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The Factors affecting dividend payout policy

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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 a 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 literature and still keeps its prominent place 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 don't have an acceptable explanation for the observed dividend behavior of firms (Black, et.al (1976), Allen and Michaely, 2003 and 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 investigate the dynamics and determinants of 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 over 6.1 million tones. Sugarcane farming and sugar manufacturing contribute significantly to the national exchequer in the form of various taxes and levies. Sugar manufacturing and its by-products have contributed appreciably towards the foreign exchange resources through import substitution. The Sugar industry employs over 75000 people, including management experts, technologists, engineers, and financial experts, skilled, semiskilled and unskilled workers. It contributes around 4 billion rupees only under the head of excise duty and other levies to the Government are also paramount significance.

In the year 2008-09 sugarcane production is estimated at 51.5 MMT, a decrease of 19 percent over the previous year due to both a decline in area harvested and yield. Milling policies and practices, coupled with attractive prices for alternative/competing crops (rice, cotton and sunflower) and insufficient irrigation supplies are major factors limiting crop expansion 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 shortage of cane supply during the current crushing season led to an increase in cane prices. This situation benefitted growers who received prices higher than the indicative prices announced by the Government. This development is expected to contribute to an increase in sugarcane area and productivity in the ensuing year. Moreover, last year's higher production of rice and sunflower led to lower prices received by farmers, thereby encouraging the switch 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 Exechange 100 over the period 2003-2008 and present the interpretation of results. Finally in Chapter V, we 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 dividend payout policy decision of listed firms in Ghana Stock Exchange is influenced by profitability, cash flow position, and growth scenario and investment opportunities of the firms.

Lease (2000) the firms should follow a life cycle and imitate 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.

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 firm's bottom line net income is the key 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 the agency costs of FCF implies that firms that use low debt ratios will tend to follow a policy of high- dividend payout.

Alli (1993) the liquidity or cash flows position is also an important determinant of dividend payouts. A poor liquidity position means less generous dividends due to shortage of cash. It reveals that dividend payments depend more on cash flows, which reflect the company's ability to pay dividends, than on current earnings, which are less heavily influenced by accounting practices. They claim current earnings do no really reflect the firm's ability to pay dividends.

Farzad Farsio and Amanda Geary (1983) in their research the relationship between Dividends and Earnings say that dividends have no explanatory power to forecast future earnings. They presented four cases for possible effects of earnings on future dividends and show that there should be no significant relationship between dividends and future earnings in the long run. The contribution of this study is that it provides financial managers and investors with evidence that it would be a mistake to base investment decisions on inferences about dividend/earnings relationships that rely on some certain short-term periods.

John and Kalay (1982) Debt agreement to minimize dividend payments are necessary to prevent bondholder wealth transfers to shareholders. An additional way dividend payout ratio affects agency costs is the reduction of agency cost through increased monitoring by capital market.

Analysis shows the positive association among profitability and dividend payout ratio, corporate tax and cash flows. The study also suggests that when the liquidity of companies increases the companies disburse more dividends. The companies with dynamic profitability find out hard to disburse dividends. Last but not least, conclusion of the study shows that cash flow, profitability, growth and investment opportunities influence the dividend payout policy.

Amidu and Abor (2006) conducted and they have taken the Payout Ratio as dependent variable and defined as dividend per share divided by earning per share. The included the explanatory variable profitability(profit), risk(risk), cash flows (cash), corporate tax(tax), institutional holdings(INSH), Sales Growth and Market to Book value(MTBV). By using the Panel data which involves the pooling of observations on a cross sectional of unit over several time periods and provides the results that are simply not measurable in pure cross-sections or exact time series studies. Because the panel time series is different from a regular time series or cross section regression equation and each variable use the double subscript in the data.

Jensen (1986) concluded that funds remaining after financing all positive net present value projects cause conflicts of interest between managers and shareholders. Dividends and debt interest payment decrease the free Dividend payout ratios in Ghana cash flow available to managers to invest in marginal net present value projects and manager perquisite consumption.

Crutchley and Hansen (1989) examined the hypothesis that financial leverage, dividends and managerial ownership are jointly determined by firms' attempts to minimize the total agency costs of debt and equity. Chaplinsky and Niehaus (1992) examine whether managerial ownership share and financial leverage common determinants. In addition to the agency costs of debt and equity, they also assess whether these decisions are governed by the tax advantage of debt, the costs of issuing securities and the demand for risk sharing by insiders.

