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Devised Theories Regarding Determinants Of Dividend Policy Finance Essay

CHAPTER 1:

Corporate dividend policy was one of the most debated topics in corporate finance. Many researchers had devised theories and provided empirical evidence regarding the determinants of a firm’s dividend policy. The dividend policy issued, however, remain still unresolved as due to the fact that there were so many variables depending upon the type of company, its financial conditions, its industry etc that no single formula could be applicable. Clear guidelines for an ‘optimal payout policy’ had not yet emerged despite the voluminous literature. Still there was an acceptable explanation for dividend behavior of companies.

During the last fifty years several theoretical and empirical studied had been done leading to mainly three outcomes:

1. The increase in dividend payout affects the market value of the firm.

2. The decrease dividend payout adversely affects the market value of the firm.

3. The dividend policy of the firm does not affect the firm value at all.

However, it could be said that empirical evidence on the determinants of dividend policy was unfortunately very complex. Basis on which corporations pay out dividends to the share holders were still an unresolved puzzle. First prominent study that appeared in the literature of finance regarding dividend policy was that of Miller and Modigliani (1961) where they stated that there was no deception in a perfect and a rational economic environment. This was the starting point for other researchers to explore dividend payout policy phenomena. Almost all researches that followed referred back to Miller and Modigliani (1961).

Various researches were carried out by many researchers to explore the determinants of dividend payout policy, some of them focused on profitability, some on size of the firms, some on growth rate of the firm while others on agency costs. For example researches carried out by Nissim and Ziv (2001), Brook, Yaron Charlton and Hendershot (1998), Bernheim and Wantz (1995), Kao and Wu (1994), and Healy and Palapu (1988) found out a positive association between increased in dividend payout and profitability.

Kalay and Lowenstein (1986) and Asquith and Mullins Kalay (1983) found out that dividend changes was positively associated with stock returns. Sasson and Kalody (1976) concluded that the payout ratio was positively associated with average rates of return. Studies of Benartzi, Michaely, and Thaler (1997) and DeAngelo, DeAngelo, and Skinner (1996) found no support for the relationship between future profitability and dividend changes.

On the other side most debated factor affecting dividend policy arguably was agency costs Jensen (1986). Agency cost argument suggests that cost had reduced by dividend payments and cash flow Rozeff (1982). Researches carried out by Jensen, Solberg, and Zorn (1992), and Lang and Litzenberger (1989) supported this agency cost hypothesis, while others such as Lie (2000), Yoon and Starks, (1995) and Denis, Denis, and Sarin, (1994) found no support for this hypothesis.

Size of the firm was another factor which seemed to have an impact of dividend payout policy. Firms larger in size were considered to have more ability to payout dividends to their share holders. Lloyd, Jahera, and Page (1985), and Vogt (1994) pointed that firm size played a role in clarifying the dividend-payout ratio of firms. They argued that because larger firms were mature and had easy access to capital markets thus they did not really depended much on internally generated funding which enabled them to payout higher dividends.

The purpose of this research was to investigate the dynamics and determinants of dividend policy of oil & gas sector firms in Pakistan. The independent variables were: size, profitability and growth. Analysis of these variables revealed the existence of an impact of these variables on dividend payout policy of the firms and very nature of the relationship.

The remaining part of this thesis is patterned as under.

Section 2: Short critical evaluation of theories about the dividend has been presented.

Section 3: The factual information and possible variables that could work as proxy for determining of various influences for analysis have been discussed.

Section 4: Provided details of methodology used.

Section 5: Thesis established analysis and interpretations.

Section 6: Mentioned results and drew a conclusion.

CHAPTER 2:

LITERATURE REVIEW

There are various theories which provide insight on how a firm pays the dividends.

2.1 Miller and Modigliani Theory

According to Miller and Modigliani (of Merton Miller, Franco) (1961) dividend did not affect firms’ value in perfect market. Shareholders where not concerned about receiving their cash flows as dividend or in shape of capital gain, as far as firms did not change the investment policies. In this type of situation firms’ dividend payout ratio affected their residual free cash flows, when the free cash flow was positive the firms decided to pay dividend and if negative they decided to issue shares. They also concluded that change in dividend could be conveying the information to the market about their future earnings.

