pakistan and their consequence is besides consistent with the old survey, where they apply four methods in their analysis which are Generalized Method of Moments ( GMM ) , pooled time-series cross-section informations with common consequence ( POOL ) pooled informations with fixed consequence theoretical account ( FEM ) and pooled informations random consequence theoretical account ( REM ) . They found out that when the house has high liquidness, they are likely to pay more dividends to stockholders, because wage more dividends will fulfill their stockholder and cut down the bureau struggle.

From the old research worker surveies, we found out that the relationship between the liquidness and dividend payout has positive relationship in the banking sector. So we predict that the relationship between the liquidness and dividend payout are positive, because we believe that pay dividend to stockholders can assist to cut down the hazard of stock monetary value volatility ( Nazir, Abdullah and Nawaz, 2012 ) .

2.1.4 Profitableness

Profitableness is the efficiency of a house in bring forthing net income and frequently step in the signifier of ratio. Appannan and Lee ( 2011 ) studied the determiners that impacting the dividend payment determination by the company direction in Malaysia listed companies for nutrient industries under the consumer merchandises sector from twelvemonth 2004 to 2008. They used 7 independent variables to analyze the determiners that impacting dividend payment determination and findings showed net income after revenue enhancement and dividend payment determination are important and have a positive relationship harmonizing to their multiple arrested development theoretical account analysis. Besides, the premise of profitableness is an of import determiner of dividend payment is besides supported by Mohamed et Al. ( 2008 ) . They studied the determiners of dividend payment for the top 200 listed companies which includes fiscal establishments, on the Bursa Malaysia from twelvemonth 2003 to 2005 utilizing profitableness and liquidness as their mugwumps variables to analyze the determiners of dividend payments utilizing pooled ordinary least square analysis. Results show that profitableness is positively important act uponing dividend payment. Both Appannan and Lee ( 2011 ) and Mohamed et Al. ( 2008 ) surveies show that profitableness is important and have a positive relationship to dividend payment in Malaysia. Both of these findings can be apply to our survey because it shows that Malaysia has a similar tendency in most of the industries, including fiscal sector where dividend payment will be higher when steadfast addition more net incomes.

Aivazian, Booth and Cleary ( 2003 ) examine whether emerging market houses in Korea, India, Malaysia, Thailand, Zimbabwe, Jordan, Pakistan and Turkey follow different dividend payout policies from the United States houses. Aivazian et Al. ( 2003 ) expect both Korea and Malaysia prosecute similar dividend payout policies to United States houses. They used pooled time-series cross-sectional arrested development to analyze the survey. Findings show profitableness is important with dividend payments and positively affects dividend payments with high return on equity ( ROE ) consequences high dividend payments with the support of the residuary hard currency flow theory of dividend. Denis and Osobov ( 2008 ) examined the international grounds on the determiners of dividend utilizing univariate analysis and multivariate analysis found that the possibility of houses paying dividends in developed states such as United States, United Kingdom, Canada, Japan, Germany and France are positively related to profitableness. Besides, their consequence shows that houses with higher net income compared to old twelvemonth with greater proportion of earned equity are more likely to pay higher dividends compare to old twelvemonth. This survey is applied to our survey because it shows emerging houses in every state are practising the same dividend payout where a house with more profitableness tends to pay more dividends and this statement besides supported by Aivazian et Al. ( 2003 ) , who expect Malaysia pursue similar dividend payout policies to houses in developed state such as United States.

However, Anil and Kapoor ( 2008 ) who used multiple additive arrested development analysis as their empirical analysis in examine the determiners of dividend payout ratios in Indian Information Technology ( IT ) sector from 2000 to 2006. The consequences show positive but undistinguished relationship between profitableness and dividend payout. This survey highlighted that dividend payout has a positive relationship with profitableness but it is non an of import determiner of dividend payment in IT sector as IT sector would retained more gaining for future undertakings and merchandise development. Therefore, IT sector used to pay small or no dividend compared to others sector.

Mehta ( 2012 ) examined the of import factors which affect the dividend payout determination in United Arab Emirates ( UAE ) ‘s seven sectors listed on the Abu Dhabi Stock exchange for a period of 5 old ages from 2005-2009. Mehta examined 5 mugwumps variables utilizing rearward multiple additive arrested development theoretical accounts and consequences shows that profitableness of the houses ( which measured by ROE ) is most important variable act uponing the dividend payout but has a negative relationship with dividend payout. Furthermore, profitableness measured by return on assets ( ROA ) and net incomes per portion ( EPS ) are non statically important and have a negative relationship with dividend payout, which shows that the more profitable houses pay fewer dividends. This scenario reflects to the picking order theory, where houses will prefer to trust more on maintained net incomes or internal financess as a consequence the houses will hold a possibility of paying fewer dividend and retained more net incomes.

