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The factors that influence dividend policy

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According to Maury and Pajuste (2002) this kind of factor is important that may affect company's dividend policy. Each company big or small has different structure of owners who have different preference of dividends. The relationship between managers and stockholders in family companies is monitored by agency theory. As there is no separation between ownership and control, the agency problems will be reduced in family companies according the paper of Yoshikawa and Rasheed (2010). But, in big companies which have a huge government ownership will affect by agency problem. This may happen in corporations because of a double principal-agent problem as Gugler (2003) pointed out. For these companies there a solution to mitigate the agency problems which is by paying dividends.

There is a huge separation between ownership and management in new companies. This may make inconsistent relation between managers and the owners of the company. Jensen and Meckling (1976) pointed out this problem in their research paper. If the managers have the decision in their hand, they will make it for their interest rather than of the company. This issue was discussed by La Porta et al. (2000). They argue that managers who have the authority on the company may advantage themselves in the form of stealing, increasing the salaries for themselves or selling the assets of the firm.

In Oman, there is no big difference in the ownership structure of listed firms. Although the government in Oman is not an active investor in the Muscat Securities Market, it holds a large amount of shares in Oman Telecommunication Company which is about 70% of the shares. In the other hand, Omani government holds a little amount of shares in some large listed companies. There are a number of papers examined the relationship between ownership structure and dividend policy such as Desmetz, (1983); Desmetz and Lehn, (1985); Shleifer and Vishny, (1986); Morck et al., (1988); Schooley and Barney,(1994). They found that the ownership structure in large firms could affect dividend policy. In a recent study in emerging markets, Jayesh Kumar (2003) found that ownership structure does not influence dividend pay out policy uniformally. Ramli in his study of Malaysia suggests that controlling shareholders does influence the dividend policy of Malaysian listed companies. He also found that large shareholders have effects on Malaysian dividend policy. Mondher Kouki (2009) examined the Tunisian firms and found that the ownership structure is affected by institutional investors. They suggest that ownership structure approach is highly relevant to an understanding of corporate dividends policy in Tunisia. Al-Yahyaee (2008) in his study of dividend policy of Omani firms found that government which controls the company tends to have large payout ratios. In addition, Al-Kuwari (2009) pointed out that companies which the government owed a proportion of shares pay dividend more than companies owned by private sector. . Al-Yahyaee result's also shows that there is a positive association between dividend yield and government ownership. This finding is in consistent with the results suggested by Gugler (2003). According to Al-Yahyaee (2008), Government ownership has a strong influence on the dividend policy of the non financial firms.

Company Size:

Firm Size is considered as one of the variables that have the ability to affect the dividend policy of the company. Lloyd et al. (1985) in their study to examine the influence of the firm size on the dividend policy add firm size as an important variable of dividend behaviour. Aivazian, and Booth (2003) found in their study about dividend policy in both US companies and emerging markets companies that there is evidence that firm size influence dividends. There are two types of companies, large and small. Many researchers such as Jensen et al. (1992), Fama and French (2000) on their study about dividend policy found that big firms pay high dividend to their shareholder than small firms. This occurs because of the fact that small firms have high chance of bankruptcy than large firms. Moreover, the research paper of Lloyd, Jahera, and Page (1985) argued that the variable firm size can be used to illustrate the dividend pay ratio of the company. Their findings discussed that big companies are more mature than small firms. This feature makes them enter the capital market easily and let to pay higher dividends.

According to Marsh, (1982); Baskin, (1989), Chang and Rhee, (1990); Bennets and Donnelly, (1993); Charitou and Vafeas, (1998), big companies have better evaluation debt. The size of the company has a positive correlation with dividend payment. This positive relationship is studied by a lot of financial economists for example, Lloyd and Jahera (1985), Rhee (1990), Smith and Watts (1992), Gaver and Gaver (1993), Vogt (1994), Redding (1997), Adedeji (1998), Bradley, Capozza, and Seguin (1998), Holder et al. (1998), Fama and French (2001). Ho, H. (2003) study the dividend policy of Japan firms and Australia firms. Their result show that the firms size have a positive sign with dividend policy in Australia and liquidity has a positive sign with dividend policy in Japan.

