Determinants Of Dividend Payout In Thailand

This paper examines the effects of risk (variability of profit), cash flow, investment opportunities (market to book value), firm size (market capitalisation), percentage of majority shareholders and financial leverage (debt ratio) on Thailand SET100 firm’s dividend policy. The results indicate that the stability of earnings (proxy risk) and financial leverage are significantly inverse related to firm’s payout ratio. It also implies that dividend policy is regardless of the firm’s cash flow, investment opportunities, firm size and agency cost. The implication of this study is if dividend policy does matter, the management cannot make the dividend decisions decision without taking consideration of the integration of business strategies including both financial and investment decisions.

1. Introduction

Dividend policy question has been a controversial issue since the introduction irrelevance of dividend policy theory by Miller and Modigliani (M&M) in the 1960’s when they believed in the world of efficient market, dividend policy does not affect the shareholder’s wealth. Basically, the principal hypotheses of dividend policy can be classified into signaling models, clientele effects, agency models, tax effects and free cash flow hypothesis (Frankfurter et al, 2004; Brav et al, 2005). There is an emerging consensus that there is no single explanation of dividend decision making (Abrutyn and Turner, 1990, Lease et al, 2000). Recent studies showed that the patterns of corporate dividend payout policies do not only differ across time periods (Pandey, 1995; Sarig, 2004) but also across countries (La Porta et al, 2000; Frankfurter, 2002) as well as between emerging and developed countries (Adaoglu, 2000; Aivazian and Booth, 2003).

An examination of corporate dividend policy practices in emerging countries are currently not well established in the literatures (Lease et al, 2000). Emerging markets differ from those in developed countries in terms of corporate governance (Mitton, 2004), taxation on dividends and capital gains (La Porta et al, 2000), and ownership structure (Lin, 2002). In addition, firms in emerging markets are subjected to more financial constraints than their counterparts in developed markets (Glen and Singh, 2004); they often have less information efficiency, more volatility, and are smaller market capitalization (Fuss, 2000; Bekaert and Harvey, 2003) which may have difference influence on their dividenpolicy. y.

As an example, in Adaoglu (2000) study, it showed that the emerging market firms followed unstable cash dividend policies and the main factor that determines the amount of cash dividends was the earnings of the corporation in that year. Aivazian and Booth (2003) also found out that companies in developing countries were shown to be less reluctant to change its dividends than their United States counterparts. These differences of the particular markets themselves raised the question about the extent to which the competing dividend policy theories could apply to such markets, in particular to Thailand.

This paper tries to address the determinants of dividend policy from a developing country perspective by focusing on SET100 firms in Thailand. We define dividend policy as dividend per share divided by earning per share before extraordinary item (Gul, 1998; Zeng, 2003; Amidu and Abor, 2006). We use variability of profit, cash flow, market to book value, market capitalisation, ownership of the majority shareholders, and debt ratio as proxies for risk, residual theory, investment opportunities, firm size, agency cost or clientele theory and financial leverage respectively. We adapted and modified the dividend policy model by D’Souza & Saxena (1999) in testing the dividend policy in international perspective. Their study findings indicated that the dividend payout ratio is significantly negatively related to institutional ownership of a firm’s shares and its risk but independent of investment decisions. However, they also suggested there were other factors determine dividend policy which we included in our study in order to find out to what extent the predictors which are mostly tested in developed countries applicable in developing countries.

The rest of the paper is organised as follows. Section two discusses the literature review on determinants of dividend policy. Section three discusses the empirical methods employed in this study. Section four describes the empirical analysis and Section five concludes the discussion.

2. Literature Review

Since Miller and Modigliani (1961) introduced the dividend irrelevance hypothesis and Black (1976) addressed “Dividend Puzzle” in their respective papers, there are numbers of researchers trying to solve the puzzle resulting development of theories in dividend policy. Lease et al (2000) argued by relaxing several of the assumptions of irrelevance dividend theory (taxes, agency costs and asymmetric information), the dividend policy may have impact on the share price.

