Research Papers Dividend Policy Theories

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We find that size, profitability, and interest coverage ratios have a significant positive relation to dividend policy.

Furthermore, business risk and debt reveal a significantly negative relation with dividends.

This longitudinal study uses balanced data consisting of companies listed on the National Stock Exchange (NSE) of India for 12 years—from 2006 to 2017.

Pooled ordinary least squares (POLSs) and fixed effects panel models are used in our estimation.

All investors expect a certain amount of return on their investment for the risk taken.

Firms can allocate profits to their stockholders either through dividends or share repurchases.Dividends can be distributed out of profits, and require the existence of free cash flows; hence, the payment of dividends provides a positive signal to investors (Bhattacharya 1979; Miller and Rock 1985).According to Jensen (1986), the agency cost of the free cash flow model predicts that companies with larger free cash flows tend to distribute higher dividends rather than investing in projects with a lower net present value (NPV).It is referred to as the “bird-in-hand” argument, as investors prefer current income rather than future income (Gordon 1963).Also, the tax treatment of dividends and capital gains is different.Investors can get a return on their investment through dividends (current income).Alternatively, if a company has a lucrative investment opportunity available, it may not distribute its profits.The results of this study can be used by financial managers and policymakers in order to make appropriate dividend decisions.They can also help investors make portfolio selection decisions based on sectoral dividend paying behavior.Thus, as concluded by Miller and Modigliani (1961), investors should not differentiate among dividends and retaining profits.However, Miller and Modigliani’s assumptions of a perfect capital market, no taxes, certainty, and fixed investment strategy does not really exist.


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    REFERENCES. Testing for Market Efficiency in Emerging Markets A Case Study of the Karachi Stock Market. The Lahore Journal of Economics, 12 1, 119-140 Naeem, S. and Nasr, M. 2007. Dividend policy of Pakistani Firms; Trends and Determinants. International Review of Business Research Papers, 3 3, 242-254.…

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