Recently, there are some papers in emerging markets investigate the factors affecting dividend policy. For instance, Al-Kuwari study the determinant of dividend policy in GCC, and his result reveal that companies pay more dividends when firma size is high. On the other hand, Naceur, Goaied, and Belanes (2006) in their study of study the dividend policy of 48 firms listed on the Tunisian Stock Exchange found that the firm size has a negative sign with dividend policy,

Business risk:

Business risk is a risk that affects the company when it has no enough cash flow to cover its obligations such as operating expenses. It is considered as one of the

determinant of companies dividend policy and can play an important role to influence dividend payment. According to the results of Pruitt and Gitman (1991) risk is one of the factors that determine the dividend policy of the company. Furthermore, there is evidence of that risk can impact the dividend policy of the firms. This is provided by the study of Lintner (1956), Brav et al. (2005). When the business risk is high, the relationship between current and expected future profit will be uncertain. As a result, firms will avoid the obligation to pay high dividend. There are many studies reveal that companies which have high risk will pay low dividends to their shareholders because of the volatility of earnings. Some of these studies are conducted by Rozeff (1982), Lloyd et. al. (1985), 1993; Moh'd et al., 1995, and Colins et. al. (1996). They apply in their study beta value of the firm as a proxy of the company business risk. This beta is expected to be negative with dividend payment. D'Souza (1999) argues that there is a negative relationship between beta and dividend policy. In recent studies, Ling, Mutalip, Shahrin, and Othman (2007) test the dividend policy of Malaysian companies and they found that business risk has negative relationship with dividend yield and dividend payout ratio. Their result also show that firm risk influence the dividend policy of the firms. Al-Kuwari in his study of non financial firms of GCC argues that business risk is insignificant variable. In the case of Oman, Al-Yahyaee (2008) gave the same results as the above discussions and his result reveal that there is negative relationship between dividend payout and business risk.

Profitability:

This kind of variables that can affect dividend policy of the firm is considered as a primary factor of dividend payment because when firms have high profits, they tend to pay high dividend to their shareholder. Many financial economists such as Lintner (1956),Jensen et al (1992); Han et al (1999), Fama and French (2000), Adaoglu (2000), Pandey (2003) suggest that the company's profitability is an important indicator that affect dividend policy of the firm. Some of these papers argue that there is a positive relationship between profitability of the company and the dividend policy. This positive relationship is considered as an important prediction of the signaling theory of dividend policy. The positive sign means firms which have profits will pay dividend. In addition, Fama and French (2001) in his research pointed out that the positive relationship between the firm's profitability and dividend payment is consistent with the pecking order theory.

There are many studies reveal that in emerging market, the dividend payment is higher than that in developed markets. For example, the results of Glen et al. (1995) reveal that dividend payment is higher in developing countries. Furthermore, Aivazian, booth, and cleary (2003) found that in their study about emerging market and US firms, profitability in emerging markets has higher influence on dividend payout than in US companies.

As discussed above similar findings were reported by Al-Kuwari (2007) for GCC firms, Al-Yahyaee (2008) for Omani firms, and Al- Najjar (2009) for Jordanian firms. To test the profitability of the dividend policy of the firm, the (ROE) measure was used. According to the above results, I expect to find a positive sign for the relationship between dividend payment and profitability.

Leverage:

Financial leverage is one of the main explanatory variables of firm's dividend policy. The definition of this variable is that the long term debt to total asset. Firms that are highly leveraged and cannot make a payment on their debt will be faced risk of bankrupt. This fact may explain that firms with high debt may pay low dividend to their shareholders because they need to utilize their cash flow to pay their obligations. . On the other hand, Aivazian et al (2003) said that companies with low debt can pay and maintain their dividends. Financial leverage has a negative relationship with dividend payment. There are many studies appear to support this negative relationship. Rozeff (1982) result's revealed that companies with high leverage prefer to pay low amount of dividends. Moreover, Crutchley and Hansen (1989) Jensen et al. (1992), Bradley et al. (1998), Faccio, Lang, and Young (2001) pointed out that financial leverage influence dividend payment in negative way.

The recent studies also are in line with these findings. For instance, Kouki, Guizani (2009) in their study of the dividend policy of the Tunisian firms found that firms with high debt prefer to pay a little amount of dividend. the results of Al-Najjar (2009) shows that there is a negative relationship between leverage and dividend policy.

Growth opportunities:

The growth opportunity of the company is an important indicator that influences the operation of the distribution of dividends. When firms expect to have huge growth opportunities in their business, they will utilize the firm's funds to finance the expansion. This may make the firms to pay lower amount of dividend to the shareholders. On the other hand, if companies know that the growth opportunities are low and the projects investment is small, they will distribute high cash dividend. These analyses propose that growth opportunities have a negative relationship with dividend payout. a lot of studies appeared to support this negative relationship such as, Higgins (1972), Rozeff(1982), Lloyd et al.(1985) and Collins et al (1996), Fama

and French (2001), Ho, Lam, and Sami (2004), and Aivazian et al. (2006). They argue that firms with high growth opportunities are more likely to pay low dividends. However, LaPorta et al. (2000) show different results. He found that there is a positive relationship between growth opportunities and dividend payment in countries that have high shareholder protection, but negative relationship in countries that have low shareholder protection.