Example:

It’s a common belief that dividend policy is created by shareholder himself for example if a person has 10,000 PKR and wants income of 3,000 PKR a year from that portfolio, simply 3000 PKR money value can be sold by a person because this amount as dividend income is not desired by him. This theory says, “Who is anxious about dividends?”

M&M explain that under certain assumptions including rational investors and a perfect capital market, the value of a firm is not dependent on its dividend policy.

Smirlock & Marshall, (1983) stated that relationship between the Dividend and Investment Decisions indicates lack of causality between the dividend and investment decisions of the firm. The fact that the firm-specific data conclusively supported the separation principle is particularly convincing. This is the first application of causality tests to a large sample of firms.

2.2 The Bird in the Hand Theory

Investors always preferred cash in hand rather than a future promise of capital gain due to minimizing risk Gordon (1963).

Gordon believed that he was anxious about investing in dividends and dividend stocks. Gordon said that when he was paid hard cash by the company, he knew that the company was not just telling him that it was making money but the fact was that it was really making money. This was the idea that cash payment was valued by the investors in the hope of future profits.

2.3 The Agency Theory

Traditionally, corporate dividend policy has been examined under the assumptions that the firm is one homogenous unit and that the management’s objective is to maximize its value as a whole. The agency cost approach differs from the traditional approach mainly in this way that it explicitly recognizes the firm as a collection of groups of individuals with conflicting interests and self-seeking motives. According to the agency theory, these behavioral implications cause individuals to maximize their own utility instead of maximizing the firm’s wealth.

The agency theory of Jensen and Meckling (1976) is based on the conflict between managers and shareholder and the percentage of equity controlled by sponsor ownership should influence the dividend policy. The theory focuses on the relationship between an agent of the principal (company's managers) and a principal (shareholder).

According to Jensen and Meckling (1976) in corporations, agency problem arises due to external debt and external equity. Jensen and Meckling (1976) analyzed that how firm value is affected by the distribution of ownership between inside shareholders and outside shareholders who can consume perquisites, while some cannot. Within this framework, increased managerial ownership of equity alleviates agency difficulties by reducing incentives to consume perquisites and expropriate shareholder wealth. Jensen and Meckling (1976) argue that equity agency costs would be lower in firms with larger proportions of inside ownership. Managers have better understanding with their stockholders when they increase the shareholders’ ownership of the firm.

Dividends play an important role to reduce conflicts between stockholders and managers. Any dividend policy should be designed to minimize the sum of capital, agency and taxation costs.

According to Bathala (1990), in the agency costs and dividends, two lines of thought can be found explaining cross-sectional variations in payout ratios.

First view

Holds that a firm’s optimal payout ratio is the results of a trade-off between a reduction in the agency costs of external equity and an increase in the transaction costs related with external financing, resulting from dividend payments as the payout ratio increases.

Second view

Argues that inside ownership and external debt are substitute mechanisms in mitigate agency costs in a firm. Basic study for the first line of thought is based on Rozeff’s (1982) propositions. He suggests that dividend payout ratios may be explained by reduced agency costs when the firm increases its dividend payout and by increased expensive external capital.

Easterbrook (1984) gives further explanation regarding agency cost problem and says that there are two forms of agency costs; one is the cost monitoring and other is cost of risk aversion on the part of directors or managers. The agency theory is related with resolving two issues that can be held in an agency relationship.

Problems

The desire of the principal and agent conflict and it is expensive or complicated for the principal that it cannot check that the agent has behaved appropriately.

Risk sharing is a problem that occurs when the agent and principle have different behavior towards hazard. The issue here is that the principal and the agent may prefer separate actions because of the separate risk preferences.

According to (Naceur, Goaied, & Belanes, 2006) profitable firms with more stable earnings can pay larger dividend. Whenever they are growing very quick, dividend policy doesn’t get any impact from financial leverage and ownership concentration. Also the dividend payment is being impacted negatively by the liquidity of stock market and

size.

