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European Journal of Business and Management                                                                www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
                                  2839
Vol 4, No.12, 2012



The Determinants of Corporate Dividend Policy: An Investigation

                                  of Pakistani Banking Industry

                                        Sajid Gul (Corresponding Author)
            Faculty of Administrative Sciences Air University Islamabad ,Mardan 23200 KPK Pakistan
                                                                         Mardan
                            Tel: +92
                                 +92-332-8102955 *E-mail: sajidali10@hotmail.com
                                                 Sumra Mughal
                       MS Scholar Air University Islamabad Gujrat 50700 Punjab Pakistan
                                                  Islamabad,Gujrat
                            Tel: +92
                                 +92-301-8959323 E-mail: sumra.ansar@yahoo.com
                                                   Nabia Shabir
                       MS Scholar Air University Islamabad ,Islamabad 4400 ICT Pakistan
                                                              Islamabad
                           Tel: +92--301-8959323 E-mail: Nabia.shabir@hotmail.com
                                              Syeda Asma Bukhari
                       MS Scholar Air University Islamabad ,Lahore 54000 Punjab Pakistan
                                                             Lahore
                         Tel: +92-301
                                   301-8959323 E-mail: syedaasmabukhari@ymail.com

Abstract
The paper investigates the impact of different firm specific factors on the dividend policy of companies by
  he
selecting a sample of 18 banks listed in KSE for the period 2006 2011. The dependent variable is dividend
                                                                  2006-2011.
policy where as explanatory variables include, firm size and risk, profitability, firm’s growth and leverage. It was
                                        include,
found that out of 18 banks 11 banks pay dividends whereas seven banks do not. The results have shown that the
independent variables growth, profitability and firm size have positive coefficient of correlation when the
dependent variable is dividend yield and Dividend Payout Ratio. However there is strong linear association
between profitability and firm size with dividend policy but the variable growth rate has weak positive
correlation with dividend policy. In contrast, the variables leverage and firm risk has inverse lin
         on                                                                                      linear relationship
with dividend policy. Banks that pay dividends were found, when we use method of correlation coefficient more
profitable, stable and less risky as co
                                     compare to banks that do not pay dividends.
Keywords: Dividend Policy, Listed Banks, Pakistan
                              y,

1. Introduction
Dividend policy can be describe as the policy a company uses to decide how much it will pay to shareholders in
dividends. Dividend policy that a firm adopts has implications for different stakeholders such as lenders,
investors and managers. Since Miller and Modigliani (MM) presented dividend irrelevance theory. This theory
discloses that firm value and shareholders’ wealth are not related to the decision of whether or not the firm pays
                                                                             decision
dividend. However, on the other side Bird the Hand theory strongly suggest paying dividend (see for instance
                                          Bird-in-the
Linter, 1956; Gordon, 1956; and Gordon and Brigham, 1968). There are several researches on dividen
      policy till date, which deal with different aspects of the policy. Stability of dividend is an important decision
to be made by any firm just as other decisions made. Brealey and Myers (2005) listed top ten problems that are
unresolved in advance corporate finance and one of them is dividend policy. In empirical literature, one of the
                                      finance
important issues that are investigated intensively is to find the factors affecting firm’s dividend policy. It is
noteworthy that dividend policy is not only influenced by internal factors but external factors also play
significant role (Jensen &Johnson, 1995; Jensen & Smith, 1984; Lintner, 1956). Internal factors include
investment opportunity, profitability and liquidity, whereas among external factors, macroeconomic problems
like growth, stability, change in technology, and change in consumer taste are most important Roberto (2002).
      Despite the importance of the issue, limited number of research studies is available for a developing country
like Pakistan and especially in the banking sector. Most of the studies are conducted in developed markets.
                                         banking
Previous studies related to Pakistan show that dividend announcement affects the share price and market
efficiency Akbar & Baig (2010). Ahmed & Attiya (2009) find that dividend policy is af          affected by earning per
share (EPS) and by previous dividend per share. However, these studies are limited to non   non-financial firms only.
Thus, the objectives of this study are:
        I.           The first aim is to search out those banks that pay dividends and those that do no from banks
                                                                                                       not,
                     listed in Karachi Stock Exchange (KSE).
       II.           The second aim is to look at yield of dividend and payout ratio in order to observe the trend
                     of dividend distribution of Pakistani listed Banks.
                                     stribution


                                                          1
European Journal of Business and Management                                                               www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
                                  2839
Vol 4, No.12, 2012

