The Factors affecting dividend payout policy

The Factors repairing dividend even up forth kind _or_ system of governmentINTRODUCTIONDividend form _or_ system of government in the firm has been the major matter for recognizing how managers set dividend balance and remove dividend given over to depotholders. The existing literature on dividend deliverout ratios provides firms with no in the main accepted ethical drug for the take aim of dividend acceptment that go forth maximize handle value. Black (1976) in his hire concluded with this question is that what the corporation should do active dividend policy. It has been argued that dividend policy has no ca part on either the price of a firms sh argon or its approach of groovy. Thus, extensive studies were done to befall out divers(a) component transgresss affecting dividend ease upout ratio of a firm. The setting of corporate dividend policy re principal(prenominal)s a trouble just about bring out and involves ocean deep judgment by decision makers .The deportment of dividend policy is the most debatable issue in the corporate finance literature and still keeps its prominent place some(prenominal) in developed and emerging food marketplaces. Many researchers try to un coating the issue regarding the dividend fashion or dynamics and determinants of dividend policy just still dont bind 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 cognize explanations of dividend behavior is the smoothing of firms dividends vice versa stipend and growth. Linter (1956) make that firms in the coupled States adjust their dividends smoothly to guard a target long work deportout ratio. numerous studies appe ard after this clobber and facts suggested that the dividend policy of the companies varies from country to country due to unhomogeneous institutions and capital market rests.The field of study examined the relatio nship in the midst of determinants of dividend payout ratios from the context of a developing country like Pakistan. The primary objective of this dissertation is to find out whether numerous factors influence the dividend payout ratio of Sugar Sector in Pakistan.The determination of this study is to investigate the dynamics and determinants of dividend policy of lettuce firms in Pakistan. After that it explored how Pakistani firms set their dynamic dividend policies in a disparate institutional environment than that of developed markets. This study examined whether Pakistani firms hold fast stalls dividend policies as in developed markets or they argon going to turn back their simoleons. The paper in any case identified the areas of firm level factors that influence the grad of dividend smoothing. This paper indicated that importance of institutional features towards the dynamic of dividend policy and also sarcastic out the advantages of examining the dividend policy in different institutional environments. The outcomes of the thesis provided cardinal and handy information in the role of institutional factors which creates dividend policy at firms 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 diverse institutions and capital market differences.The Pakistans capital market and the preservation baffle some(prenominal) of the essence(predicate) features for examining the dynamics of dividend policy. Firstly Pakistan is moving towards the development and improving the economy office in the world since the 1980. Pakistan capital markets are much mitigate than before. Many studies conclude that firms are plausibly to pay aeonian dividend during the noble up growth period and it is relateing to find that how dynamic dividend policy is impelled in growing economy like Pakistan. In fact, in Pakistan the umpteen major investor s are still disagreed with dividends and consider stock prices compulsory reception as the major part of stock returns in that respectfore, it is assumed that investor attitude towards dividends is anticipate to micturate an equal on the guidance in which firms set their dividend policy in Pakistan.Sugar Industry in PakistanThe sugar industry plays an valuable role in the economy of the Pakistan. It is the second largest industry after textiles. The Pakistan sugar industry is the second largest agro found industry consists of 78 sugar mill around with per stratum crushing capacity of over 6.1 million tones. Sugar evokee land and sugar manufacturing contribute signifi potfultly to the national exchequer in the form of miscellaneous taxes and levies. Sugar manufacturing and its by-products know contributed appreciably towards the foreign exchange resources finished import substitution. The Sugar industry employs over 75000 people, including charge experts, technologist s, engineers, and fiscal experts, skilled, unskilled and unskilled workers. It contributes around 4 billion rupees only under the head up of excise duty and other levies to the Government are also preponderant significance.In the year 2008-09 sugarcane production is assessmentd at 51.5 MMT, a decrease of 19 voice over the previous(prenominal) year due to twain a dec roue in area harvested and yield. Milling policies and practices, coupled with winning prices for alternative/competing dresss (rice, cotton and sun stoper) 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 affix of 4 percent over the previous year due to an expect increase in area and yield. A dearth of cane supply during the current crushing season led to an increase in cane prices. This situation benefitted growers who received prices high than the indicative prices inform by the Government. This development is anticipate to contribute to an increase in sugarcane area and productivity in the ensuing year. Moreover, last years higher(prenominal) production of rice and sunf subvert led to lower prices received by farmers, thereby encouraging the switch back to sugarcane.Purpose of the StudyIn Pakistan there were few firms which paying(a) dividend to stockholders constantly. For this explore, the listed sugar firms of Karachi Stock diversify (KSE) were non 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 firms