Oskar kowalewski and Ivan Stetsyukand Olesksandr Talavera (2007) study that how corporate governance determines dividend polices in Poland. They have recognized for the first time, quantitative measures on the quality of corporate governance for non- financial companies. Their result recommended that big and extra profitable companies have high dividend payout. In addition, unsafe and extra indebted firms favor to pay lower dividend s. The results finally, based on the period of 1998-2004, Reveals that dividend policy is quite important in the valuation process of companies, but the issues still remain scantily investigated in transition countries. A study on the determinant s of dividend policy and its association to corporate governance in a transition economy both offers an interesting subject and complements the existing corporate governance literature.

The agency theory points that dividend may mitigate agency costs by distributing free cash flows that would otherwise be spent on unprofitable projects by the management. It is argued that dividends expose firms to more frequent analysis by the capital markets as dividend payout increases the likelihood that a firm has to issue new common stock. On the other hand scrutiny by the market helps alleviate opportunistic management behavior and agency costs. Agency cost in turn is related to the strength of shareholders rights and they are associated with corporate governance. Furthermore, agency suggested that shareholders may prefer dividends particularly when they fear expropriation by insider. They test the determinants of dividend policy in a multiple regression framework to control firm’s specific characteristics other than governance. All the variables enter the regressions with expected signs. Size and return on assets are positively associated with variable cash dividend while leverage is negatively associated with variable cash dividend. Their results provide evidence that in Poland, listed companies where corporate governance practices are high and as a result shareholders’ rights are for strong payout of higher dividends.

Jianguo Chen and Nont Dhiensiri (2009) mention the relationship between dividend pay-out ratio (POR) with the pro Cash flow variability (CFV), ownership dispersion, insider ownership, free cash flow, collateral stable assets, Past growth (GROW1), future growth (GROW2), stable dividend policy and imputation credit (IMP). They analyze the determinants of the corporate dividend policy using firms listed on New Zealand Stock Exchange. They examined that firms traditionally have high dividend payouts compared with companies in the US. They find that there is a negative relationship between dividend payout ratio and CFV, Insider, Beta, growth and positive relationship between ownership dispersion ,free cash flow, collateral stable assets, stable dividend policy and imputation credit. Their conclusion provides strong support to the agency cost theory and partially supports transaction cost and residual dividend theory. They do not have any evidence to support the dividend stability and the signaling theories.

2.4 Signaling Theory

The explanation about the signaling theory given by Bhattacharya (1979) and John, Kose and Williams (1985) dividends allay symmetric information between managers and shareholders by delivering inside information of firm future prospects.

A firms’ announcement of issuing in common is a signal that the firms’ view are not clear, more over a signal that the firms’ stock price might just turn down.

For example:

If a firm view would be clear, which means its stock price would increase; in such case the firm would not like to sell stock price for avoiding the share the growing profits with other new stock holders. It could use debt to increase money. In the conflicting, if a firm view would be bad, its stock price will probably fall, the firm in such case would want to sell new stock for sharing future losers with other new stock holder.

2.5 Effect of Tax Preferences Theory

Miller and Scholars (1978) find that the effect of tax preferences on clientele and conclude different tax rates on capital gain and tax rates on dividend leading to different clientele.

"Tax Preference theory"

Investors gave an important consideration to the taxes. This should be kept in mind that the dividends are taxed at a upper rate than the capital gains. As such, capital gains are preferred by the investors as compared to the dividends. This is known when the investments are actually sold only then the capital gains are paid. When capital gains are realized as inverse then it is controllable, otherwise dividend payments are uncontrollable by them and the related companies control the dividend payment. In an estate situation, capital gains are not realized.

For example:

If a stock is purchased by an investor 50 years ago and is held by him until his or her death it is then passed on to an heir after death. Now that heir does not have to pay taxes on stock’s appreciation.

2.6 Life Cycle Theory

Life Cycle Theory and Fama and French (2001) state that the firms should follow a life cycle and reflect management’s assessment of the importance of market imperfection and factors including taxes to equity holders, agency cost asymmetric information, floating cost and transaction costs.

2.7 Catering Theory

Baker and Wurgler (2004) in Catering theory suggest that the managers in order to give incentives to the investors according to their needs and wants. In this way cater the investors by paying smooth dividends .When the investors are not paid then they prefer non payers to put stock price premium on them.

2.8 Lintner’s Model

John Lintner (1956) initiates with his theory relies on two important things that he studied about dividend policy:

According to the total of positive net-present-value (NPV) plan the companies be likely to set long-run aim dividends-to-earning ratios.