      III.          By analyzing different firm specific factors the third aim is to distinguish the characteristics
                                                                            a           stinguish
                    of banks that pay dividend and those that do not pay dividends.
       IV.          To investigate the association between firm specific factors and dividend distribution.
2. Literature Review
How firms decide their dividend policy has been a puzzle to financial economists for many years. Based on
previous work done, Fisher Black in 1976 found that “dividends” is a puzzle. This conclusion of Fisher
                                 Black’s                                                 .
motivates researchers to study the dividends in more detail, e specially those factors t h a t play an important
role in determining the dividend policy for emerging country like Pakistan. Different studies have been
                                                                                      .
conducted on emerging countries in     ncluding Pakistan is done by Aivazian, Booth and Clear (2003). They stated
                                                                                           Clearly
that profitability and Investment oppo
                                     opportunities play a significant role in determining divid
                                                                                             dividends. Similarly Hu
and Liu, (2005) found a positive relationship between the current earnings of a c              company and the cash
dividend they pay to their shareholders and a significant negative relationship between the debt to total assets
                   y        shareholders,
and dividends.
      Different researches have explained that the disputed dividends are outcomes of bird    bird-in-hand theory. The
bird-in-hand means cash dividends, in comparison it considers birds
         hand                                                         birds-on-the-bush (capi gains). This theory
                                                                                   bush (capital
states that investors prefer cash dividends to capital gains. This leads firms to lay high dividends, which will
result in the increase in value of shares. (Brigham & Gordon, 1968; Gordon, 1956; Lintner, 1956) The theory of
Gordon-Lintner was criticized by MM as Bird hand fallacy because many investors use to reinvest their
           intner                                Bird-in-hand
dividends in the stocks of similar companies. So, the investors are exposed solely to the risk of firm’s cash flows,
which are associated with the firms’ assets riskiness during the long time. All these theories prescribe the
                                            assets
financial managers with a diverse approach. There is no single perfect dividend payout policy. The firms should
adjust higher payout of dividend ratio so that the stock prices can be raised. Many empirical studies afterwards
                                                                          raised.
proved that the results gained from the researches were not consistent.
      According to Miller, Merton & Franco (1961) dividend policy does not affect firm value under a certain set
of assumptions; which include perfect capital markets, no transaction costs, no flotation costs and no taxes. Their
                                           capital
independence will be observed between systematic information, dividend policy and equity costs. Most of the
financial researcher and academics acknowledged this theory with a surprise because previous researches
                                                                              surprise
focused and suggested that share price and shareholder equity is affected if dividend policy is properly managed,
similarly structure of a capital is affected by cash dividend Gordon (1959).
      Most of the prior literature suggests that large companies due to greater access to capital markets have
                                     suggests
better opportunity to raise funds comparatively at lower cost. Therefore, they do not rely on their retained
earnings and pay higher dividends to their shareholders (Fama and French, 2001; Holder et al, 1998). Large
                                                                                   2001;
firms are more mature and thus have easy access to capital markets and thus have little dependence on internal
funds and allow high dividend paying ratios. Previous studies suggest positive association between payout of
dividend ratio and size because larger firms face higher agency costs and inferior issuing costs. A study based on
    dend
agency cost, earned equity and dividend policy was conducted by (DeAngelo et al, 2004) who focused on why
the firms pay dividends? They found that there is a significant relationship between the choices to pay or not to
                                          that
pay dividends and the leverage, profitability, cash balance, firm size, growth and past dividends. A similar study
in the context of Ghana was conducted by Amidu and Abor (2006). The results indicate that there is positive
                                                                           The
association between profitability and dividend policy and liquidity and dividend policy. They found a positive
association between the payout of dividend ratio, cash flows, profitability and corporate tax.
      A study regarding banks’ dividend policy is conducted by Dickens, Casey, and Newman (2000). They show
a negative relationship between yield of dividend and investment opportunities, signalling, ownership structure,
and risk and a positive relationship with size and dividend history. In Pakistan, a recent study was conducted by
Ahmad and Attiya (2009), who investigate different factors determining dividend policy. The sample of the
study was from 2001 to 2006. The results showed a trend that Pakistani companies fix their dividend payments
                                                                                          fix
through past dividends and current earnings. Second analysis of determining factors of dividend payout showed
that stable companies pay higher dividends. Growth variable did not appear to have any significance influence
on dividend policy while size of the firms found to be negatively correlated.
            d

3. Research Methodology and Variables
3.1. Data Collection Procedure
For identifying the characteristics that affect the dividend policy of Pakistani Banks, population consists of 25
Banks in Pakistan that are listed in Karachi Stock Exchange (KSE). The final sample after considering any
    ks
missing data consist of 18 banks. Thus the sample consist of a major fraction 72% of banks listed in KSE from
2006-2011. The data sources are the audited financial reports collected from KSE, SECP, SBP and bloom burg
      2011.
business week.
     In order to be included in the study all banks must meet two criteria. (1) The bank needs to be listed in the


                                                          2
European Journal of Business and Management                                                              www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
                                  2839
Vol 4, No.12, 2012

KSE during 2006-2011 and (2) data needs to be available on all variables. We have used simple correlation to
                  2011                                            variables.
measure the link between dividend policy and several firm specific factors.