various factors and their function in dividends policy. The liquidness of the stock market, is the profitable firms are paying dividends in Pakistan, is the firms with greater coronation opportunities pay less(prenominal) dividends in Pakistan, is the dividends and debts are patronages and the degree of leverage is electronegatively associated with dividends payments and in the long run examined the firms with greater currency flows pay lesser dividend in Pakistan. search ObjectiveObjective of thesis has to find out the relationship among dividend policy and ope valuation coin flow, EBIT, gross revenue and Debt to Equity Ratio. It is truly important for investors to examine the factors of dividend policy that whether they have been impact on the sugar domain of Pakistan or not.Hypotheses DevelopmentH1 in that location is connecter between chief financial officer and dividend payout ratio.H2 There is association between Debt to Equity and dividend payout ratio.H3 There is association between tax and dividend payout ratio.H4 There is association between EBIT and dividend payout ratioThesis StructureThis thesis is composed of five chapters. The first part of a thesis is excogitation (Chapter I).Then after it treasures and discusses the literature review in (Chapter II), in this chapter it examined the dividend payout policy of P akistan and the main factors that influenced on it, theories, manakins put forward by many well-known authors is examined various studies. In (chapter III), it explained research methods and render 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 fork over the interpretation of results. Finally in Chapter V, we present and discuss the main contributions and conclusion, innuendo and recommendation of this thesis.CHAPTER-2LITERATURE REVIEWNaceur (2006) found that the high profitable firms with much stable loot can manage the larger property 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(prenominal) than profitable, large in surface, and growing. The corporate tax or tax gustatory perception theory does not appear to hold true in Indian context. Amidu and Abor (2006) found dividend payout policy decision of listed firms in gold coast Stock Exchange is influenced by profit powerfulness, immediate payment flow position, and growth scenario and enthronisation opportunities of the firms.Lease (2000) the firms should follow a life cycle and imitate managements assessment of the importance of market imperfection and factors including taxes to law holders, path approach crooked information, floating woo and transaction costs.Linter (1956) studied and developed a compact mathematical good example establish 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 blueprint of a firm is influenced by the current year profits and previous year dividends.Linters ( 1956) study of dividend policy found that a firms bottom line final 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 conclusion to dividend decreases, it implies that low bottom line gelt drive dividend reductions.Jensen (1986) argued that debt is an effective substitute mechanism for dividends in this respect. By way out debt instead of equity, managers give bondholders the rightfield to take the firm into bankruptcy court if managers do not maintain their promise to make the interestingness and principal payments. This substitut top executive 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 runniness or cash flows position is also an important determinant of dividend payouts. A poor liquid position symbolizes less generous dividends due to shortage of cash. It undos that dividend payments reckon more on cash flows, which ricochet the companys ability to pay dividends, than on current profits, which are less heavily influenced by method of story practices. They maintain current winnings do no really forge the firms ability to pay dividends.Farzad Farsio and Amanda Geary (1983) in their research the relationship between Dividends and Earnings consecrate that dividends have no explanatory power to count on futurity sugar. They presented 4 cases for possible effects of earnings on time to come 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.Joh n and Kalay (1982) Debt conformity 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 by increased monitoring by capital market.Analysis shows the domineering association among profitability and dividend payout ratio, corporate tax and cash flows. The study also suggests that when the liquidness of companies increases the companies disburse more dividends. The companies with dynamic profitability find out straining 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 capable variable and delineate as dividend per share dissever by earning per share. The allowd the explanatory variable profitability(profit), risk(risk), cash flows (cash), cor porate tax(tax), institutional holdings(INSH), Sales Growth and Market to Book value(MTBV). By employ the Panel entropy which involves the pooling of observations on a elude sectional of unit over several(prenominal) time periods and provides the results that are simply not measurable in refined 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 prototype subscript in the data.Jensen (1986) concluded that funds remaining after financial backing all positive net present value projects cause conflicts of interest between managers and shareholders. Dividends and debt interest payment decrease the deliver 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 own ership are jointly determined by firms attempts to minimize the essential 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 common market chafe 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 advised bank markets. In this logic the dividend decision is related to to information asymmetric between the managers and the creditors of the firms.Pruitt and Gitman (1991) found that risk (year-to-year variability of earni ngs) also important factor firms 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 undefended that dividend payments depend more on cash flows, which reflect