Earnings increases are not always bearable. As a result, until managers can see that new earning levels are bearable then dividend policy is not changed.

As regards the empirical literature the roots of the literature on determinants of dividend Policy is related to Lintner (1956) seminal work after this work during the period of 1996-2002 this work model was extended by The Samy Ben Naceur, Mohamed Goaied and Amel Belanesthe (2006) on the Tunisian Stock Exchange. Lintner’s model is applied using static and dynamic panel data regressions. They examined that Tunisian firms rely more on current earnings that past dividends to fix their dividend payments in the way that the current earnings are more sensitive to the dividend than the prior dividend and earnings of the cooperation are directly reflected by any inconsistency in the level of dividends. Naceur et al.(2006) focused on the relationship between dividend and ownership, liquidity, return on assets (ROA), profitability, investment, leverage ratio, size. The results indicate that highly profitable firms with more stable earnings can payout large dividends as they can afford large free cash flows. Moreover, fast-growing firms distribute larger dividends so as to meet the demand of investors. On the other hand, ownership concentration does not have any impact on dividend payment. In fact, being closely held Tunisian firms witnessed less agency conflicts and shareholders did not resort to dividends in order to reduce managerial discretion and protect their interests. As such the liquidity of the stock market had a negative influence, which confirmed that the use of the electronic transaction system in the TSE facilitated the realization of capital gains, which reduced the need for dividend payments. At last, the negative coefficient on size found in the full sample disappeared when regulated firms were excluded, thus reducing the strength of this factor. Researchers have proposed many different theories about the factors that affect a firm’s dividend policy.

Kanwal Anil and Sujata Kapoor (2008) analyzed that The Determinants of Dividend Payout Ratio-A Study of Indian Information Technology Sector. The period under study is 2000-2006 as it is known that the period of 5 to 6 years covers both recession and booming of IT industry. They stated that profitability has always been measured as a primary needle of dividend payout ratio. There are many other factors than profitability also that affect dividend decisions of an organization that is cash flows, corporate tax, sales growth and market to book value ratio. They suggest that dividend payout ratio is positively related to profits, cash flows and it has inverse relationship with corporate taxes, sales growth and market to book value ratio. Statistical techniques of correlation and regression have been used to explore the relationship between key Variables. Thus, the main theme of this study is to recognize the various conditions that affect the decision of dividend payout policy of IT firms in India.

In short factors influencing the corporate dividend policy, according to them, may substantially vary from country to country because of variations in tax ,legal and accounting policy. In view of these facts, the present study aims at identifying the variables influencing corporate dividend policy in Pakistan.

CHAPTER 3:

DEPENDENT AND INDEPENDENT VARIABLES

The rationale of this study is to evaluate the factors that have an impact on dividend of Oil & Gas Exploration and Oil & Gas Marketing sector of KSE. Dividend per share is dependent variable and the three independent variables are size, profitability and growth. These variables are discussed below.

3.1 Dependent Variables

3.1.1 Dividend per share

Arthur A. Thompson in his book Crafting and Executing Strategy says dividend per share is paid to shareholder on each share. As indicated below.

DPS= Dividend after Share

Total Share

3.2 Explanatory Variables

This thesis selected 3 variables used by different researchers Naceur et al. (2006) and Hafeez Ahmed and Attiya Y. Javid (2009).

3.2 .1 Firm Size

Hafeez Ahmed and Attiya Y. Javid (2009) The firm size has been calculated on the bases of its total assets because a positive coefficient is expected from this variable as there is a very low chance of bankruptcy as in large more diversified firms and it can sustain higher level of debt.

Scott and Martin (1975) found that the size of the firm is an important factor, which can affect the firms’ dividend and debt policies.

A negative impact has been found on the dividend payout policy by size of the firm and the market capitalizations which show that instead of paying dividends to the shareholders the firm prefers to invest in its assets. The financial characteristic of size has been explained by the limits of the firm and market capitalization. According to the null hypothesis for this financial characteristic there is no relation between the market capitalization and size with dividend payout ratio but the results show that there is an inverse and significant relationship between dividend payout and MV. Hence null hypothesis is rejected. The evidence supported by the finding of Belans et al (2007), Jeong (2008) deviate from Avazian et al (2006).