Based the old research worker surveies, we found that the relationship between profitableness and dividend payout are consist statement, some of the research worker ( Appannan and Lee, 2011 ; Mohamed et al. , 2008 ; Aivazian et al. , 2003 ) have found the positive relationship between profitableness and dividend payout while some of the research worker ( Anil and Kapoor, 2008 ; Mehta, 2012 ) acquire the contrary consequence. We predict that the relationship between profitableness and dividend payout are positive, because house will seek to counterbalance more to stockholders when the house generate higher net income to carry through stockholders involvement.

2.1.5 Dividend Payout

Dividend payout is another signifier of return to the stockholder other than capital addition when stock monetary values rise ( Chang, 2007 ) .

Huda and Farah ( 2011 ) conducted a research of the determiners of dividend determination of house in the banking industry of Bangladesh where the information is selected from 11 Bankss informations listed with Dhaka Stock Exchange ( DSE ) between the period of 2003 to 2010. They used simple arrested development, multiple arrested development and F-test to analyze their survey. There are three different theoretical accounts is created in this survey and the dependant variable for three theoretical accounts are hard currency payout ratio, stock payout and entire payout ratio. Based on the consequences, multiple arrested developments suggest that the chosen regressor explain more than 99 % alterations in the stock payout and entire payout. While they found the relationship is lesser in the instance of hard currency payout which is merely 70.40 % . The relationship is shallow with each of the regressor because the regressand, hard currency payout itself shows asymmetrical form in the banking industry. The relationship of hard currency dividends with regressor could hold been shown a better image if the Bankss had paid hard currency dividend in the same manner they paid stock dividend.

In add-on, Subramaniam and Susela ( 2011 ) who examined the function of corporate administration and relationship between investing chance set and dividend policy in Malaysia. The sample of the survey consists of three hundred of the highest capitalized companies listed on Bursa Malaysia for the old ages ended 2004 boulder clay 2006. Ordinary Least-Squares Arrested development is used to analyse the cross-sectional informations by E-views. The dependant variable usage to calculate dividend policy is dividend per portion which expression is hard currency dividend paid divide net income. This is because dividend output is antiphonal to portion monetary value while dividend per portion is non. Therefore, dividend per portion is chosen as the chief step of dividend policy ( Smith & A ; Watts, 1992 ; Gaver & A ; Gaver, 1992 ; Adam & A ; Goyal, 2008 ) .

Harmonizing to Gupta and Banga ( 2010 ) conducted a research on the determiner of corporate dividend policy for Indian companies by utilizing a two-step multivariate process. Sample is collected of 150 companies from 16 industries from 2001 to 2007. Dividend rate is used to represent the dividend determination. This is because Mohanty ( 1999 ) found that dividend rate is a critical determiner of dividend policy than dividend payout ratio in the Indian state of affairs. Gupta and Banga ( 2010 ) have study merely hard currency dividend and neglected stock dividends and stock redemptions by companies due to Indian houses merely distribute one time dividend a old ages.

Last but non least, John and Muthusamy ( 2010 ) who examined the corporate dividend policy for the Indian paper industry utilizing OLS on the sample of Top-ten paper houses from Indian paper industry listed in Bombay Stock Exchange. The survey used dividend payout ratio as the dependant variable base for dividend determination. The ground why they choose dividend payout ratio to be the dependent variable is to stay changeless with old research worker ( Amidu & A ; Abor, 2006 ) .

In decision, we found that hard currency dividend is normally used as a placeholder to gauge dividend payout, determination or policy. Past research workers that mentioned above used dividend per portion, dividend rate and dividend payout ratio as their dependant variable. All of these variables are merely include the hard currency dividend. However, dividend payout is used as dependent variables in this survey because our aim is to happen out the relationship between independent variable and dividend payout of the Malayan local Bankss.

2.2 Review of Relevant Theoretical Models

2.2.1 Clientele Effect

Harmonizing to Borges ( n.d. ) , clientele consequence is based on the theory that when the fringy income revenue enhancement of the investor is higher, they will be less interested in owing high dividend output stocks and preferring to keep stocks where returns come from capital additions. Furthermore, harmonizing to Barman ( 2008 ) , this statement stated that there are three types of stockholders, viz. , those who looking for current dividend income, seeking capital addition and those who are concerned with both dividend income and capital addition. Thus, a house is non merely faced with one patronage but with different patronages or with one dividend policy over different patronages.