Avazian (2006) conducted the study on United Stated listed firms at NYE and find that decision to smooth dividends depend at the part of public market access as proxies by the rating of bonds. In their study dividend payment is the optimal for firms raising debts in the public Unknown bond markets but not for firms in the private informed bank markets. In this logic the dividend decision is related to information asymmetric between the managers and the creditors of the firms.

Pruitt and Gitman (1991) found that risk (year-to-year variability of earnings) also important factor firm's dividend payout ratio. A company that has constant earnings is often able to forecast approximately what its future earnings will be. Company is therefore more likely to pay out a higher percentage of its earnings than a firm with unpredictable earnings.

The liquidity or cash flow from operation is an important factor of dividend payouts policy. A less liquidity position means less generous dividend due to shortage of cash. He exposed that dividend payments depend more on cash flows, which reflect the company's ability to pay dividends, than on current earnings, which are less heavily influenced by accounting practices. They claim current earnings do not really reflect the firm's ability to pay dividends. (Alli, 1993)

Green (1993) questioned the irrelevance argument and investigated the relationship between the dividends and investment and financing decisions. Their study showed that dividend payout ratio is not totally decided after a firm's investment and financing decisions have been made. Dividend decision is taken along investment and financing decisions. Higgins (1981) indicated a shortest link between growths and financing needs, speedily growing firms have external financing needs because working capital needs usually exceed the cash flows from new sales.

Daniel (2007) conducted the study that they found that firms are more likely to manage their earnings upward when their earnings would otherwise fall down of expected dividend levels. The earning management behavior significantly impacts the likelihood of dividend cut. The firms made discretionally accruals because reported earnings to exceed the expected dividend levels are significantly less likely to cut dividends than those firms whose reported earnings fall down of expected level of dividends. They conclude that managers treat expected dividend levels as a vital earning threshold.

Higgins (1972) and McCabe (1979) et.al the leverage (Lev) also influenced the dividend behavior of the firm, if the level of the leverage is high that mean the firm is high risky in the cash flows. The negative effect of leverage on dividends payments is documented in the literature, finds that the firms with higher leverage pay lower dividends in order to evade the cost of raising external capital of the firm.

Lintner (1956) founded that past dividends of the companies and current earnings are the key determinants of current dividends and managers prefer to maintain stable dividends and make cyclic adjustments toward a target payout ratio.

Arditti (1976) carried out research in order to evaluated dividend policy with respect to taxes and uncertainty. The purpose of this paper has been to tackle the distressing dilemma of the zero dividend solution by clearly incorporating M&M's original proposal that dividends have an information aspect that is of potential worth to investors. The analysis of ambiguity they have offered is only one of many possible hypotheses which can account for the experimental fact that companies naturally do not take on intense dividend policies.

Arnott and Asness (2003) suggested that a higher payout ratio results in low future growth, based their study on America stock market it founded that higher aggregate dividend payout ratios were associated with higher future earnings growth.

Modigliani and Miller (1985) carried out research to evaluate dividend Policy under asymmetric information. The Standard finance model of the firm's dividend/investment/financing decisions gives manager more appropriate information regarding the firm's current earnings. The purpose of research is to replace the assumption built by Miller and Modigliani that the outside investors and inside managers have the same information about companies profit and future income with the assumption that inside managers know more than outside investors about the actual situation of firm's current earnings.

James A. Gentry (1990) informed about free cash flow analysis, showed that the financial position of a company depends upon its ability to generate net operating cash flows that are sufficient to cover up a hierarchy of cash outflows. The profiles generated from a large sample of companies show that relative cash flow components vary across company size and across industry groups. The researcher hopes that these profiles will serve as benchmarks for comparing cash flow components and encourage financial analysts to use cash flow analysis.

Miller and Modigliani et.al (1961) suggest that in perfect markets, dividend do not affect firms' value. Shareholders are not concerned to receiving their cash flows as dividend or in shape of capital gain, as for as firm's doesn't change the investment policies. In this type of situation firm's dividend payout ratio effect their residual free cash flows and the result is when the free cash flow is positive firms decide to pay dividend and if negative firm's decide to issue shares. They also conclude that change in dividend may be conveying the information to the market about firm's future earnings.

Gordon and Walter (1963) present the bird in the hand theory which says that investors always prefer cash in hand rather than a future promise of capital gain due to minimizing risk.