Naceur et al. (2006) the size of the firm by total market value (LNSIZE) and it is expected to be positively correlated with dividend paid. The literature suggests that size may be inversely related to the probability of bankruptcy (Ferri and Jones 1979; Titman and Wessels 1988; Rajan and Zingales 1995). In particular, larger firms should have an easier access to external capital markets and can borrow on better terms, Moreover, larger firms tend to be more diversified and their cash flows are more regular and less volatile. Thus, larger firms should be more willing to pay out higher dividends. Even the conflicts betweebn creditors and shareholders are more severe for smaller firms than the larger ones.

Khamis Al-Yahyaee, Toan Pham, and Terry Walter (2006) measure size of the firm from Log of sales. A firm’s dividend policy is influenced by variables such as size. There is an advantageous position for larger firms to increase external funds in the capital markets and are less dependent of internal funds. Therefore there is a negative relationship between dependence on internal financing and the size of the firm. Moreover, there is a chance of lower bankruptcy probabilities in larger firms and thus they are able to pay more dividends.

Thus as per this research the hypothesis is:

H1= Firm size is positively associated with dividend payouts.

3.2.2 Firm Profitability

Empirical research found that there is a positive relationship between dividend yield and profitability. The more profitable the firms are, the more internal financing they would have, and thus are able to afford larger dividends. Some of them are as follow:

Al-Yahyaee et al. (2006) measured profitability by earnings before interest and taxes to total assets as their surrogate for profitability. Hence a positive relationship between profitability and dividend was expected. Since the annual profits payout, the dividends therefore seemed logical that more dividends were paid by profitable firms.

Naceur et al. (2006) measured the profitability by the return on assets (ROA) net income/total assets and it is positively correlated with dividend payments. Firms with high profitability could afford larger free cash flows and hence new investment opportunities. Therefore, paying higher dividends did not disturb them. In the same vein and according to the pecking order theory, firms preferred using internal sources of financing first, then debt and finally external equity obtained by stock issues. The more profitable the firms were, the more internal financing they would have, thus were able to afford larger dividends.

Hafeez Ahmed and Attiya Y. Javid (2009) measured Profitability Net Earnings and Earnings Per Share after tax. The net earnings show the positive relationship with the dividend yield. The net earnings after interest, depreciation and after tax have been used as the explanatory variable to examine the role of earnings to pay dividends.

Thus as per this research the hypothesis is

H2= There is a positive relationship between a firm’s profitability and dividend payouts.

3.2 .3 Firm Growth

Naceur et al. (2006) measured investment and growth by MBV (market value of equity/ book value of equity) and annual rate of growth of total assets. Firms anticipated higher growth, when they established lower dividend payout ratio because growth entailed higher investment expenditures. When firms retained higher proportion of earning to finance future investments needed due to high cost of external financing, their dividend pay out in anticipation of future growth reduced. Hence, a negative relationship between dividend payout and expected growth was expected.

Al-Yahyaee et al. (2006) calculated the growth opportunities by using market-to-book ratio. A negative relationship was expected between growth opportunities and dividend. Large additions of capital were required by the firms experiencing substantial success and rapid growth. Consequently, lower dividend payout policies were expected by growth of the firms. Similarly, the pecking order theory foretell that more earnings were retained by the firms having a high proportion of market value followed by growth opportunities hence they were able to reduce the need to increase new equity capital. Free cash flow theory also foretells that there would be a lower free cash flow and lower dividend was paid by the firms with high growth opportunities.

On the other hand Hafeez Ahmed and Attiya Y. Javid (2009) argued with the above researchers. According to the signaling theory the higher the firm grows, the higher they pay dividends to their shareholders. The shareholders get signals from the growth of the firms having high growth opportunity. The sales growth has been used as proxy of Growth in the empirical analysis of the study and has been used as percentage change in sales annually as proxy of growth.

Whereas Kanwal Anil and Sujata Kapoor (2008),measured growth and investment by sales growth and MTB. Hafeez Ahmed and Attiya Y. Javid (2009) measures investment as SLACK = accumulated retained earnings/ total asset.

Thus as per this research the hypothesis is

H3=Firm growth is negatively associated with dividend payouts.