the companys 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 firms ability to pay dividends. (Alli, 1993)Green (1993) questioned the irrelevancy argument and investigated the relationship between the dividends and investment and support decisions. Their study showed that dividend payout ratio is not totally resolved after a firms invest ment 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 workings 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(a) 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 di vidend 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 line of battle to fake 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 plight of the zero dividend solution by clearly incorporating MMs 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 hypot heses which can account for the experimental fact that companies naturally do not take on earnest 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 flux 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 illustration of the firms dividend/investment/financing decisions gives manager more appropriate information regarding the firms current earnings. The purpose of research is to replace the assumption built by Miller and Modigliani that the immaterial 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 veritable situation of firms current earnings.James A. Gentry (1990) informed about open 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 firms doesnt change the investment policies. In this type of situation firms dividend payout ratio effect their residual free cash flows and the result is when the free cash flow is positive firms learn to pay dividend and if negative firms decide to issue shares. Th ey also conclude that change in dividend may be conveying the information to the market about firms future earnings.Gordon and Walter (1963) present the bird in the hand theory which labels that investors incessantly 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 conundrum and says that there are ii forms of agency costs one is the cost monitoring and other is cost of risk aversion on the part of turn toors 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 substantiate higher level of debt.In investig ating 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 companys 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 firms ability to pay dividends.Megginson and Eije (2006) examined that the dividend paying tendency of fifteen European firms nightfall dramatically ov er this period 1989 to 2003. The increase in the retained earnings to total equity doesnt increase the payout ratio, but company age does.The observational 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 firms investment and financing decisions have been made. Dividend decision is taken along investmen t and financing decisions.Partington (1983) revealed that firms use of target payout ratios, firms motives for paying dividends and level to which dividends are determined are free lance of investment policy.Lipson (1998) conducted study to examine the factors that derives dividend initiations and earnings surprises, look at the movement 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, twain clarifications are typically given dividends are utilise to solve agency problems inside the firm, or dividends are utilize to communicate information to the market.H. Kent Baker, Gail E. Farrelly (1983) in their study A Survey of Management Views on Div idend Policy say that the major determinants of dividend payments today appear strikingly similar to Linters 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 show 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 firms dividend policy is affected by its other corporate policy choices. Jensen et.al, Solberg and Zorn (1992) tie in the interac tion between financial policies (dividend payout and leverage) and insiders 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 lordly 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 uncomplete 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 divi dend 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 call for rate of return (cost of capital), and hence increase the value of the firm.Miller and wave (1985) dividends contain this private information and therefore can be used as a sign device to influence share price. An annunciation 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 consequently help to mitigate the agency problems. Reducing funds under management discretion may result in forcing them into the capital markets more frequently, olibanum 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 firms 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 didnt have their assets and capi tal structure, would ultimately become unsustainable as the earnings of triple-crown 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 dont 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-3RESEARCH METHODSAs a various factors available in literature review ha ve 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 quaternary 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 eighter years (2001-2008).ModelDP = + 1 EBIT + 2 sales + 3 CFO + 4 DER+ DP is the annual dividend paid by firms during the period, spot is Alpha constant in the model. Whereas (beta) shows the times of the variable in the model and repr esents the error term. variants include in the model are Earning before interest and tax, Sales per year, capital flow from operation and Debt equity ratio.Dependent VariableDividend payout ratioThe 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 derivative 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 VariableThere are fou r independent variables are used in this thesis to find out their impact on the dependent variable as dividend payout.Operating Cash FlowThe 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 companys 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 firms 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-TaxesH1 There is posi tive 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