3.2. Variables Measurement
The explanatory attributes that influence banks dividend policy in Pakistan are discussed in this section and how
they are measured. Following Fama, and French (2001), L a Porta et al, (2000), Grullon et al, (2002), Chen et
al, (2005), Collins and Kothrai (1989), Ghosh (2006), Gugler (2003), Chung and Charoenwong (1991) and
Stacescu (2006) we used firm size, growth oppurtunities, firm risk, firm performance, and leverage as
                                          growth
explanatory variables. The first variable is size that is measured as Ln of total assets. The attribute growth
oppurtunities is measured as percentage increase in total assets, whereas profitability is proxied by using the ratio
                                                                           profitability
return on assets, and return on equity. The next explanatory variable is leverage, we have proxy it by taking total
debt and divide it by total equity. Risk of the firm is measured by firm’s beta.
      We have defined a dividend-payer bank as one, which have at least two dividend payments during six
                                    payer                                                                   six-year
period from 2006 – 2011, in contrast a bank will be considered as non dividend payer bank if it does not make at
least two dividend payments during the study period. The ratio yield of dividend and dividend payout is used to
investigate the dividend distribution of Pakistani listed banks. Yield of Dividend is defined as stocks annual
dividend divided by its current market price whereas payout ratio is measured as dividend per s                share
divided by earning per share. Both yield of dividend and p a y o u t o f dividend ratios are used as dividend
variables.

4. Discussion of Findings
4.1. Dividend Payers and Non- Paye   ers
As it can be seen in table 1 presented below that out of total 18 banks 61% pay dividends while 39% do not.
4.2. yield of Dividend and payout of DDividend Ratio
The average mean values of yield of dividend and payout of dividend ratio are presented in table 2 from
2006-2011 for the entire sample. Yield of Dividend has a mean value of 27.77% whereas payout of dividend ratio
       2011
is 20.21%.
4.3 Comparison of Financial and Performance Variables for Dividend-Paying and Non-D
                        nancial                                                              Dividend-paying Banks
The mean values of different firm specific factors are shown in table 3 for dividend payer and non-payers. Firm
                                                                                         payers
specific factors are firm size, growth rate, firm risk, leverage and profitability.
      Table 4 shows the correlation coefficients of different firm specific factors, when payout of dividend ratio
as the dependent variable. It can be see n that the independent variables growth, profitability and firm size
                                       seen
have positive coefficient of correlation with the dependent variable payout of Dividend Ratio. However there
                                    lation                                                 dend
is strong linear association between profitability and firm size with payout ratio but the variable growth rate has
                                                                                 ratio
weak positive correlation with payout ratio. In contrast, the variables leverage measured as debt over equity and
firm risk measured by beta has inverse lin linear relationship with payout ratio. The analysis of single year data
on 2011 shows similar result as the average results, except for Growth opportunities, Return on Equity and
Total Revenue which          show     stronger      linear association with 0.124209, 0.416006 and 0.741162
respectively.
      Table 5 shows the correlation coefficients of different firm specific factors, when yield of dividend ratio
                                      coefficients
as the dependent variable. The results are in line with the results between dividend payout and firm specific
factors. It can be seen that the independent variables growth, profit ability and firm size have direct
                                                                           profitability
positive association with the dependent variable Dividend. However there is strong linear association between
                                                            dend.
profitability and firm size with yield of dividend but the variable growth rate has weak positive correlation. I   In
contrast, the variables leverage and firm risk has negative association with yield of dividend. The analysis of
single year data on 2011 shows similar result as the average data of 2006-2011, except for Growth
                                                                                          2011,
opportunities , Return of Equity and Total Revenue which show stronger relationship as compared to
average data of 2006-2011 with 0.108229, 0.424412 and 0.715992 respectively.
      The results show that growth, firm size and profitability variables have positive association with payout of
Dividend Ratio and yield of Divi end Ratio. Furthermore, there is stronger association between size,
                                    Dividend
profitability of the firm and both dependent variables. The reason behind this result is that profitable
companies are large in size and due to high profitability they disburse higher dividends. Moreover, we have
found positive but insignificant association between other explanatory variables and dependent variables. The
two variables risk and firms leverage adversely affects its dividend policy, thus as a result h  high leveraged firm
avoid payment of dividend. In the context of No Norwegian companies Baker (2006) found similar results.

5. Conclusion


                                                         3
European Journal of Business and Management                                                                 www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
                                  2839
Vol 4, No.12, 2012

The paper investigates the impact of different firm specific factors on the dividend policy of companies by
selecting a sample of 18 banks listed in KSE for the period 2006-2011. It was found that out of 18 banks 11
              ample                                            2006 2011.
banks pay dividends whereas seven banks do not. The results have shown that the independent variables
growth, profitability and firm size have positive coefficient of correlation when the dependent variable is
yield of dividend and payout of Dividend Ratio. However there is strong linear association between
profitability and firm size with dividend policy but the variable growth rate has weak positive correlation with
dividend policy. In contrast, the variables leverage measured as debt over equity and firm risk measured by beta
has inverse linear relationship with dividend policy.