Table 3.1

Summary of substitute Variables and Research Hypotheses

H1: Size

SIZE = Total assets

Positive

H2: Profitability

ROA= net income/total assets

Positive

H3: Growth

GROWTH = sales growth

Negative

CHAPTER4:

RESEARCH METHODS

[[[4.1Data Collection Method

The data have been collected from Securities Exchange Commission of Pakistan, State Bank of Pakistan and the Karachi Stock Exchange. The variables of the study are calculated from the Audited Annual Accounts of 6 firms for the period of 2001 to 2008 leading to about 84 observations for each variable and as such it is a long period and enough to smooth out variable fluctuations. (Rozeff, 1982).

4.2 Sample

Sample Size consists of six companies from oil and gas exploration and marketing sectors in Pakistan, listed on Karachi Stock Exchange (KSE).Data collected from year 2001 to year 2008.

4.3 Statistical Test

Linear Regression test was performed to analyze data. Dividend yield is a dependent variable whereas growth, size and profitability are taken as independent variables.

4.4 Regression Model

This study uses multiple regression analysis. This thesis estimates that

Y= α + β X1 + β X2 + β X3 + e

Y = Dividend per share.

α = Intercept of the equation.

β X1= Change in coefficient of Firm size.

β X2= Change in coefficient of Firm profitability.

β X3= Change in coefficient of Firm sale growth.

e = Error Term.

CHAPTER 5:

RESULTS

5.1 Findings and Interpretation of results

Table 5.1Model summary

Model

R

R Square

Adjusted R Square

1

.790

.624

.596

The capital “R” in this table was coefficient of correlation which was.790 which showed that there were positive and high correlation between dependent and independent variable. The results suggested that 62.4% variation in dependent variable (dividend per share) was due to independent variables (size, profitability and growth)

Adjusted R Square was an adjustment of R Square that adjusts for the number of explanatory variable in a model. Unlike R Square, the adjusted R Square increased only if the new variable improved the predictability of the model. Adjusted R Square showed that variation in dividend per share was 59% by predictors after adjusting the error terms.

Table 5.2 Anova

Model

Sum of Squares

Df

Mean Square

F

Sig.

1 Regression

Residual

Total

3374.869

2029.819

5404.688

3

40

43

1124.956

50.745

22.169

.000(a)

Anova table suggested that F ratio for the regression model was significant, indicating regression model to be the best fit. Anova test was significant that indicated that this model could be used for prediction purpose. . Regression row displayed information about the variation that was accounted for by the above model. Similarly, residual row displayed information about the variation that was not accounted for by the above model.

Table 5.3 Coefficient

Model

Unstandardized

Coefficient

Standardized

Coefficients

Collinearity

Statistics

B

Std. Error

Beta

t

Sig

T

VIF

(constant)

Size

Profitability

Growth

3.455 -.0002

66.74

0.0001

2.863

0.00006

15.995

0.00001

-.418

.445

.802

1.207

-3.177

4.173

6.565

.235

.003

.000

.000

.542

.824

.628

1.847

1.214

1.591

According to the first hypothesis results indicated that the firm’s size was significant as shown in table 5.3 which showed that size was negatively correlated with dividend at 1%. According to researcher’s hypothesis, the size could present a positive relationship but here its coefficient was negative which was rejected.

The result of the researchers Fama and French (2000 and 2001), Lloyd and Jahera (1995 cited on holder 1998), Aneel Kanwer (2002), and Oskar kowalewki Oskar kowalewski and Ivan Stetsyukand Olesksandr Talavera (2007) showed that the size was positively related to dividend as they explained in their different articles of dividend as Fama and French (2000 and 2001) concluded that more dividends were payable by large and more profitable firms. Lloyd and Jahera (1995 cited on holder 1998) concluded that those larger firms had easier contact to capital markets, which were more mature, hence permitting for higher dividend payout ratios and falling their dependence on internally generated financial support. Similarly Aneel Kanwer and Sujata Kapoor (2002) measured size with total sales and researchers found out that the size was positively related to dividend yields. Smaller companies gave lower dividends as compared to larger companies. Another two researchers Oskar kowalewki and Ivan Stetsyukand Olesksandr Talavera (2007) made a research in Poland and they measured size with total assets. They found out that size was positively related to dividends because more dividends were paid by companies, which were larger in size and had more assets.