Harmonizing to Allen, Bernardo and Welch ( 2000 ) , their consequence found two patronages which are tax-exempt institutional and taxed person. Untaxed institutional is the group which was often revenue enhancement exempted and largely is public and corporate pension financess, colleges and universities. It is consistent with the survey support by Brigham and Houston ( 2004 ) , those investors who are in low or zero revenue enhancement brackets are in the immediate dividend class and normally are retired persons or university gift financess. On the other manus, investors with high revenue enhancement brackets would prefer capital addition because the less the house pays out in dividends, the lower the investor ‘ revenue enhancements would be and the less dealing costs they will hold to pay by reinvest their dividend income after first paying revenue enhancements on dividends received ( Barman, 2008 ) .

Therefore, investors who want immediate dividend income should have portions in high dividend payout houses, while investors who do non necessitate dividend distributions should have portions in low dividend payout houses ( Barman, 2008 ) .

2.2.2 Dividend Signalling Theory

Dividend distribution serves as a signalling device for the direction ‘s quality and committedness degree ( Miller and Modigliani, 1961 ; Bhattacharya, 1979 ; Miller, Merton and Rock, 1985 ; John, Kose and William, 1985 ) . In other words, houses commit to pay dividends in order to credibly signal to investors private information about their bright hereafter. Dividends are considered to be direction ‘s most cost-efficient manner of cut downing the investor uncertainness about the company ‘s value ( Ameer, 2008 ) .

Numerous documents observe that houses that pay dividends tend to be more mature and less volatile because investors consider dividend induction and additions as good intelligence. Furthermore, empirical grounds indicates that investors respond favorably to dividend additions and inductions. Allen and Michaely ( 2003 ) showed that a important monetary value addition follows proclamations of dividend additions, and a important monetary value bead follows proclamations of dividend lessenings. This is consistent with the consequence done by and DeAngelo, DeAngelo, and Skinner ( 2009 ) which stock ‘s monetary value reacts positively to dividend induction and to dividend addition proclamations.

Harmonizing to Allen and Michaely ( 2002 ) , dividends might convey information non antecedently known to the market, or they may be used as a dearly-won signal to alter market perceptual experiences refering future net incomes chances. It is good documented that proclamations of dividend alteration are positively associated with future net incomes. Arnott and Asness ( 2001,2003 ) , Harada and Nguyen ( 2005 ) , Baker, Mukherjee and Paskelian ( 2006 ) , Stacescu ( 2006 ) and Vivian ( 2006 ) , among them, analysed the instance of dividend alterations, reasoning that there is a strong association between dividend alterations and subsequent net incomes.

Harmonizing to Allen and Michaely ( 2002 ) , houses that pay dividends, particularly houses that increase their dividends, are houses that are undervalued by the market. If the house is really undervalued, this higher proportionate portion is valuable to the stockholder. Therefore, the most of import anticipation that dividends convey good intelligence about the house ‘s future hard currency flows. Adversely, some companies might increase dividend because of a diminution in the available investing chances, which would non be regarded as good intelligence by investors. So, dividend alteration is non sufficient to convey information about future hard currency flows of a peculiar company ( Khan, 2009 ) . It is clear that dividend-increasing houses have done good prior to the proclamation and dividend-decreasing houses are non making really good. On the other manus, paying out dividends sends out a positive signal sing the fiscal wellness of a company. This could hike investor assurance and lead to a higher demand for the company ‘s portions, doing a rise in the portion monetary value. This in bend could do it easier for the company to bring forth new equity on the market when they need to finance for new investings ( Vermeulen & A ; Smit, 2011 )

Investors are cognizant of this behavior as they know that direction is likely to hold a clearer position of their company ‘s chances than foreigners, a dividend addition maps as a reasonably dependable signal that direction anticipate a rose-colored hereafter, and a dividend decrease signals a glooming prognosis. If a house increases dividend payout so it signals that it has expected future hard currency flows to run into debt payment and dividend payments without increasing the chance of bankruptcy. A dividend addition is regarded as a more believable signal of future good times than merely to state, a direction prognosis of higher future net incomes. As a consequence we may happen empirical grounds that shows the value of the house increases ( Khan, 2009 )

2.2.3 Bird-in-Hand Theory

Harmonizing to Al-Malkawi ( 2007 ) , “ A bird in manus ( dividend ) , is worth more than two in the shrub ( capital additions ) ” . Due to uncertainness in future hard currency flow, investors will frequently be given to prefer dividends to maintained net incomes ( Marfo-Yiadom & A ; Agyei, 2011 ) . It is consistent with the survey of Subramaniam and Susela ( 2011 ) , they implied that the chief premises that investors have imperfect information about the profitableness of a house and dividends paid are normally taxed at a higher rate than when capital addition is realised on the sale of a portion. Therefore, investors prefer dividend on manus instead than capital addition because the promise for grasp in value of stock in the hereafter is more hazardous. In other words, dividend income is more safety than holding uncertainness capital addition in the hereafter.