References
Aivazian, V, Booth, L and Cleary, S. (2003). Do Emerging Market Firms Follow Different Dividend Policies
                                                                                                ferent
from U.S. Firms? The Journal of Financial Research, 26 (3), 371-387.
Ahmed H. & Javid A. (2009). The Determinants of dividend policy in Pakistan International Research Journal
of Finance Economics, 29.
Akbar M. & Baig H.H. (2010). Reaction of stock prices to dividend announcements and market efficiency in
                             .
Pakistan, the Lahore Journal of Economics 15 (1), 103-125.
                                        Economics,
Baker H. Kent, Tarun K.Mukherjee and Ohannes George Paskelian (2006). How Norwegian Managers View
Dividend Policy, Global Finance Journal, 17 (1), 155-176
Brealey, R. A. & Myers, S. C. (2002). Principles of corporate finance, (7th ed.), New York, NY: McGraw
                                                                               ,                           McGraw-Hill.
Brigham, E. F. & Gapenski, L. C. (2002). Financial management: Theory and practice,
Chen, Z, Yan-Leung Cheung, Aris Stouraitis and Anita W.S. Wong (2005) Ownership Concentration, Firm
Performance, and Dividend Policy in Hong Kong, Pacific- Basin Finance Journal, 13(4), 431-449
Chung, K.K. And C. Charoenwong (1991). Investment Options, Assets in Place, and the Risk of Stocks.”
Financial Management, 20, 21-33
DeAngelo, H, DeAngelo, L and Skinner, D (2004). Are Dividends Disappearing? Dividend Concentration
a n d t h e C o n s o l i d a t i o n o f E a r n i n g s . Journal of Financial Economics, 72(3), 425
                                                                                          ,        425-456
Dickens, N, Casey, M. K Newman, J. A. ( 2000). Bank Dividend Policy: Explanat                     tory Factors, Quarterly
Journal of Business & Economics, Vol.41, Nos. 1 & 2
Fama, E.F., French, K.R. ( 2001). Disappearing Dividends: Changing Firm Characteris           Characteristics or Lower
Propensity to Pay?, Journal of Financial Economics, 60, 3–43.
Ghosh, C and D.F. Sirmans (2006). Do Managerial Motives Impact Dividend Decisions in REITs?, Journal of
                                      2006).                         es
Real Estate Finance, 32, 327-355
Gordon, M. J. (1959). Dividends, earnings, and stock prices The Review of Economics and Statistics 99-105.
                                                                                                    Statistics,
Grullon G. Michaely, R. and Bhaskaran Swaminathan (2002). Are Dividends Changes a Sign of Firm Maturity?
Journal of Business, 75, 387-424
Gugler, Klau, B. Burcin Yurtoglu (2003). Corporate Governance and Dividend Payout Policy in Germany,
                                                                                                 out
European Economic Review, 47 (4), 731 –758.
Holder, M. E., Langrehr, F. W. & Hexter, L. (1998). Dividend policy determinants: an investigation of the
influences of stakeholder theory Financial Management 27 (3), 73-85
                                                      Management,
           Hu, Y and Liu S. (2005). E      . Empirical Analysis of Cash Dividend Payment in Chi
                                                                                              Chinese Listed Companies,
Nature and Science, 3 (1)
Jensen, G. & Johnson, J. (1995). The dynamics of corporate dividend reductions. Financial Management vol. 24
                                                                                                     Management,
(4), 31-51.
Jensen, M. C. & Smith, C. W. (1984). The theory of corporate finance: A historical overview New York, NY:
            .                                                                                 overview.
McGraw-Hill.
La Porta, R. Silanes, F.L, Sheleifer.A and Vishny W R. (2000). Agency Problems and Dividend Policies around
the World, Journal of Finance, 55 (1 305-360 (1),
Lintner, J (1956). Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes,
                                                                                             ained
America Economic Review, 46, 97-113         113
Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and tax             taxes
American Economics Review, 46 (2), 97          97-113.
Miller, Merton and Franco Modigliani (1961). Dividend Policy, Growth and the Valuation of Shares, Journal of
Business, 34, 411-433.
Roberto, M. A. (2002). Making difficult decisions in turbulent times: In their own way, complexity and
ambiguity tyrannize decision-making. What managers need are strategies for making clear, accurate judgments
                                      making.
under stressful conditions Ivey Business Journal 66 (3), 15-20.
                                                   Journal,
           Stacescu, B (2006). Dividend Policy in Switzerland, Journal of Economic Literatur Nov, 1-44
                                                                                            Literature,



                                                           4
European Journal of Business and Management                                                            www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
                                  2839
Vol 4, No.12, 2012

Table 1:     Analysis of Dividend Pay and Non-Payers
                                  Payers
                   Industry                    Dividend payer                      Non-dividend payer
                                                                                   Non
                     Banks                                     11                                  7
                      Total                                    11                                  7


Table 2: yield of Dividend and payout of Dividend Ratio
Variables                                                                          Mean 2006
                                                                                        2006-11

yield of Dividend Ratio (%)                                                           27.76502
Dividend Payout Ratio (%)                                                             20.21419


Table 3: Comparison between DivDividend-Paying and Non Dividend-Paying Banks
                       Variables                         Dividend Paying    Non-Dividend Paying
                                                                            Non
                                                           Banks Mean              Banks
                                                                                   Mean
 % increase in Total Assets (Growth opportunities)    0.211566            0.451351

 Ln of Total Assets (Firm Size)                             12.12773             10.09286

 Earning volatility before depreciation (Firm Risk/ Beta)   0.036325             0.035773

 ROA (Firm Profitability)                                   0.015536             -0.01719
                                                                                  0.01719

  ROE(Firm Profitability)                                   0.270999             0.16616

Debt over Equity Ratio (Leverage)                           0.905073             0.792191