Jensen and Meckling (1976) the agency theory is based on the conflict between managers and shareholder and the percentage of equity controlled by insider ownership should influence the dividend policy. 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 firm size (SIZE) defined as natural logarithm of total assets is expected to have a positive effect on dividend payouts as large more diversified firm are likely to have very low chance of bankruptcy and can sustain higher level of debt.

In investigating the determinants of dividend policy of Tunisian stock Exchange, found that the high profitable firms with more stable earnings can manage the larger cash flows and because of this they pay larger dividends. (Naceur, 2006)

Baker (2007) reports that Canadian dividend paying firms are significantly larger and more profitable, having greater cash flows, ownership structure and some growth opportunities.

The liquidity or cash flows position is also an important determinant of dividend payouts. A poor liquidity position means less generous dividends due to shortage of cash. Alli et.al (1993) reveal that dividend payments depend more on cash flows, which reflect the company's ability to pay dividends, than on current earnings, which are less heavily influenced by accounting practices. They claim current earnings do no really reflect the firm's ability to pay dividends.

Megginson and Eije (2006) examined that the dividend paying tendency of fifteen European firms decline dramatically over this period 1989 to 2003. The increase in the retained earnings to total equity doesn't increase the payout ratio, but company age does.

The empirical study of Canadian dividend-paying firms found that they try to maintain stable dividends per share, are reluctant to decrease the payout level, and smoothly adjust the level of payout based on level of expected future earnings. (Adjaoud, 1986)

Easterbrook (1984) argues that increasing dividends raises the probability that additional capital will have to be raised externally on a periodic basis and consequently, the firm will be subject to constant monitoring by experts and outside suppliers in the capital market.

Green (1993) questioned the irrelevance argument and investigated the relationship between the dividends and investment and financing decisions. Their study showed that dividend payout levels are not totally decided after a firm's investment and financing decisions have been made. Dividend decision is taken along investment and financing decisions.

Partington (1983) revealed that firm's use of target payout ratios, firm's motives for paying dividends and level to which dividends are determined are independent of investment policy.

Lipson (1998) conducted study to examine the factors that derives dividend initiations and earnings surprises, look at the performance of newly firms that started dividends with those that did not. Earnings increases following the dividend initiation and earnings revelations for initiation firms are more constructive than for those non initiating firms. In an economy that charges taxes on investment income, dividends are obviously a disadvantageous means of transferring wealth to shareholders. To validate dividend costs, two clarifications are typically given: dividends are used to solve agency problems inside the firm, or dividends are used to communicate information to the market.

H. Kent Baker, Gail E. Farrelly (1983) in their study A Survey of Management Views on Dividend Policy say that the major determinants of dividend payments today appear strikingly similar to Linter's behavioral model developed during the mid-1950. In particular, respondents were highly concerned with dividend continuity. Second, the respondents seem to believe that dividend policy affects share value, as evidenced by the importance attached to dividend policy in maintaining or increasing stock price. Although the survey does not uncover the exact reasons for their belief in dividend relevance, it does provide evidence that the respondents are generally aware of signaling and clientele effects. Finally, the opinions of the respondents from the utilities differ markedly from those of the other two industries.

Smith and Watts (1992) examined the relationship among executive compensation, corporate financing and dividend policy. They concluded that a firm's dividend policy is affected by its other corporate policy choices. Jensen et.al, Solberg and Zorn (1992) linked the interaction between financial policies (dividend payout and leverage) and insider's ownership to informational asymmetries between insiders and external investors. They found that corporate financial decisions and insider ownership are interdependent.

Lintner (1956) suggested that the firms have long run target dividend payout ratios and place their attention more on dividend changes than on absolute dividend levels. He also finds that dividend changes follow shifts in long-run sustainable earnings and managers are hesitant to make dividend changes that may later need to be reversed. Managers also try to stabilize dividends and avoid dividend cuts. Linter developed a partial adjustment model to describe the dividend decision process that explained 85 percent of year-to-year dividend changes. Gordon (1959) argued that an increase in the dividend payout raise stock price (value) and lowers the cost of equity, but practical support for this position is weak.

Bemstein (1996) maintain that dividend policy makes no difference because it has no effect on either stock prices or the cost of equity. According to Gordon (1959) a higher payout ratio will reduce the required rate of return (cost of capital), and hence increase the value of the firm.