The result of some other researchers’ like Hafeez and Attiya Y. Javid (2009), Naceur et al. (2006) showed that the size was negatively related to dividend as they mentioned in their articles as made by Hafeez Ahmed and Attiya Y. Javid (2009) on KSE (non financial firms) were similar to this thesis result i.e they measured size with natural logarithm of total assets. This result indicated that the firms’ preferred to invest in their assets rather than paying dividends to their shareholders having a negative impact on dividend payout policy. Similarly Naceur et al. (2006) made their research on the firms of the Tunisian Stock Market and they measured the size with logarithm of stock market capitalization, they concluded that there were a negative relationship between size and dividend, but the negative relationship disappeared when regulated firms were removed.

The logic of this opposite view by the researcher was that different countries had different environment, taxes, difference in culture, different economic position and so on, in addition to that, difference in industries and financial firms were the major reasons of differences in the views of various researchers. The hypothesis of this thesis was positive because large size firms paid more dividends and hypothesis of various researchers was also positive as the large size firms would earn more profit and hence, could pay more dividends to their shareholders but the result of this thesis was negative, because researchers used total asset to measure size. The large firms dominated and might be involved in greater scale production, and thus would distribute less cash dividends as compared to their smaller counterparts.

According to second hypothesis Profitability was positively correlated with dividend, which was significant at 1%. This showed that more profitable firms gave more dividend than the firm which was earning less profit. The result of the researcher Hafeez Ahmed and Attiya Y. Javid (2009) measured profitability with earning per share after tax and Naceur et al.(2006) they measured profitability with ROA=net income/total assets which was similar to the result of this thesis . The results indicated that large free cash flow was afforded by the firms, which were highly profitable and had more stable earnings. Al-Yahyaee et al. (2006) measured the profitability by earnings before interest and taxes to total assets as their proxy for profitability. Hence a positive relationship between profitability and dividend was expected. Therefore the more the profit the more they would pay in form of dividend. Shammyla Naeem and Mohammad Nasr (2007) measured the profitability with return on investments. They also got the same conclusion i.e. the size was positively related to the dividend and the higher profitable firms paid more dividend.

According to third hypothesis growth was also statistically significant as shown in Table 5.3, the growth was negatively related to dividend but the result of this thesis differed from the hypothesis because it was positively related to the dividend hence this hypothesis was rejected. The conclusion was that growing firms were more geared to provide more dividends.

Some researchers also found out growth to be positive,as the result of the researcher Naceur et al. (2006) measured growth with annual rate of growth of total assets and found to be similar to this thesis result. The results indicated that fast-growing firms distributed larger dividends so they were more appealing to the investors. The result of research by Hafeez and Attiya Y. Javid (2009) showed that the growth had been measured with sale. According to the signaling theory the high growth firms were smoother to pay their dividends to shareholders. Growth signaled the shareholders about the firms having high growth opportunities.

Whereas, some researchers result found out growth to be negative. Rozeff (1982), Lloyd et al. (1985) and Collins et al. (1996) all showed significantly negative relationship between growth and dividend payout as Rozeff, (1982) obtained the results which were similar to our hypothesis that dividend payout was negatively related to growth due to investment needs for costly external funding and growth which was significant at 5%. Al-Yahyaee et al. (2006) calculated the growth opportunities by using market-to-book ratio and showed negative relationship between growth and dividend. The firms experiencing considerable success and fast growth required large additions of capital. Consequently, growth firms expected lower dividend payout policies. Kanwal Anil and Sujata Kapoor (2008) made their research on IT firms in India which concluded that dividend payout ratio was in an inverse relationship with growth. They measured growth by sales growth and MTBV. Jianguo Chen and Nont Dhiensiri (2009) measured growth with Average growth rate of revenues, made their research on sample firms listed on NZSE which concluded that there was significantly negative relationship between growth and dividends payout ratio and the significance level was 5%.

The hypothesis of this thesis was negative because when the growth increased the firm tended to pay more attention on their internal financing and they invested in their own company rather than paying to the shareholders. The result of this thesis was positive because the growth was measured by sales growth. The more sales growth, the more would be the profitability and therefore the company could generate revenue and hence more dividend was paid to their shareholders.