Table 4: Coefficient of correlation for dividend payout ratio and firm specific factors
      Variables                       Coefficient of Correlation (Average Coefficient of Correlati (2011)
                                                                                          Correlation
                                                  2006-2011)
 Growth opportunities                               0.084173                            0.124209
 Return on Assets                                   0.467492                           0.446434
 Return on Equity                                   0.173829                           0.416006
 Total Revenue                                      0.627498                           0.741162
  Debt over Equity                                  -0.11236                            -0.03521
Debt over Equity
 Beta                                               -0.15961                            -0.33913


Table 5: Coefficient of correlation fo yield of dividend and firm specific factors
                                     or
      Variables                         Coefficient of Correlation (Average Coefficient of Correlation (2011)
                                                    2006-2011)
 Growth opportunities                               0.065759                            0.108229
 Return of Assets                                   0.448559                            0.424412
 Return of Equity                                   0.128754                            0.324906
 Total Revenue                                      0.647934                            0.715992
 Debt over Equity                                   -0.13938                            -0.11812
 Beta                                               -0.11054                             -0.2447




                                                        5
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The determinants of corporate dividend policy an investigation of pakistani banking industry

  • 1. European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) 2839 Vol 4, No.12, 2012 The Determinants of Corporate Dividend Policy: An Investigation of Pakistani Banking Industry Sajid Gul (Corresponding Author) Faculty of Administrative Sciences Air University Islamabad ,Mardan 23200 KPK Pakistan Mardan Tel: +92 +92-332-8102955 *E-mail: sajidali10@hotmail.com Sumra Mughal MS Scholar Air University Islamabad Gujrat 50700 Punjab Pakistan Islamabad,Gujrat Tel: +92 +92-301-8959323 E-mail: sumra.ansar@yahoo.com Nabia Shabir MS Scholar Air University Islamabad ,Islamabad 4400 ICT Pakistan Islamabad Tel: +92--301-8959323 E-mail: Nabia.shabir@hotmail.com Syeda Asma Bukhari MS Scholar Air University Islamabad ,Lahore 54000 Punjab Pakistan Lahore Tel: +92-301 301-8959323 E-mail: syedaasmabukhari@ymail.com Abstract The paper investigates the impact of different firm specific factors on the dividend policy of companies by he selecting a sample of 18 banks listed in KSE for the period 2006 2011. The dependent variable is dividend 2006-2011. policy where as explanatory variables include, firm size and risk, profitability, firm’s growth and leverage. It was include, found that out of 18 banks 11 banks pay dividends whereas seven banks do not. The results have shown that the independent variables growth, profitability and firm size have positive coefficient of correlation when the dependent variable is dividend yield and Dividend Payout Ratio. However there is strong linear association between profitability and firm size with dividend policy but the variable growth rate has weak positive correlation with dividend policy. In contrast, the variables leverage and firm risk has inverse lin on linear relationship with dividend policy. Banks that pay dividends were found, when we use method of correlation coefficient more profitable, stable and less risky as co compare to banks that do not pay dividends. Keywords: Dividend Policy, Listed Banks, Pakistan y, 1. Introduction Dividend policy can be describe as the policy a company uses to decide how much it will pay to shareholders in dividends. Dividend policy that a firm adopts has implications for different stakeholders such as lenders, investors and managers. Since Miller and Modigliani (MM) presented dividend irrelevance theory. This theory discloses that firm value and shareholders’ wealth are not related to the decision of whether or not the firm pays decision dividend. However, on the other side Bird the Hand theory strongly suggest paying dividend (see for instance Bird-in-the Linter, 1956; Gordon, 1956; and Gordon and Brigham, 1968). There are several researches on dividen policy till date, which deal with different aspects of the policy. Stability of dividend is an important decision to be made by any firm just as other decisions made. Brealey and Myers (2005) listed top ten problems that are unresolved in advance corporate finance and one of them is dividend policy. In empirical literature, one of the finance important issues that are investigated intensively is to find the factors affecting firm’s dividend policy. It is noteworthy that dividend policy is not only influenced by internal factors but external factors also play significant role (Jensen &Johnson, 1995; Jensen & Smith, 1984; Lintner, 1956). Internal factors include investment opportunity, profitability and liquidity, whereas among external factors, macroeconomic problems like growth, stability, change in technology, and change in consumer taste are most important Roberto (2002). Despite the importance of the issue, limited number of research studies is available for a developing country like Pakistan and especially in the banking sector. Most of the studies are conducted in developed markets. banking Previous studies related to Pakistan show that dividend announcement affects the share price and market efficiency Akbar & Baig (2010). Ahmed & Attiya (2009) find that dividend policy is af affected by earning per share (EPS) and by previous dividend per share. However, these studies are limited to non non-financial firms only. Thus, the objectives of this study are: I. The first aim is to search out those banks that pay dividends and those that do no from banks not, listed in Karachi Stock Exchange (KSE). II. The second aim is to look at yield of dividend and payout ratio in order to observe the trend of dividend distribution of Pakistani listed Banks. stribution 1