Miller and Rock (1985) dividends contain this private information and therefore can be used as a sign device to influence share price. An announcement of dividend increase is taken as good news and accordingly the share price reacts favorably, and vice versa. Only good-quality firms can send signals to the market through dividends and poor-quality firms cannot mimic these because of the dissipative signaling costs. According to Easterbrook (1984) the agency costs thesis predicts that dividend payments can reduce the problems associated with information asymmetry. Dividends may also serve as a mechanism to reduce cash flow under management control, and thus help to mitigate the agency problems. Reducing funds under management discretion may result in forcing them into the capital markets more frequently, thus putting them under the scrutiny of capital suppliers. The tax-preference theory posits that low dividend payout ratios lower the required rate of return and increase the market valuation of a firm's stocks. Because of the relative tax disadvantage of dividends compared to capital gains investors require a higher before-tax risk adjusted return on stocks with higher dividend yields.

Higgins et.al indicated that a direct connection between growth and financing needs: growing firms have outside financing requirements because working capital needs normally go beyond the incremental cash flows from new sales. It showed those payouts ratios are negatively related to firms' need top fund finance growth opportunities. (Higgins, 1972)

De Angelo (2004) conducted a study on dividend policy, agency cost and earned equity. The study told that why companies pay dividends? If they didn't have their assets and capital structure, would ultimately become unsustainable as the earnings of successful firms surpass their investment opportunities. They found that dividend payments prevented major agency problems since the retention of the earnings would have given the managers command over an additional $1.6 trillion without access to better investment opportunities and without any monitoring. This sense suggests that firms with high retained earnings are especially likely to pay dividends. In this view, firms pay high dividend when earned equity to total equity is high, and decline when this ratio declines and when this ratio is zero or near to zero, meaning that firms don't have the earned equity. They finally found that the highly significant association between the decision to pay dividends and the ratio of earned equity to total equity controlling for size of the firm, profitability, growth, leverage, cash balance.

CHAPTER-3

RESEARCH METHODS

As a various factors available in literature review have been identified that they affect the dividend policy decisions of the companies. It includes some important variables in order to achieve at some positive conclusions. Multiple linear regressions model has been developed to conduct the research, which contain of dependent variable and independent variables. Dependent variable in this study has dividend payout that is defined as the percentage of earnings disbursed as dividends. While the independent variables include of profit (EBIT), sales, debt equity ratio and cash flow from operation. These four variables are used as predictors in order to conclude that how much each of the variables affects the dividend payout of sugar firms listed on the Karachi Stock Exchange over the period of eight years (2001-2008).

Model:

DP = α + β1 EBIT + β2 sales + β3 CFO + β4 DER+ ε

DP is the annual dividend paid by firms during the period, while α is Alpha constant in the model. Whereas β (beta) shows the times of the variable in the model and ε represents the error term. Variables include in the model are Earning before interest and tax, Sales per year, Cash flow from operation and Debt equity ratio.

Dependent Variable:

Dividend payout ratio:

The dividend policy is the one of the very important issue of corporate finance. It developed the dividend model which becomes very famous and known as Linter Partial Adjustment Model. According to the Linter each firms i has target dividend payout ratio. By using the target payout ratio linter calculated the target dividend at time (Dit*) as percentage of net earnings of the firms i at the time t (Eit), i.e Dit*= ri. Eit. John Linter (1956)

In this study we used dividend payout ratio as dependent variable. It is calculated by percentage of net earnings of the firms paid at the end of period. The set of determinants of dividend payout ratio consist of following variables. CFO (cash flow), Sales, EBIT (earning) and Debt to Equity Ratio (leverage).

Independent Variable:

There are four independent variables are used in this thesis to find out their impact on the dependent variable as dividend payout.

Operating Cash Flow:

The liquidity or cash flows position is also an important determinant of dividend payouts. A poor liquidity position means less giving dividends due to shortage of cash. Alli (1993) reveal that dividend payments depend more on cash flows, which reflect the company's ability to pay dividends, than on current earnings, which are less heavily influenced by accounting practices. They claim current earnings do no really reflect the firm's ability to pay dividends.

The market liquidity is defined as annual value of stock traded divided by the stock market capitalization. Market liquidity is one of very important factor that can influence the decision or behavior of the dividend policy. Belanes (2007) there is a negative relationship between the market liquidity and dividend yield in Tunisian Stock exchange (TSE).

OCF= EBIT +Depreciation-Taxes

H1: There is positive impact of CFO on dividend payout ratio.