5.2 Hypothesis Assessment Summary

H1: There was an association between dividend per share and firm size. The first hypothesis for this research was Firm size positively associated with dividend payouts on the basis of statistical test in which significance value was used at 1% the hypothesis was accepted . According to researcher’s hypothesis, the size could present a positive relation but here its coefficient was negative which rejected researcher’s hypothesis. Since, the size was also statistically significant the hypothesis for this thesis showed that the growth was negatively related to dividend hence, this hypothesis was rejected.

H2: There was an association between dividend per share and firm profitability. The second hypothesis for this research was that there was a positive relationship between a firm profitability and dividend payouts on the basis of statistical test in which significant value was used at 1% the hypothesis was accepted because the results for profitability were significant p= .000which was less than 0.01(1% level of significance) so it was significant therefore it was concluded that Profitability was positively correlated with dividend. This showed that more profitable firms gave more dividend than the firms, which was earning less profit.

H3: there was an association between dividend per share and firm growth. The third hypothesis for this research was that firm growth was negatively associated with dividend payouts on the basis of statistical test in which significance value was used at 1% this hypothesis was accepted because the results for the growth were significant p=.000 Which were less than 0.01(1% level of significance) but the result of this thesis differed from the hypothesis because it was positively related to the dividend hence this hypothesis was not rejected.

Table 5.4

Hypothesis

Proposed Result

Actual Result

Conclusion

H1:Size Firm size is positively associated with dividend payouts

Positive

Negative

Rejected

H2: Profitability There is a positive relationship between a firm’s profitability and dividend payouts.

Positive

Positive

Accepted

H3: Growth Firm growth is negatively associated with dividend payouts.

Negative

Positive

Rejected

CHAPTER 6:

CONCLUSION, IMPLICATIONS AND RECOMMENDATIONS

6.1 Conclusion

In this research, three variables were tested to analyze their possible impact and relationship with dividend per share, namely size, profitability and growth. The thesis uses multiple linear regression models, the data analysis covering from 2001 to 2008 of Oil & gas sector in Pakistan. Results showed that dividend per share and independent variables were statistically significant.

Size was statistically significant which showed that a direct relationship existed between firm size and dividend per share. Since, the size was significant and a direct relationship existed between firm size and dividend per share but here the result showed an inverse relationship between dividend per share and size. Therefore, the hypothesis of this research was rejected. This result was supported by the result of different researchers like Naceur et al. (2006), and Hafeez Ahmed and Attiya Y. Javid (2009)

Profitability was also statistically significant and thus a positive relationship existed between the dividend and profitability, this showed that H0 was rejected. The more the firms’ profit the larger the dividends. Researcher measured the profitability by ROA. This result was supported by the result of different researchers for instance, Naceur et al. (2006), Shammyla Naem and Mohammad Nasr (2007), and Hafeez Ahmed and Attiya Y. Javid (2009).

Growth was also statistically significant. There was a positive relationship between growth and dividend per share which indicated that the hypothesis of this thesis was rejected because in this thesis the growth was negatively related. This result was supported by the result of researchers named Naceur et al. (2006), and Hafeez Ahmed and Attiya Y. Javid (2009).

6.2 Implication and recommendation

In this research, three variables were tested to analyze their possible impact on dividend per share, but study of available literature reveals that there were some other variables that could have an impact on dividend policy of a firm such as price to earning ratio, profit margin, debt to equity ratio, current ratio, available float, insider ownership, institutional ownership, and investment policy. Further researches can be carried out to test the relationship of these variables on a firm’s dividend policy and the kind of relation it has, can also be easily tested. Dependent variable can also be changed, in this result the dependent variable was dividend per share but dividend yield and dividend pay out ratio can also be the dependent variable which will give different results.

As said above and mentioned earlier in introduction, the number of variables affecting the dividend payout policy, were numerous. However, the three variables that had been taken into consideration for this thesis were very significant to oil and gas sector. As per the research conducted by researcher, an opportunity taken to recommend that these variables were the key ingredients for any dividend analysis but would like to stress on the fact that other factors or variables which were inherent due to the uniqueness of the company/industry being reviewed should also be taken into consideration before arriving at an opinion on its respective dividend policy.

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