  • 2. European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) 2839 Vol 4, No.12, 2012 III. By analyzing different firm specific factors the third aim is to distinguish the characteristics a stinguish of banks that pay dividend and those that do not pay dividends. IV. To investigate the association between firm specific factors and dividend distribution. 2. Literature Review How firms decide their dividend policy has been a puzzle to financial economists for many years. Based on previous work done, Fisher Black in 1976 found that “dividends” is a puzzle. This conclusion of Fisher Black’s . motivates researchers to study the dividends in more detail, e specially those factors t h a t play an important role in determining the dividend policy for emerging country like Pakistan. Different studies have been . conducted on emerging countries in ncluding Pakistan is done by Aivazian, Booth and Clear (2003). They stated Clearly that profitability and Investment oppo opportunities play a significant role in determining divid dividends. Similarly Hu and Liu, (2005) found a positive relationship between the current earnings of a c company and the cash dividend they pay to their shareholders and a significant negative relationship between the debt to total assets y shareholders, and dividends. Different researches have explained that the disputed dividends are outcomes of bird bird-in-hand theory. The bird-in-hand means cash dividends, in comparison it considers birds hand birds-on-the-bush (capi gains). This theory bush (capital states that investors prefer cash dividends to capital gains. This leads firms to lay high dividends, which will result in the increase in value of shares. (Brigham & Gordon, 1968; Gordon, 1956; Lintner, 1956) The theory of Gordon-Lintner was criticized by MM as Bird hand fallacy because many investors use to reinvest their intner Bird-in-hand dividends in the stocks of similar companies. So, the investors are exposed solely to the risk of firm’s cash flows, which are associated with the firms’ assets riskiness during the long time. All these theories prescribe the assets financial managers with a diverse approach. There is no single perfect dividend payout policy. The firms should adjust higher payout of dividend ratio so that the stock prices can be raised. Many empirical studies afterwards raised. proved that the results gained from the researches were not consistent. According to Miller, Merton & Franco (1961) dividend policy does not affect firm value under a certain set of assumptions; which include perfect capital markets, no transaction costs, no flotation costs and no taxes. Their capital independence will be observed between systematic information, dividend policy and equity costs. Most of the financial researcher and academics acknowledged this theory with a surprise because previous researches surprise focused and suggested that share price and shareholder equity is affected if dividend policy is properly managed, similarly structure of a capital is affected by cash dividend Gordon (1959). Most of the prior literature suggests that large companies due to greater access to capital markets have suggests better opportunity to raise funds comparatively at lower cost. Therefore, they do not rely on their retained earnings and pay higher dividends to their shareholders (Fama and French, 2001; Holder et al, 1998). Large 2001; firms are more mature and thus have easy access to capital markets and thus have little dependence on internal funds and allow high dividend paying ratios. Previous studies suggest positive association between payout of dividend ratio and size because larger firms face higher agency costs and inferior issuing costs. A study based on dend agency cost, earned equity and dividend policy was conducted by (DeAngelo et al, 2004) who focused on why the firms pay dividends? They found that there is a significant relationship between the choices to pay or not to that pay dividends and the leverage, profitability, cash balance, firm size, growth and past dividends. A similar study in the context of Ghana was conducted by Amidu and Abor (2006). The results indicate that there is positive The association between profitability and dividend policy and liquidity and dividend policy. They found a positive association between the payout of dividend ratio, cash flows, profitability and corporate tax. A study regarding banks’ dividend policy is conducted by Dickens, Casey, and Newman (2000). They show a negative relationship between yield of dividend and investment opportunities, signalling, ownership structure, and risk and a positive relationship with size and dividend history. In Pakistan, a recent study was conducted by Ahmad and Attiya (2009), who investigate different factors determining dividend policy. The sample of the study was from 2001 to 2006. The results showed a trend that Pakistani companies fix their dividend payments fix through past dividends and current earnings. Second analysis of determining factors of dividend payout showed that stable companies pay higher dividends. Growth variable did not appear to have any significance influence on dividend policy while size of the firms found to be negatively correlated. d 3. Research Methodology and Variables 3.1. Data Collection Procedure For identifying the characteristics that affect the dividend policy of Pakistani Banks, population consists of 25 Banks in Pakistan that are listed in Karachi Stock Exchange (KSE). The final sample after considering any ks missing data consist of 18 banks. Thus the sample consist of a major fraction 72% of banks listed in KSE from 2006-2011. The data sources are the audited financial reports collected from KSE, SECP, SBP and bloom burg 2011. business week. In order to be included in the study all banks must meet two criteria. (1) The bank needs to be listed in the 2