Debt to Equity Ratio (leverage):

The leverage has been used as proxy of Debt to equity ratio and variable in this study. Because debt to equity is very important variable for the determinants of dividend policy,if the level of the leverage is high its mean the firm is more risky in the cash flows. The effect of negative leverage on dividends payments is already documented .Higgins (1972) and McCabe (1979) suggested that long term debt had negative impact on the amount of dividend paid. Rozeff (1982) found that the firms with higher leverage paid lower dividends in order to avoid the cost of raising external capital of the firm. When reorganization results in a debt-equity swap, the firm becomes an all-equity firm. Since there are no tax benefits or the possibility of bankruptcy in the future, the total value of the firm is exactly the asset value.

Debt to Equity ratio =Total debt / Total equity

H2: There is association of Debt to Equity on dividend payout ratio.

Sales (Revenue):

According to the assumption the high growth firms are smooth to pay their dividends to shareholders. The sales growth has been used as proxy of Growth in the empirical analysis of the study. The sales growth has been use as percentage change in sales annually of the growth. But in thesis, Sale is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold. In this study sales consist of total a sale that is included local sales and export.

H3: There is association of Annual Revenue on dividend payout ratio.

EBIT (Earnings before interest and taxes):

Profits have been as the important indicator of the firm's to pay dividends. Linter (1956) conducted a classic study on how U.S. managers make dividend decisions. He developed a compact mathematical model based on survey of 28 well established industrial U.S. firms which is considered 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. Baker, Farrelly and Edelman (1986) surveyed of New York stock exchange firms and concluded that the major determinants of dividend payments are anticipated level of future earnings and pattern of past dividends. Pruitt and Gitman (1991) showed that current and past year' profits are important factors influencing dividend payments. Firm's profitability is argued to be an important factor in determining dividend policy. It can be argued that profitable firms are more able to distribute dividends, and hence a positive relationship is expected between firm's profitability and its dividend payments. This result is also supported by the signaling theory of dividend policy. In other words, profitable firms pay dividends to convey their good financial performance (Bhattacharya, 1979; Chang and Rhee, 1990, Aivazian et al, 2003).This earning is calculated by operating profit at the end of year. A measure of a company's ability to produced income from its operations in a given year. It is calculated as the company's revenue less its expenses (such as overhead) but not subtracting its tax liability or interest paid on debt.

H4: There is association of EBIT on dividend payout ratio

Data and Sample Size:

Sample size is consisting of twelve sugar companies listed in KSE (Karachi Stock Exchange) and period from 2001 to 2008. There are two types of sources available for data collection concerning research purpose i.e. primary and secondary data. The data is secondary data which sourced from published annual reports of the sugar companies from internet and also from Karachi Stock Exchange in Pakistan and State Bank of Pakistan.

Research and Testing Instrument:

The instruments used for collecting data for this thesis consisted of financial report (secondary data) of firms and SPSS as testing tool. During the analysis of data in SPSS, researcher has used technique of Multiple Linear Regression (MLR) model, because the instrument has scale types of date. Therefore, MLR model is the best tool to evaluate this kind of data. The statistical tool has been used to analyze the association between a dependent variable and four independent variables. Multiple Linear Regression estimates the coefficients of the linear equation, involving one or more independent variables that best predict the value of the dependent variable.

CHAPTER-4

ANALYSIS OF RESULTS

(Table-4.1): Correlation:

EBIT

Debt Equity Ratio

Sales

CFO

Pearson Dividend

Correlation

.553

-.154

.411

.466

Sig. (1-tailed) Dividend

.000

.068

.000

.000

The correlation table shows the relationship between the dependent variable and independent variables. The dividend payout ratio shows the relationship with earning of the firm is 0.553 strongly positive and significant which shows that the dividend payments are dependent on the profit of the firms. Dividend payout shows the relationship between debt equity ratio (leverage) of the firm (-0.154) which has negative.

Dividend paid shows the relationship with sales (0.411) which are positive and shows that sales can positively affected the dividends of the firms. Dividend with the cash flow from operation is (.466) also positive association with each other.

(Table-4.2): Model Summary.

R

R Square

Adjusted R Square

F

Sig:

.740

.548

.528

27.24

0.000

Total variation explained by the predictors in dependent variable as indicated by adjusted R square. The value of Adjusted R square is 0.528 or 52.8 %, It means that 52.8% dividend payout ratio pattern in listed firms of the Karachi Stock Exchange due to the Sales, EBIT, cash flow and Debt to Equity.