Based on the above assumptions I expect to find a negative association between dividends growth opportunities.

Sample Description and Data:

The sample data of this dissertation includes 5 large non financial companies listed in the Muscat Securities Market. The annual reports of the firms were taken also from the website of the Muscat Securities Market to get information about shareholders. There are 125 listed companies in Muscat Securities Market as at 31 September 2010. The main listed companies in MSM are banking and investment, services and insurance, and industry. The sample in this research come from industry and service sectors such as telecommunications, oil, and manufacturing companies. The data is obtained by Share-Holding Guide of Muscat Securities Market companies. The data are cross sectional and time series which are collected from 2005 to 2009. As discussed in the previous section, the dividend payout ratio is the model of the dependent variable of the dividend policy. the explanatory variables of the suggested dividend policy are ownership structure, firm size, profitability, business risk, leverage, and growth opportunities. The primary idea was to test the dividend policy and the six hypotheses related to dividend policy of the 6 companies listed on Muscat Securities Market.

I chose to use non financial firms rather than financial because the information is limited and the data is missed on financial firms. The dividend paying firms are those companies that paid dividend at least one time over the five years period of the study 2005 to 2009. This means that all the five companies I selected are dividend payment firms.

Measurement of Variables:

This section is based on the previous discussions to test the six hypotheses on dividend payout ratios of Omani firms. The study of the variables is based on average for the 2005 to 2009 periods to examine the influence on company's dividend policy. Moreover, the predicted sign for the variables are positive with dividend policy for ownership structure, profitability, and firm's size, but negative for business risk, leverage, and growth opportunities. The estimations of the models are as follows:

DIV = f (GOV, SIZE, GROW, LEV, BETA, PROF)

Where DIV is the dividend payout ratio which is measured by: Dividends per Share / EPS.

The dividend payout ratio show the percentage amount of dividend the company will tend to distribute to their shareholders. This ratio indicates that the earnings of the company support the dividend payout. If the dividend payout is high, the share will be attractive to the shareholders. It differs among firms and the fact that the majority of mature firms have higher dividend payout ratio.

The model utilizes the percentage number of shares that owned by corporation's investors especially the proportion of the government shares (GOV) in the firm to test the ownership structure to know if it can affect the dividend policy. This is used by many studies for example, Gugler (2003), and some recent studies like Al-Kuwari (2007) in her study about GCC countries. Profitability (PROF) ratio can be measured as return on asset and return on shareholder equity. Return on asset is calculated by net profit over total asset.

PROF = net profit/total asset

Return on equity (ROE) which I have used in this study is measured by net profit divided by shareholder equity.

PROF = net profit/shareholder equity

Many existing studies have used return on equity (ROE) as a proxy of profitability more than using return on asset. For example, Aivazian, booth, and cleary (2003), Al-Yahyaee (2008), and Al- Najjar (2009) utilize return on equity in their study about dividend policy.

Firm size (SIZE) is measured by the natural log of the total assets. Total revenue is also used as a proxy of firm size for example, Holder et al. (1998) has been used the same proxy for this variable. The proxy of the business risk (BETA) is beta. This has been used by Rozeff (1982), Lloyd et. al. (1985), 1993; Moh'd et al., 1995, Colins et. al. (1996), and DSouza (1999). Growth opportunities (GROW) is measured by market to book ratio. Market to book ratio is calculated by dividing book value over market value of the firm. This ratio is used to find identify the value of the firm.

Market to book ratio = book value/ market value

Leverage (LEV) ratio is defined as total debt over total equity. This ratio is used to test how can debt affect the dividend payment of the firm.

LEV = total debt/ total equity

The Tobit and random effects models:

The liner regression model includes, fixed and random effect tobit model. It has been used by several studies to test dividend policy. It is a statistical technique that tries to determine the link between two or more variables: dependent and explanatory variables. The dependent variable selected is dividend payout ratio. The explanatory or independent variables that used in this research are ownership structure, profitability, firm size, leverage, business risk, and growth opportunities. In this study of Omani firms I have used tobit models to investigate the factors of the dividend paid. In addition, to get the results I utilize the random effect tobit model which is suitable for nonfinancial firms.


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