  • 3. European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) 2839 Vol 4, No.12, 2012 KSE during 2006-2011 and (2) data needs to be available on all variables. We have used simple correlation to 2011 variables. measure the link between dividend policy and several firm specific factors. 3.2. Variables Measurement The explanatory attributes that influence banks dividend policy in Pakistan are discussed in this section and how they are measured. Following Fama, and French (2001), L a Porta et al, (2000), Grullon et al, (2002), Chen et al, (2005), Collins and Kothrai (1989), Ghosh (2006), Gugler (2003), Chung and Charoenwong (1991) and Stacescu (2006) we used firm size, growth oppurtunities, firm risk, firm performance, and leverage as growth explanatory variables. The first variable is size that is measured as Ln of total assets. The attribute growth oppurtunities is measured as percentage increase in total assets, whereas profitability is proxied by using the ratio profitability return on assets, and return on equity. The next explanatory variable is leverage, we have proxy it by taking total debt and divide it by total equity. Risk of the firm is measured by firm’s beta. We have defined a dividend-payer bank as one, which have at least two dividend payments during six payer six-year period from 2006 – 2011, in contrast a bank will be considered as non dividend payer bank if it does not make at least two dividend payments during the study period. The ratio yield of dividend and dividend payout is used to investigate the dividend distribution of Pakistani listed banks. Yield of Dividend is defined as stocks annual dividend divided by its current market price whereas payout ratio is measured as dividend per s share divided by earning per share. Both yield of dividend and p a y o u t o f dividend ratios are used as dividend variables. 4. Discussion of Findings 4.1. Dividend Payers and Non- Paye ers As it can be seen in table 1 presented below that out of total 18 banks 61% pay dividends while 39% do not. 4.2. yield of Dividend and payout of DDividend Ratio The average mean values of yield of dividend and payout of dividend ratio are presented in table 2 from 2006-2011 for the entire sample. Yield of Dividend has a mean value of 27.77% whereas payout of dividend ratio 2011 is 20.21%. 4.3 Comparison of Financial and Performance Variables for Dividend-Paying and Non-D nancial Dividend-paying Banks The mean values of different firm specific factors are shown in table 3 for dividend payer and non-payers. Firm payers specific factors are firm size, growth rate, firm risk, leverage and profitability. Table 4 shows the correlation coefficients of different firm specific factors, when payout of dividend ratio as the dependent variable. It can be see n that the independent variables growth, profitability and firm size seen have positive coefficient of correlation with the dependent variable payout of Dividend Ratio. However there lation dend is strong linear association between profitability and firm size with payout ratio but the variable growth rate has ratio weak positive correlation with payout ratio. In contrast, the variables leverage measured as debt over equity and firm risk measured by beta has inverse lin linear relationship with payout ratio. The analysis of single year data on 2011 shows similar result as the average results, except for Growth opportunities, Return on Equity and Total Revenue which show stronger linear association with 0.124209, 0.416006 and 0.741162 respectively. Table 5 shows the correlation coefficients of different firm specific factors, when yield of dividend ratio coefficients as the dependent variable. The results are in line with the results between dividend payout and firm specific factors. It can be seen that the independent variables growth, profit ability and firm size have direct profitability positive association with the dependent variable Dividend. However there is strong linear association between dend. profitability and firm size with yield of dividend but the variable growth rate has weak positive correlation. I In contrast, the variables leverage and firm risk has negative association with yield of dividend. The analysis of single year data on 2011 shows similar result as the average data of 2006-2011, except for Growth 2011, opportunities , Return of Equity and Total Revenue which show stronger relationship as compared to average data of 2006-2011 with 0.108229, 0.424412 and 0.715992 respectively. The results show that growth, firm size and profitability variables have positive association with payout of Dividend Ratio and yield of Divi end Ratio. Furthermore, there is stronger association between size, Dividend profitability of the firm and both dependent variables. The reason behind this result is that profitable companies are large in size and due to high profitability they disburse higher dividends. Moreover, we have found positive but insignificant association between other explanatory variables and dependent variables. The two variables risk and firms leverage adversely affects its dividend policy, thus as a result h high leveraged firm avoid payment of dividend. In the context of No Norwegian companies Baker (2006) found similar results. 5. Conclusion 3
