Azeem Complete Thesis Imran Azeem

7/31/2019 Azeem Complete Thesis Imran Azeem

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DETERMINANTS OF DIVIDEND

Thesis submitted to:

Department of Management SciencesSuperior University Lahore

In partial fulfillment of the Requirement for the degree of masters inManagement Sciences

Supervisor:Prof. Shahid Ghori

Submitted BY:Imran AzeemRoll Number: MBP 10406 Session 2009-2011

Department of Management Sciences

Superior University Lahore


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Thesis Title:

Determinants of Dividend

Research By:

Imran Azeem

Research Supervisor:

Signature: _________________________ Date: __________________

Prof. Shahid Ghori

Submitted as the requirement of master of Business Administration

Department of Management Sciences

Superior University Lahore


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Our Parents, Teachers, Friends andthose who inspired me and whom I

will inspire.


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Declaration of Originality

I hereby declare that this project is entirely my own work and that any additional sources of

information have been duly cited. I hereby declare that any Internet sources published or

unpublished works from which I have quoted or draw references fully in the text and in the

content list. I understand that failure to prove this will result in failure of this project due to

plagiarism. I understand I may be called for viva and if so must attend. I acknowledge that this

is my responsibility to check whether I am required to attend and that I will be available during

the viva periods.

Signed

Date.

Name of Supervisor


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Abstract

The purpose of this study is conduct a researcher on determinants of dividend that compares the

independent variables namely return on equity , corporate taxes , liquidity to the dependent

variable dividend . I had successfully researched various research articles and journals

referenced comprehensively throughout the literature review and thus have established that

theres positive evidence in support of my opinion that theres indeed a relationship established

amongst the aforementioned independent and dependent variable respectively, as is evident in all

other previous researches carried out so far. I used the quantitative approach for this research,

which is based on positivism paradigm. The sample size of 15year data is taken. And SPSS

software is exclusively used for the analysis and verification of data is confirmed through

descriptive statistics, histogram, scatter plot, correlation and regression.

Key words: return on equity, corporate taxes, liquidity and dividend


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First of all I acknowledge ALMIGHTY ALLAH whose blessings

lead us towards successes accomplishing in every sphere of life.

All respects for HAZARAT MUHAMMAD (peace be upon him),

who is forever a torch of knowledge and guidance to humanity

and enable us to shape our lives according to the teachings of

Islam.

It is matter of great pleasure and honor for us to express our deep

sense of gratitude for the continues guidance , indispensable

advice and precious time devoted to us by our advisor and teacher

SHAHID GHORI , superior university , Lahore.Finally, I extendmy cordial and my special regards to my most respectful

affectionate and loving parents, who have always prayed for my

success and betterment.

Imran Azeem


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Dedication........................................................................................................................... 3

Declaration of Originality................................................................................................. 4

Abstract................................................................................................................................ 5Acknowledgment................................................................................................................... 6

Chapter 1: Introduction....................................................................................................... 8

1.0 Introduction....................................................................................................... 8

1.1Back ground of the study................................................................................... 11

1.2 Purpose statement............................................................................................. 13

1.3Objectives......................................................................................................... 13

1.4Significance....................................................................................................... 14

1.5 Research questions and hypothesis................................................................... 14

Chapter 2: Literature Review.............................................................................................. 17

Chapter 3: Theoretical Foundations................................................................................. 44

Chapter 4:Data/Methodology............................................................................................. 49

4.0Data................................................................................................................... 49

4.1Methodology..................................................................................................... 50

Chapter5: Analysis............................................................................................................... 51

5.1Data screening................................................................................................ 51

5.2DescriptiveStatistics......................................................................................... 52

5.3Histogram..........................................................................................................