The ANOVA table suggested that independent variables explain a significant amount of the variance in the dividend payment. In above table F = 27.24, p< .05 and therefore can conclude that the regression is statistically significant.

(Table-4.3): Coefficient.

Model

Unstandardized Coefficients

Standardized Coefficients

T

Sig.

B

Std. Error

Beta

1

(Constant)

12.413

3.109

3.993

.000

EBIT

.346

.044

3.393

7.920

.000

Debt Equity Ratio

.012

.283

.003

.041

.967

Sales

.007

.002

.484

3.436

.001

CFO

-.292

.043

-3.277

-6.804

.000

Unstandardized Equation:

Dividend=12.413+ (.346) EBIT+ (.007) sales + (-.292) CFO

Standardized Equation:

Dividend=12.413+ (3.393) EBIT+ (.484) sales + (-3.277) CFO

The regression coefficient indicated that the amount of change in the value of dependent variable for a unit change in independent variable. The regression results shown three of the important variable that is profitability, cash flow and total sales has significant, regression coefficient less than 0.05 indicating the level of significance. The results support the hypothesis to have a positive impact of profitability, sales. Therefore cash flow from operation on dividend decision and also it's statistically significant but negative effect on the dividend payout ratio. The debt equity ratio variable is insignificant in the model.

Constant value (12.413) suggested that if the value of all variables becomes zero then the value of dividend ratio will be (12.413).

The Standardized Beta Coefficient column shows the overall contribution of an individual variable to the model. From the above (table 4.3) it has shown that the profit contributes (.346) to the dividend policy. The sales contributes (.007) to the dividend policy. The CFO contributes (-.292) to the dividend policy.

The relationship between profitability and dividend is positive and significant so null hypothesis is rejected. It concluded that firms listed in Karachi Stock Exchange determining the amount of dividends according profitability of the firm. Cash flow shows negative association but significant so null hypothesis rejected.

The results show that relationship between the debt equity ratio and dividend payout is negative and insignificant by using statistical tool, so we concluded that it is not the determinant of dividend payout policies in listed firms of KSE. So we will not reject the null hypothesis. The evidence supported by the findings of Baker (2007) and deviate from Belans et al (2007), Avizan et al (2006).

(Table-4.4): Hypothesis Assessment Summary

Hypothesis

R Square

F

Sig: value

Î’

T

Sig: value

Empirical Conclusion

There is association of CFO on dividend payout ratio.

.548

27.24

0.000

-3.277

-6.804

.000

There is association of Debt to Equity on dividend payout ratio

.548

27.24

0.000

.003

.041

.967

There is association of Revenue on dividend payout ratio

.548

27.24

0.000

.484

3.436

.001

There is association of EBIT on dividend payout ratio.

.548

27.24

0.000

3.393

7.920

.000

CHAPTER-5

CONCLUSION

This thesis examined the variables that impact on dividend payout ratios of listed companies in Karachi stock exchange. The analyses are performed by using data that is secondary from the financial statements of sugar firms listed on the KSE during as Eight-year period.MLR technique was used to analyzed the affects of independent variables on dividend policy. The results demonstrate positive association between dividend payout and profitability, sales, debt equity ratio and negative relationship to cash flow. The results told that profitable firms tend to pay high dividend. A good liquidity position increases a firm's ability to pay dividend. Companies with earning instability found it difficult to pay dividend, such companies would pay less or no dividend. The results again suggested that growing firms require more funds in order to finance their growth and therefore would typically retain greater proportion of their earnings by paying low dividend. The results highlighted that profitability is the only key variable that shows significance with the help of regression coefficients at 5% level of significance. Usually, cash is strongly associated with the dividend payout policy of firms; the companies with stable cash are capable of disbursing dividends as compared to firms with low availability of cash. But results of this study showed negative and weak relationship between cash and dividend payout of firms. In Pakistan most of firms focus on the retention ratio that can facilitate in their firm growth.

IMPILICATION

In the analysis it is found that there are so many important variables that derive the dividend payout policy of any organization. The purpose is to examine the specific factors in firms and their key role in dividend policy. The explanatory variables taken into consideration for this study, explained 54.8% of the existing linear regression model. In Pakistan, previously a research was conducted on the determinants of dividend payout policy. In which, so many variables were considered for analysis purpose. In Pakistan there are few companies which are paying dividend constantly. Higher the profit retained this year for capital expenditure and operations lower will be the divined payment.