Modigliani Miller theorem called this theory as the bird-in-the-hand false belief since investors tend to reinvest their dividends in fiscal instrument that have the same hazard features as the stock paying the dividend. Furthermore, Gordon ( 1963 ) argue that when doing dividend payouts, the house will obtains a higher evaluation from evaluation bureaus as compared to a house non doing any dividend payout. With a good evaluation, the house will be able to raise finance more easy from capital markets since recognition establishments will be willing to give loans to the house since the payout of dividends shows that the house has the ability to run into its duties. Beside that, in some instances, the house will be able to borrow at discriminatory rates and bask better installations.

2.2.4 Free Cash Flow Hypothesis

Dividend is utility mechanism for cut downing the bureau costs of free hard currency flow, while debt serves as another mechanism for cut downing the bureau costs of free hard currency flow besides. Many old researches have been done sing dividend and debt to cut down free hard currency flow bureau jobs. Agency theoretical accounts ( Easterbrook, 1984 ; Jensen, 1986 ; Myers, 2000 ) assert that dividend payments address struggles of involvement between corporate insiders ( such as directors and commanding stockholders ) and outside stockholders. It is consistent with survey of Jensen ( 1986 ) who defined free hard currency flow as hard currency flow left after the house had invested in all available positive cyberspace present value ( NPV ) undertakings. He showed that increasing free hard currency flow enhances bureau struggles between managerial involvement and outside stockholder, which causes a lessening in the company ‘s public presentation.

Harmonizing to Ross, Stephen, Westerfield and Jaffe ( 2002,2005 ) , free hard currency flow hypothesis states that a dividend addition is a positive signal to investors as it reduces the sum of free hard currency flow available for unauthorised usage by direction. Meanwhile, La Porta, Rafael, Silanes, Andrei Shleifer, and Vishny ( 2000 ) explained that if the company had higher free hard currency flow, the directors will prosecute in uneconomical patterns, even when the protection for the investor increased and house should pay more dividends to diminish free hard currency flow bureau costs.

Harmonizing to Ross et Al. ( 2002 ) and Ross et Al. ( 2005 ) , when the free hard currency flow is positive, steadfast decides to pay dividend and if negative house decides to publish portions which is stock dividend. The consequences show that the houses holding high profitableness with stable net incomes can afford larger free hard currency flows therefore pay out larger dividends. At the same clip, houses paying big dividends are exposed to less hazard of stock monetary value volatility. Myers and Bacon ( 2005 ) besides find that dividend hard currency flow provides a positive signal to shareholders and increases the repute of the house.

2.3 Proposed Theoretical Framework


Figure 2.0: Model 1

Model 1 is about four factors that affect the dividend payout. These four factors are steadfast size, purchase, liquidness and profitableness. These four factors besides are the independent variables of our research while dividend payout is our dependent variable.

2.4 Hypothesiss of the Study

1. Relationships between Malayan local Bankss ‘ house size and dividend payout.

H0: Size of the Malayan local Bankss has no consequence on the dividend payout.

H1: Size of the Malayan local Bankss has consequence on the dividend payout.

2. Relationships between Malayan local Bankss ‘ purchase and dividend payout.

H0: Leverage of the Malayan local Bankss has no consequence on the dividend payout.

H1: Leverage of the Malayan local Bankss has consequence on the dividend payout.

3. Relationships between Malayan local Bankss ‘ liquidness and dividend payout.

H0: Liquid of the Malayan local Bankss has no consequence on the dividend payout.

H1: Liquid of the Malayan local Bankss has consequence on the dividend payout.

4. Relationships between Malayan local Bankss ‘ profitableness and dividend payout.

H0: Profitableness of the Malayan local Bankss has no consequence on the dividend payout.

H1: Profitableness of the Malayan local Bankss has consequence on the dividend payout.

2.5 Decision

After revised from different old researches, we have more comprehensive apprehension towards the relationship between the dependent variables and independent variable. Besides, we found different measurement criterion for our survey in assorted old researches. We developed four hypotheses which link to the research aim. The following chapter will implicate the research methodological analysis.


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