5.4 Scatter plot........................................................................................................

53

54

5.5Correlations....................................................................................................... 55

5.6Regressions....................................................................................................... 57

Chapter 6: Summary/Conclusion and recommendation.................................................. 60

6.1Summary.......................................................................................................... 60

6.2Conclusion....................................................................................................... 62

6.3Recomendations............................................................................................... 62

References............................................................................................................................. 64


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Chapter 1

1.0 Introduction

The word dividend comes from the Latin word dividendum meaning the thing which is to be

divided. Dividends are payments made by a corporation to its shareholder members. It is the

portion of corporate profits paid out stockholders when a corporation earns a profit or surplus

that money can be put to two uses: it can either be re-invested in the business called retained

earnings or it can be paid to the shareholders as a dividend. According to the Ross (2008)

Westerfield and Jordan dividend can be defined as cash paid out from current or accumulated

retained earnings rather than other sources. This payment of dividend to shareholders depends

on the company managements willingness to distribute their surplus of cash from their net

income to shareholders or to retain it for other re-investment opportunities. Many

corporations retain a portion of their earnings and pay the remainder as a dividend. For a joint

stock company, a dividend is allocated fast as a fixed amount per share. Therefore, a

shareholder receives a dividend in proportion to their shareholding. For the joint stock

company paying dividends is not an expense rather it is the division of an asset among

shareholders. Public companies usually pay dividends on a fixed schedule but may declare a

dividend at any time, sometimes called a special dividend to distinguish it from a regular one.

Cooperatives on the other hand, allocate dividends according to members activity so their

dividends are often considered to be a pre-tax expense. Dividends are usually settled on a

cash basis, as a payment from the company to the shareholder. They can take other forms

such as store credits common among retail consumers cooperatives and shares in the

company either newly-created shares or existing shares bought in the market. Further many


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public companies offer dividend reinvestment plans, which automatically use the cash

dividend to purchase additional shares for the shareholder. An important part of your

investment return is dividends. Usually a cash payment to shareholders, dividends are most

often paid on a quarterly basis. When the performance of dividend-paying stocks is compared

to non-dividend-paying stocks, the difference from total return perspective capital

appreciation dividends can be quite surprising. But keep in mind that not all companies pay

out dividends. Some keep all of their profit and reinvest it back into the company while others

pay out a portion to shareholders.

Types of dividend

Special dividend

Cash dividend

Stock dividend

Property dividend

Special Dividend

Normally public companies declare their dividend on a specific schedule. However, they also

have a option to declare a dividend at anytime. This type of dividend is referred as special

dividend.

Cash Dividend

Cash Dividend normally paid in checks; this is a basic form of dividend. Cash Dividend

considered a type of investment earnings and is taxable.


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Stock Dividend

This type of dividend given in the form of bonus shares or stocks of the issuing company or a

subsidiary company. In routine this type of dividend offered on the basis of prorates allocation.

Property Dividend

This type of dividend is distributed in the form of assets by the issuing company or a subsidiary

company.

Other dividends

It can be used in structured finance. Financial assets with a known market value can be

distributed as dividends; warrants are sometimes distributed in this way. For large companies

with subsidiaries, dividends can take the form of shares in a subsidiary company. A common

technique for "spinning off" a company from its parent is to distribute shares in the new

company to the old company's shareholders. The new shares can then be traded independently.

Importance and Benefits of Dividends:

It is important for investors to consider the benefits that dividends offer and how easy it is to

include dividend-paying stocks in any portfolio. Dividend paying stocks offer numerous

advantages, including:

Attractive Returns: Dividends paid are part of total return. Companies that pay

dividends are usually historically stable.


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Less Volatility: Dividends help lessen the potential fall of a companys stock price

thereby reducing volatility.

Increased Yield: Dividends provide income (however they are only a small part of

an investments total return.

Favorable Tax Treatment: Canadian dividends receive more favorable tax

treatment than interest incomes which is fully taxed like employment income.

Companies that manage their cash flow effectively tend to sustain and grow their dividend

payouts over time. Successful growth of earnings usually pays off for investors in the form of

higher share prices.

Dividend Timeline:

Dividends must be declared by a companys Board of Directors before they are paid out this

is known as the declaration date or announcement date. A stock is said to tradecum dividend

with dividend before the ex-dividend date, meaning investors will receive the dividend if they

own the stock before this date. The ex-dividend date is usually set two days before the date of

record; this allows all stock trades made on previous dates to be properly settled and the

shareholder list on the date of record to accurately reflect the current owners. On the record

date, a company determines its shareholders or "holders of record." The payment date is when

the dividend chaque are mailed to the shareholders of a company or their brokers.

