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An assessment on how the identified financial factors affect the dividend policy

Chapter 3 Research Methodology

3.1 Introduction

This chapter describes the research methods used for assessing the relationship between the several financial factors and the company's dividend policy. Research methodology is a set of procedures or method used to conduct research. It also encompasses with the theoretical framework, data collection and data analysis method in this chapter.

3.2 The purpose of the study

The purpose of this research is to verify whether the dividend distribution policy of food and beverage industry in Malaysia depends not only on profit but also on any other factors such as liquidity position, investment opportunities and taxation. Further, a descriptive study was initially undertaken in order to describe the variables of this research.

3.3 Theoretical framework


Return on Total assets

Return on equity

Earnings per share


Current ratio

Operating cash flow / Total Assets

Dividend Yield

Dividend Payout Ratio

Dividend per Share

Investment Opportunities

Market-to-book ratio

Sales growth rate


Effective tax rate

Independent Variables Dependent Variables

Figure 4: Research Model for the Research Study

Theoretical framework is a conceptual model of how one theorizes or makes logical sense of the relationships among the several factors that have been identified as important to the problem. Figure 4 showed that the research model for this research study. This research model had been developed based on the objectives that have been laid down in the beginning of this research study. An independent variable influences the direction and the volume of change of the dependent variable. While dependent variable is an observed variable in an experiment whose changes are determined by the presence or degree of one or more independent variables.

Dependent variable

The trend of dividend distribution of Malaysian food and beverage companies is observed through their dividend yield and dividend payout ratio. Therefore, in this research study, dividend yield and dividend payout ratios have been use as dependent variable. Dividend yield of a company's stock is the company's annual dividend payments divided by its market capital. As for dividend payout ratio, it provides an idea of how well earnings support the dividend payment and it is calculated as the ratio of dividend per share to earnings per share.

Independence variable


The decision to pay dividends starts with profits. The financial literature documents that a firm's profitability is a significant and positive explanatory variable of dividend policy (Fama and French, 2000). However, there is a significant difference between dividend policies in developed and developing countries. Therefore, it is logical for a company to consider profitability as a threshold factor. Further, the level of profitability also one of the most important factors that may influence firm's dividend decisions. Based on the above discussion, as a proxy, this study measured firm profitability by the Return on equity (ROE), Return on Total assets and Earnings per share (EPS).


Liquidity is a relatively broad concept which in this case refers to the ability to trade large volumes quickly, at low cost, and without moving the price. Operating Cash Flow (OCF) represents the level of cash flow from operating activities. This is a strong positive relationship of operating cash flow and dividend payment is expected. From a company's point of view, cash generated from operating plays an important role in deciding the level of payout, among all three sources of cash flows such as operating, investing and financing. In fact, cash generated from operation is considered as most desirable source of funds for the company for distribution of dividends. In this study, operating cash flow as a proxy of measuring the liquidity position of those selected food and beverage companies. Besides, current ratio has been used as measuring the liquidity position of a firm.

Investment opportunities

Those firms with high growth and investment opportunities will need the internally generated funds to finance those investments, and thus tend to pay little or even no dividends. Mature companies are likely to be in their low-growth phase with less investment opportunities (Barclay et al, 1995). These companies do not have the incentives to build-up reserves as a result of low growth and few capital expenditures, which enable them to follow a liberal dividend policy. On the contrary, new or young companies will need to build-up reserves to face their rapid growth and financing requirements. Therefore, these companies retain most of their earnings and pay low or no dividends. Several studies found that the market-to-book ratio, sales growth rate and asset growth rate was commonly used as a proxy variables for growth opportunities.


The incidence of taxation on the firm and the shareholders has a bearing on the dividend policy. Due to high rates of taxes, the company's profit is reduced, leading to a lower rate of dividend. For instance, in case of closely-held companies, the shareholders who are mostly in the highest tax brackets would like to received fewer dividends and opt for capital gain. In this paper, effective tax rate was used as proxy variables for taxation.

3.4 Data collection method

Data collection is an important aspect of any type of research study. Thus, inaccurate data collection can impact the result of a research study and ultimately lead to invalid results. In a research, data is collected from various sources and a variety of methods or techniques are used in its collection (Hafeezrm, 2010). There may be primary data or secondary data.

Primary data is the specific information collected by a person who is doing a research study. Its primary data can be obtained through case studies, true experiments and randomized controlled studies (Barker, 2010). Secondary data is refer to the statistical material which is not originated by the researcher but obtained from someone else's records. Normally, most of the researchers reuse and repurpose information as secondary data because it is easier and less expensive to collect (Neel, 2010).

3.4.1 Secondary data collection

In this research study, the most appropriate data use is secondary data. There are needs of accounting data from secondary data sources exist for this dividend policy research such as information from financial statement of sample firms. The advantages of using secondary data from a network of data archives in which survey data files are collected and distributed is readily available, making research for secondary analysis easily accessible.

For carry out this research study, there are various methods of secondary data collection. Reference books are one of the main sources of secondary data collection. There are many reference books such as business finance and financial accounting provide numerous dividend policy theorists that have explored on this particular topic. Mostly, the data from reference books was sources from Butterworth's Public Library, Penang's Public Library and Library of PTPL College.

However, the limitation of gather data from reference books is it does not provide sufficient information related to this dividend policy research. Therefore, there are some sources was gather from newspapers, magazines, journals and other similar periodicals.

Besides, internet web sites are also one of the important methods to gather the information or sources for this dividend policy research. The World Wide Web is a huge database of user-submitted content where researchers can assess an astronomical number of informative sources, online groups and multi-media. Thus, much useful information was collected regards to this research paper. Mostly, Google search engine was use in this research paper. Besides, there are also other internet search engine is used for collect sources such as Google e-books, Yahoo finance and e-library of Anglia Ruskin University.

Apart from this, some of the data was collected from financial statement which the companies listed on the Bursa Malaysia. The annual reports from year 2005 to 2009 are obtained on the Bursa Malaysia Listed Company website. There is some information such as dividend yield, dividend per share and etc is directly collect from statistic of the selected companies.

3.5 Sample selection

The empirical investigation analyses financial entities, to try to discover the effects of the specific financial factors of selected sample on the relevancy of dividend policies. The sample size used for this research study is the company in the Food and Beverage industry in Malaysia listed on Bursa Malaysia. The targeted samples in this research study are Nestle and Dutch Lady from year 2005 to 2009. For examining the analysis of dividend policy section discloses in the annual reports, each of the company's annual reports was scrutinize thoroughly to collect the relevant information.

3.6 Data analysis

In order to determine the relationship between independent and dependent variable, correlation coefficient analysis was used as a tool for carry out this research paper. Correlation coefficient refers to the strength of the linear association between two variables (Bewick et al, 2003).

The formula for computing the correlation coefficient is given by:

A correlation is a single number that describes the degree of relationship between two variables. The correlation coefficient always takes a value between -1 and 1, with 1 or -1 indicating perfect correlation (William, 2006).

Four important interpretations of (1) are given below:

A correlation of -1 or +1 implies a perfect linear relationship between x and y: y=cx, for some constant c.

A positive correlation implies a positive relationship between x and y: as x increases, y increases.

A negative correlation implies a negative relationship between x and y: as x increases, y decreases.

A correlation of zero implies that there is no linear relationship between x and y.

3.7 Summary

This chapter is describing the research method which would be conducted in this research. In order to gather evidence to prove the validity of the objective that has been discussed in chapter 1, selected companies annual report is used for the purpose of this research paper. Besides, the findings and results will be provided in the next chapter.

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