Stability of Earning (Risk)

A firm that has relatively stable earnings is often able to predict its future earnings. Therefore, the firms with stable earnings are more likely to pay out dividends than the firms with fluctuated earnings. In Brav et al (2005), one of the main factors to determine the dividend decision is stability of future earnings and a sustainable change in earnings. Aivazian and Booth (2003) and Amidu and Abor (2006) study results show that dividend paa negative negative relationship with risk. Their study results also suggest that profitable firms with less variability in profit increase the ability of the firm to pay dividends. Meanwhile, in Nissim and Ziv (2002) study, they argued that under the signaling theory, dividend changes are related to firm’s future earnings changes not the past information leading to insignificant in relation.

Cash Flows

Residual dividend policy theory is an approach that suggests that a firm pay dividend dividends if all the acceptable investment opportunities for those funds are currently unavailable (Lease et al, 2000). Therefore, it implies that firms with higher cash flow tend to have higher dividend payout. Zeng (2003), Deshmukh (2005), and Amidu & Abor (2006) study results showed that, firms with high cash flow have the probability to pay high dividend dividends to their shareholders. However, Baker and Smith (2006) argued that most firms nowadays practice “modified” residual policy where the firms carefully managed their payout ratio and dithe investment eam after investment decision was made. Whexperiencems may consistently experienced low free cash flows, the dividegoal. licy was not necessarily a corporate goal.

Investment Opportunities

Both residual theory and agency cost theory have the different explanation towards growth opportunitithe residual r residual theory, companies with high growth opportunities tend to pay lower dividends because they may use the available funds to finance ththe positive ments with positive net t value. This implies implies that, given investment opportunities, a firm with higher cash flow or earnings tends to pay higher dividends (Deshmukh, 2005). Collins et al (1996), Gul (1999), Zeng (2003) and Amidu and Abor (2006) study results indicate that significant negative relationship between firm growth and dividend payout. Gul (1999) and Desha significant study findings also show significant negative relationship between growth opportunities and dividend yields meaningin comparison to gh firms. firms have low dividend yields compared to low growth firms.

Under signaling perspective, high investment opportunities may be associated with high dividends as high quality firms basically may pay dividends to signal their quality to the market (Easterbrook, 1984; Zeng, 2003). Meanwhile, under agency cost theory, high growth firms may pay dividends to restrict managerial discretion (Zeng, 2003). However, D’Souza and Saxena (1999) study results that in the context of international firms, it seems that dividend are paid irrespective of the firm’s investment opportunities. They indicatthese findings this findings support the Miller and Modigliani (1961) argument that investment decisions are independent of dividend policy.

Ownership Concentration

Ownership concentration has mixed explanation. Under agency cost theory, insider ownership and institutional ownership are inversely related to agency costs as the shareholders can monitor the management more effectively (Alli et al, 1993; Collins et al 1996; Han et al, 1999; Ang et al, 2000). However, under the tax-based theory, institutional ownership is positively related to dividend payout because of tax differential and clientele effect (Short et al, 2002) because institutions prefer dividends thagains. tal gains.

Firm Size

Collins et al (1996), Lee S.R (1997), Zeng (2003), Mitton (2004) and Deshmukh (2005) study findings also indicate that firm size has a relationship with the dividend payout. Collins et al (1996) argued that larger firms have more generous payout resulting positive relationship with dividend payout. Lee S. R (1997) study results show that large companies are indeed the ones that are more likely to pay dividends explaining the decision of whether to pay dividends or not. Zeng (2003) argued that if the firm size is positively related to diversification and decentralisation, the large the firm size, the less observable the actions of management and the higher agency costs may be incurred. Therefore, paying high dividends may reduce the agency cost. Mitton (2004) and Deshmukh (2005) indicated that the firm size proxies for symmetric information where the larger firms have lesinformation. Therefore, c information therefore pay higher dividends.

Financial Leverage