  • 4. European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) 2839 Vol 4, No.12, 2012 The paper investigates the impact of different firm specific factors on the dividend policy of companies by selecting a sample of 18 banks listed in KSE for the period 2006-2011. It was found that out of 18 banks 11 ample 2006 2011. banks pay dividends whereas seven banks do not. The results have shown that the independent variables growth, profitability and firm size have positive coefficient of correlation when the dependent variable is yield of dividend and payout of Dividend Ratio. However there is strong linear association between profitability and firm size with dividend policy but the variable growth rate has weak positive correlation with dividend policy. In contrast, the variables leverage measured as debt over equity and firm risk measured by beta has inverse linear relationship with dividend policy. References Aivazian, V, Booth, L and Cleary, S. (2003). Do Emerging Market Firms Follow Different Dividend Policies ferent from U.S. Firms? The Journal of Financial Research, 26 (3), 371-387. Ahmed H. & Javid A. (2009). The Determinants of dividend policy in Pakistan International Research Journal of Finance Economics, 29. Akbar M. & Baig H.H. (2010). Reaction of stock prices to dividend announcements and market efficiency in . Pakistan, the Lahore Journal of Economics 15 (1), 103-125. Economics, Baker H. Kent, Tarun K.Mukherjee and Ohannes George Paskelian (2006). How Norwegian Managers View Dividend Policy, Global Finance Journal, 17 (1), 155-176 Brealey, R. A. & Myers, S. C. (2002). Principles of corporate finance, (7th ed.), New York, NY: McGraw , McGraw-Hill. Brigham, E. F. & Gapenski, L. C. (2002). Financial management: Theory and practice, Chen, Z, Yan-Leung Cheung, Aris Stouraitis and Anita W.S. Wong (2005) Ownership Concentration, Firm Performance, and Dividend Policy in Hong Kong, Pacific- Basin Finance Journal, 13(4), 431-449 Chung, K.K. And C. Charoenwong (1991). Investment Options, Assets in Place, and the Risk of Stocks.” Financial Management, 20, 21-33 DeAngelo, H, DeAngelo, L and Skinner, D (2004). Are Dividends Disappearing? Dividend Concentration a n d t h e C o n s o l i d a t i o n o f E a r n i n g s . Journal of Financial Economics, 72(3), 425 , 425-456 Dickens, N, Casey, M. K Newman, J. A. ( 2000). Bank Dividend Policy: Explanat tory Factors, Quarterly Journal of Business & Economics, Vol.41, Nos. 1 & 2 Fama, E.F., French, K.R. ( 2001). Disappearing Dividends: Changing Firm Characteris Characteristics or Lower Propensity to Pay?, Journal of Financial Economics, 60, 3–43. Ghosh, C and D.F. Sirmans (2006). Do Managerial Motives Impact Dividend Decisions in REITs?, Journal of 2006). es Real Estate Finance, 32, 327-355 Gordon, M. J. (1959). Dividends, earnings, and stock prices The Review of Economics and Statistics 99-105. Statistics, Grullon G. Michaely, R. and Bhaskaran Swaminathan (2002). Are Dividends Changes a Sign of Firm Maturity? Journal of Business, 75, 387-424 Gugler, Klau, B. Burcin Yurtoglu (2003). Corporate Governance and Dividend Payout Policy in Germany, out European Economic Review, 47 (4), 731 –758. Holder, M. E., Langrehr, F. W. & Hexter, L. (1998). Dividend policy determinants: an investigation of the influences of stakeholder theory Financial Management 27 (3), 73-85 Management, Hu, Y and Liu S. (2005). E . Empirical Analysis of Cash Dividend Payment in Chi Chinese Listed Companies, Nature and Science, 3 (1) Jensen, G. & Johnson, J. (1995). The dynamics of corporate dividend reductions. Financial Management vol. 24 Management, (4), 31-51. Jensen, M. C. & Smith, C. W. (1984). The theory of corporate finance: A historical overview New York, NY: . overview. McGraw-Hill. La Porta, R. Silanes, F.L, Sheleifer.A and Vishny W R. (2000). Agency Problems and Dividend Policies around the World, Journal of Finance, 55 (1 305-360 (1), Lintner, J (1956). Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes, ained America Economic Review, 46, 97-113 113 Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and tax taxes American Economics Review, 46 (2), 97 97-113. Miller, Merton and Franco Modigliani (1961). Dividend Policy, Growth and the Valuation of Shares, Journal of Business, 34, 411-433. Roberto, M. A. (2002). Making difficult decisions in turbulent times: In their own way, complexity and ambiguity tyrannize decision-making. What managers need are strategies for making clear, accurate judgments making. under stressful conditions Ivey Business Journal 66 (3), 15-20. Journal, Stacescu, B (2006). Dividend Policy in Switzerland, Journal of Economic Literatur Nov, 1-44 Literature, 4
  • 5. European Journal of Business and Management www.iiste.org ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) 2839 Vol 4, No.12, 2012 Table 1: Analysis of Dividend Pay and Non-Payers Payers Industry Dividend payer Non-dividend payer Non Banks 11 7 Total 11 7 Table 2: yield of Dividend and payout of Dividend Ratio Variables Mean 2006 2006-11 yield of Dividend Ratio (%) 27.76502 Dividend Payout Ratio (%) 20.21419 Table 3: Comparison between DivDividend-Paying and Non Dividend-Paying Banks Variables Dividend Paying Non-Dividend Paying Non Banks Mean Banks Mean % increase in Total Assets (Growth opportunities) 0.211566 0.451351 Ln of Total Assets (Firm Size) 12.12773 10.09286 Earning volatility before depreciation (Firm Risk/ Beta) 0.036325 0.035773 ROA (Firm Profitability) 0.015536 -0.01719 0.01719 ROE(Firm Profitability) 0.270999 0.16616 Debt over Equity Ratio (Leverage) 0.905073 0.792191 Table 4: Coefficient of correlation for dividend payout ratio and firm specific factors Variables Coefficient of Correlation (Average Coefficient of Correlati (2011) Correlation 2006-2011) Growth opportunities 0.084173 0.124209 Return on Assets 0.467492 0.446434 Return on Equity 0.173829 0.416006 Total Revenue 0.627498 0.741162 Debt over Equity -0.11236 -0.03521 Debt over Equity Beta -0.15961 -0.33913 Table 5: Coefficient of correlation fo yield of dividend and firm specific factors or Variables Coefficient of Correlation (Average Coefficient of Correlation (2011) 2006-2011) Growth opportunities 0.065759 0.108229 Return of Assets 0.448559 0.424412 Return of Equity 0.128754 0.324906 Total Revenue 0.647934 0.715992 Debt over Equity -0.13938 -0.11812 Beta -0.11054 -0.2447 5
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