Literature Review On Determinants Of Dividend Policy

LITERATURE REVIEW

The roots of the literature of determinants of dividend policy relate to the linter (1956) who conducted a traditional study on how U.S. managers formulate dividend decisions. He developed a compressed mathematical model supported on survey of 28 well recognized industrial U.S. firms which is measured to be a finance standard. In the perception of him the dividend imbursement model of a firm is prejudiced by the existing year earnings and year before dividends and after that the work was polished by the Fama and Babiak (1968) theory test of a number of alternate models for clearing up dividend behavior chains Lintner’s position that managers increase dividends only after they are rationally certain that they be able to lastingly continue them at the new level. And after the both Linter and Fama and Babiak many researcher study the linter model.

In Adaoglu (2000) has carry out the study on unsteadiness in the dividend policy (ISE) corporations, with content of emerging markets. By means of linter robust model on the sample of 916 dividend comments of non financial sector of listed firms on ISE. The practical investigation shows that the firms listed in ISE track unsteady cash dividend policy and the key factor for determining the sum of dividend is earning of the firms. And after this another study conducted in 2004 which not match with linters model which studied by Omet (2004), by means of the lintner’s model checked the dividend performance of Jordan capital market by taking Dividend per share current year as depended variable and explanatory variables are Earning Per Share current year and DPS last years. The experimental analysis of the study on the section of 44 Jordian listed companies listed on Amman Securities Market (ASM). The experimental investigation explains that firms track stable dividend policies. Indeed the outcome gives the signal lagged dividend per share is further important then the current earnings per share (EPS) for determining the current dividend per share.

It has been experimented that during last 52 years the chain of empirical and theoretical studies has been completed. The summarize form of those empirical studies bring to a close three important things. Firstly, market value of the firm affected when the dividend payout increases. Secondly, the firm’s value effected if the dividend decreases. Finally, the third suggest that dividend policy of the firm does not affect the firm value. However we can say that empirical proof on the determinants of dividend policy is unluckily very mixed. In addition there are many theories on why and when the firms pay dividends. In the present period, there are six very essential theories connecting to determinants of dividend polices applied in diverse economies.

The Bird In The Hand Theory which has been known by Gordon and Walter (1963), in which they find that investors always prefer cash in hand rather then a future promise of capital gain due to minimizing risk or lowering risk. There fore according to him investors wants stable dividend payout ratio rather than the capital gain earn from their share price premium which is more risky. Baker (1985) conducted the survey of management’s views on Dividend policy in which managers believed that shareholders favored a stable flow of dividends, firms tended to make interrupted fractional adjustments toward a target payout ratio rather than impressive changes in payout. So, in the short run, dividends were smoothed in a try to avoid frequent changes. Study also shows that the main determinants of dividend is the same as linter defines in its paper and second results shows that dividend policy affects the share price of the firm. Anil and Kapoor (2008) conducted a study on Determinants of Dividend payout ratio in which results show that the Cash flow from operation is most important factor in Indian Information Technology sector is dividend payout ratio and they conclude that firms which have high liquidity position gives more dividend and which have low gives no dividend. Beta of the firm share price is also significant. Al-Malkawi (2007) profitability, age, and Size of the firm appear to be determinant aspect of corporate dividend policy in Jordan though profitability is high it means free cash flow increases so firm afford to high dividend payment or pay out ratio. Javid and Ahmed (2009) conduct the study where they study the dynamics and determinants of dividend payout policy of 320 non-financial listed firm of Karachi Stock Exchange throughout the time of 2001 to 2006. The results always support that Pakistani listed non-financial firms rely on both the change in dividends and change in net earnings which obviously show that the firms rely on both current EPS and past DPS to position their dividend payments. Though the study without a doubt shows that dividend tends to be more sensitive to current earnings than past dividends. Profitable firms with more steady net earnings can have enough money larger free cash flows and as a result they pay bigger dividends.

Catering theory given by Baker and Wurgler (2004) suggest to the managers to give incentives to the investor according to their needs and wants and this is the way to cater the investors by paying smooth dividends when the investors put stock price premium on payers and by not paying when investors prefer non payers. Megginson and Eije (2006), conduct the study by taking the unique sample of over 3400 listed firms in which United States concerns the tendency of European firms those are paying dividends turn down significantly more this period. From 91 to 62 percent of listed firms, whereas on the other hand the total dividend paid and dividend payments as propensity of total corporate profit increases dramatically. Dividend and earnings also directed sharply among European firms, and similar company uniqueness increase the both tendency to pay and the sum of dividend paid. The one of the very important factor which discovers increase in the retained earnings to total equity doesn’t increase the payout ratio, but company age does. They also find that the effect of catering the dividend systematically which is nor conclusive evidence of continent and wide convergence in dividend policy. So they concluded which is opposing the catering theory and they also concluded that the age of the firm positive effect on dividend payout not the catering effect.

Bhattacharyya (1980) grow one more explanation for the dividend policy support on asymmetric information. Managers have confidential information concerning about the distributional maintain of the project cash flow and they signal this information to the market during their preference of dividends. In the signalling balance upper value of the support is signaled by higher dividend. In other words, the improved the news, the higher is the dividend. Heinkel (1978) regard as a set up where diverse firms have diverse return generating abilities. This information is broadcasted to the market by means of dividends, or regularly, from spending at less than the first best level. In the balance of Heinkel’s model, the firm with smaller amount output invests up to its first best level and declares no dividend, while the firm with upper output invests less than its first best level of savings, and declares the differentiation among the amount raised and the sum invested as the dividend. The firm with higher productivity does something in this method in order to differentiate itself from the firm with smaller amount productivity. Dividends are still irrelevant in the wisdom that both firm types might raise an additional X dollars with a new number to pay an additional X dollars as a dividend with no signalling effect. The signalling charge in this model comes from Decreased investment from first best level. In compare, the signalling charge in Bhattacharyya (1979) comes from taxation and non symmetric charge of raising finances in the money market.

Bhattacharyya and Heinkel’s work was followed by a number of additional papers which posited that dividends are used by managers to broadcast information to the money market. Notable works in signalling model of dividend policy is of John and Williams (1985