INTRODUCTION

Dividend policy in the firm has been the major matter for recognizing how managers set dividend ratio and change dividend given to stockholders. The existing literature on dividend payout ratios provides firms with no generally accepted prescription for the level of dividend payment that will maximize share value. Black (1976) in his study concluded with this question is that what the corporation should do about dividend policy. It has been argued that dividend policy has no cause on either the price of a firm’s share or its cost of capital. Thus, extensive studies were done to find out various factors affecting dividend payout ratio of firm. The setting of corporate dividend policy remains a troublesome issue and involves ocean deep judgment by decision makers.

The behavior of dividend policy is the most debatable issue in the corporate finance and still keeps its important position both in developed and emerging markets. Many researchers try to uncover the issue regarding the dividend behavior or dynamics and determinants of dividend policy but still do not have satisfactory details for the observed dividend behavior of firms. (Black, 1976; Allen and Michaely, 2003; Brealey and Myers, 2005). One of the well known explanations of dividend behavior is the smoothing of firm’s dividends vice versa earnings and growth. Linter (1956) found that firms in the United States adjust their dividends smoothly to maintain a target long run payout ratio. Numerous studies appeared after this work and facts suggested that the dividend policy of the companies varies from country to country due to various institutions and capital market differences.

The study examined the relationship between determinants of dividend payout ratios from the context of a developing country like Pakistan. The primary objective of this thesis is to find out whether numerous factors influence the dividend payout ratio of Sugar Sector in Pakistan.

The purpose of this study is to examine the dynamics and factors affecting dividend policy of sugar firms in Pakistan. After that it explored how Pakistani firms set their dynamic dividend policies in a different institutional environment than that of developed markets. This study examined whether Pakistani firms follow stable dividend policies as in developed markets or they are going to retain their earnings. The paper also identified the areas of firm level factors that influence the degree of dividend smoothing. This paper indicated that importance of institutional features towards the dynamic of dividend policy and also critical out the advantages of examining the dividend policy in different institutional environments. The outcomes of the thesis provided meaningful and handy information in the role of institutional factors which creates dividend policy at firm’s level. More than a few studies become visible after this work and evidence suggest that the dividend policy of the companies varies from country to country due to various institutions and capital market differences.

The Pakistan’s capital market and the economy have several important features for examining the dynamics of dividend policy. Firstly Pakistan is moving towards the development and improving the economy position in the world since the 1980. Pakistan capital markets are much better than before. Many studies conclude that firms are likely to pay constant dividend during the high growth period and it is interesting to find that how dynamic dividend policy is determined in growing economy like Pakistan. In fact, in Pakistan the many major investors are still disagreed with dividends and consider stock prices positive reception as the major part of stock returns therefore, it is assumed that investor attitude towards dividends is expected to have an impact on the way in which firms set their dividend policy in Pakistan.

Sugar Industry in Pakistan

The sugar industry plays an important role in the economy of the Pakistan. It is the second largest industry after textiles. The Pakistan sugar industry is the second largest agro based industry consists of 78 sugar mills with per year crushing capacity of 6.1 million tones. Sugarcane farming and sugar manufacturing contributed significantly to the national exchequer in the form of a range of taxes. Sugar manufacturing and its by-products have contributed appreciably towards the foreign exchange funds through import replacement. In Sugar industry 75000 people working over there, including engineers, technologists, and financial experts, skilled, management expert’s semiskilled and unskilled workers. It contributed around four billion rupees under the head of excise duty and other charges to the Government are also dominant implication.

The annual 2008-2009 sugarcane production is estimated at 51.5 MMT, a reduce of 19 percent over the preceding year due to both a decline in area harvested. Milling policies and practices, coupled with attractive prices for alternative/competing crops and inadequate irrigation supplies are most important factors limiting crop growth in the country.

In the year 2009-10 sugarcane production is estimate at 53.6 MMT, an increase of 4 percent over the previous year due to an expected increase in area and yield. A scarcity of cane supply during the present crushing season lead to an increase in cane prices. These circumstances benefitted who received prices higher than the analytic prices announced by the Government. The development is expected to contribute to a boost in sugarcane region and output in the following year. The previous year was higher production of rice and sunflower lead to lower prices received by farmers, so encouraging the go back to sugarcane.

Purpose of the Study

In Pakistan there were few firms which paid dividend to stockholders constantly. For this explore, the listed sugar firms of Karachi Stock Exchange (KSE) were not able to pay their dividends and which factors are influencing or determining the dividend policy in Pakistan. In this thesis it examined the number of firm’s various factors and their function in dividends policy. The liquidity of the stock market, is the profitable firms are paying dividends in Pakistan, is the firms with greater investment opportunities pay less dividends in Pakistan, is the dividends and debts are substitutes and the degree of leverage is negatively associated with dividends payments and finally examined the firms with greater cash flows pay lesser dividend in Pakistan.

Research Objective

Objective of thesis has to find out the relationship between dividend policy and operating cash flow, EBIT, Sales and Debt to Equity Ratio. It is very important for investors to examine the factors of dividend policy that whether they have been impact on the sugar sector of Pakistan or not.

Hypotheses Development

H1: There is association between CFO and dividend payout ratio.

H2: There is association between Debt to Equity and dividend payout ratio.

H3: There is association between Revenue and dividend payout ratio.

H4: There is association between EBIT and dividend payout ratio

Thesis Structure:

This thesis is composed of five chapters. The first part of a thesis is introduction (Chapter I).Then after it evaluates and discusses the literature review in (Chapter II), in this chapter it examined the dividend payout policy of Pakistan and the main factors that influenced on it, theories, models put forward by many well-known authors is examined various studies. In (chapter III), it explained research methods and sample in detail. (In chapter IV),examined the dividend payout policy and the main indicators that affect the dividend payout policy of listed firms on the Karachi Stock Exchange 100 over the period 2003-2008 and present the interpretation of results. Finally in Chapter V, researcher present and discuss the main contributions and conclusion, implication and recommendation of this thesis.

CHAPTER-2

LITERATURE REVIEW

Naceur (2006) found that the high profitable firms with more stable earnings can manage the larger cash flows and because of this they pay larger dividends. Moreover, the firms with fast growth distribute the larger dividends so as attract to investors. The ownership concentration does not have any impact on dividend payments. In Indian case Reddy (2006) showed that the dividends paying firms are more profitable, large in size, and growing. The corporate tax or tax preference theory does not appear to hold true in Indian context. Amidu and Abor (2006) found that the dividend payout policy is influenced by profitability, cash flow position, and growth scenario and investment opportunities of the firms.

Lease (2000) the firms be supposed to pursue a life cycle and imitate management’s evaluation of the importance of market imperfection and factors including taxes to equity holders, floating cost, agency cost, transaction costs asymmetric information.

Linter (1956) studied and developed a compact mathematical model based on survey of 28 well established industrial U.S. firms which is well thought-out to be a finance classic. According to him the dividend payment pattern of a firm is influenced by the current year earnings and previous year dividends.

Linter’s (1956) study of dividend policy found that a company’s net income is the determinant of dividend changes, which in his sample are largely dividend increases since he primarily surveys healthy firms.’ If one can extrapolate this finding to dividend decreases, it implies that low bottom line earnings drive dividend reductions.

Jensen (1986) argued that debt is an effective substitute mechanism for dividends in this respect. By issuing debt instead of equity, managers give bondholders the right to take the firm into bankruptcy court if managers do not maintain their promise to make the interest and principal payments. This substitutability between debt and dividends as alternative mechanisms for reducing th