If a company has surplus cash, and few good projects, returning money to stockholders is good. If a company does not have surplus cash, and/or has several good projects returning money to stockholders is bad. There has been changes in the taxation policy for dividend during the sample period of the study, which gives us an opportunity to get know how tax policy theory and its implications for the dividend payouts in economies. In such a case an investor should favor to get less dividends paid and earnings to be retained. Results suggested that rising firms require additional funds in order to finance their growth and therefore would normally retain larger amount of their earnings by paying less dividend. The result regarding relationship between cash flow from operation and dividend payout are consistent with the findings of Anil and Sujata Kapoor (2008).

The Debt to equity ratio is very important variable for the determinants of dividend behavior. In Pakistan the level of the debt is high its mean the firm is more risky in the cash flows that will result negative impact on dividends payments and less payout to stockholders.

According to the Higgins (1972) and McCabe (1979) suggested that long term debt had negative impact on the amount of dividend paid. Rozeff (1982) found that the firms with higher leverage paid lower dividends in order to evade the cost of raising external capital of the firm.

RECOMMENDATION

The main aim of this study was to examine the factors that influence the dividend payout behavior of twelve sugar firms listed on Karachi stock exchange. Form the study, it is concluded that in Pakistan the level of the debt is high its mean the firm is more risky in the cash flows that will result negative impact on dividends payments and less payout to stockholders.

Higher the profit retained for capital expenditure and operations lower will be the divined payment. It is also concluded from this study that profitability is an important factor that influence the dividend payout policy of firms, so investors should buy more shares of those companies who are stable in their earnings.

SPSS RESULTS:

Dividend

EBIT

DebtEquityRatio

Sales

CFO

Pearson Correlation

Dividend

1.000

.553

-.154

.411

.466

EBIT

.553

1.000

-.120

.791

.983

DebtEquityRatio

-.154

-.120

1.000

-.045

-.083

Sales

.411

.791

-.045

1.000

.841

CFO

.466

.983

-.083

.841

1.000

Sig. (1-tailed)

Dividend

.

.000

.068

.000

.000

EBIT

.000

.

.124

.000

.000

DebtEquityRatio

.068

.124

.

.332

.213

Sales

.000

.000

.332

.

.000

CFO

.000

.000

.213

.000

.

N

Dividend

95

95

95

95

95

EBIT

95

95

95

95

95

DebtEquityRatio

95

95

95

95

95

Sales

95

95

95

95

95

CFO

95

95

95

95

95

Variables Entered/Removed

Model

Variables Entered

Variables Removed

Method

1

CFO, DebtEquityRatio, Sales, EBITa

.

Enter

a. All requested variables entered.

Model Summaryb

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.740a

.548

.528

19.26658

a. Predictors: (Constant), CFO, DebtEquityRatio, Sales, EBIT

b. Dependent Variable: Dividend

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

40441.865

4

10110.466

27.237

.000a

Residual

33408.087

90

371.201

Total

73849.952

94

a. Predictors: (Constant), CFO, DebtEquityRatio, Sales, EBIT

b. Dependent Variable: Dividend

Coefficients

Model

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

B

Std. Error

Beta

1

(Constant)

12.413

3.109

3.993

.000

EBIT

.346

.044

3.393

7.920

.000

DebtEquityRatio

.012

.283

.003

.041

.967

Sales

.007

.002

.484

3.436

.001

CFO

-.292

.043

-3.277

-6.804

.000

Residuals Statisticsa

Minimum

Maximum

Mean

Std. Deviation

N

Predicted Value

-27.3068

140.2350

22.9663

20.74205

95

Std. Predicted Value

-2.424

5.654

.000

1.000

95

Standard Error of Predicted Value

2.020

15.676

3.536

2.666

95

Adjusted Predicted Value

-62.1609

146.0450

22.7375

22.85907

95

Residual

-40.72528

52.90254

.00000

18.85219

95

Std. Residual

-2.114

2.746

.000

.978

95

Stud. Residual

-2.199

2.769

.005

1.011

95

Deleted Residual

-44.07492

62.16088

.22879

20.52865

95

Stud. Deleted Residual

-2.248

2.879

.009

1.025

95

Mahal. Distance

.044

61.243

3.958

10.926

95

Cook's Distance

.000

1.167

.023

.123

95

Centered Leverage Value

.000

.652

.042

.116

95

a. Dependent Variable: Dividend


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