1.1Background of the study

I will discuss the different researchers studies in my thesis about the dividend. The earliest

major attempt to explain dividend behavior of companies has been credited to John Linter


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(1956) who conducted his study on American Companies in the middle of 1950. Black (1976)

finds no convincing explanation of why companies pay cash dividends to their shareholders.

Since that introduction of the dividend puzzle (1996) Gomes (1998) Fluck (1984) Myers and

Majluf recognize that dividend policies address agency problems between corporate insiders

and shareholders Grossman and Hart (1980) point out that the dividend payouts mitigate

agency conflicts by reducing the amount of free cash flow available to managers, who do not

necessarily act in the best interests of shareholders. In line with that, Jensen (1986) argues that

a company with substantial free cash flows is inclined to adopt investment projects with

negative net present values. Jensen (1986) and Chariot and Vafeas (1998). hypothesize that

the relationship between the traditional determinants and dividend behaviour of Nigerian

firms depend on growth prospects, level of gearing and firms size. Rozeff (1982) presents

evidence that the dividend payout level for unregulated firms is negatively related to its level

of insider holdings. Ho (2003) presented a comparative study of dividend policies in Australia

and Japan. Aivazian et al. (2003) are considered to be the leading scholars in investigating the

dividend policy in developing markets. Goaied (2002) conducted a study on the relationship

between dividend policy, financial structure, profitability and firm value. AnilKapoor (2008)

conducted a study on the determinants of dividend pay-out ratios. Pruitt and Gitman (1991)

asked 1000 U.S financial managers and concluded that current and paet years profits are

important factors influencing dividend payments. Baker and Powell (2000) survey of NYSE-

listed firms. DSouza (1990) also finds statistically significant and negative relationship

between beta and dividend payout. Alli et.al (1993) reveal that dividend payments more on

cash flows. (2007) Kowalewski, Stetsyuk and Talavera conducted a study on the the

Corporate Governance and Dividend Policy in Poland. Gomes (1996) Fluck (1998) Myers


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and Majluf (1984) recognize that dividend policies address agency problems between

corporate insiders and shareholders. (1980) Grossman and Hart point out that the dividend

payouts mitigate agency conflicts by reducing the amount of free cash flow available to

managers who do not necessarily act in the best interests of shareholders. Collins Saxena and

Wansley (1996) conducted a study on the role of insiders & dividend policy. Erioris (2005)

conducted a study on the effect of distributed earnings and size of the firms to its dividend

policy. Naceur and Belanes (2006) conducted a study on the determinants and dynamic of

dividend policy. Ferris Noronha and Unlu (2007) conducted a study on The More the Merrier

an International Analysis of the Frequency of Dividend Payment.

1.2 Purpose Statement (Aim of investigation)

The main purpose of the study will be to find out what factors determine the dividend in the

banking sectors of Pakistan. This study will also investigate what factors considered more

important for the determination of dividend polices. Therefore purpose of this study will be take

the data of the related variables which is already exist and quantify findings in the context of

Pakistan.

1.3 Objectives of the Study

Our main objective of this study will be determining the determinants of dividend in banking

sector of Pakistan.

1. To determine the relationship between (D) dividend (ROE) return on equity (CT)

corporate taxes and (L) liquidity in the banking sector of Pakistan.


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2. To facilitate the policymaking bodies to evolve a comprehensive view determinants of

dividend and thus undertake necessary administrative adjustments.

1.4 Significance of the Study

This study is very important as its subject matter shows that it is addressing extremely

fundamental factor of determinants of dividend. This study is providing a way to know what

factors is much influence on the determinants of dividend. Further more this study needs more

consideration because this study is more significant to the Pakistan banking sector to improve the

dividend policies .this study will provide the information concerning factor effect positively and

negatively to dividend polices. Lastly this study is significant in a way thats its gives a

conceptual understanding of the relationship of corporate taxes, return on equity, liquidity and

dividend in banking sector of Pakistan.

1.5 Research Question and Hypotheses:

1.4.1 Main Question

What factors determine the dividend in the banking sector of Pakistan?

1.4.2 Sub Questions

1. What is the impact of return on equity, corporate taxes, and liquidity position on

determinations of dividend?

2.

Is return on equity, corporate taxes, liquidity and dividend are mutually correlated?


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HYPOTHESIS:

Hypothesis I

Ho: There is no association between dividend payout and return on equity.

H1: There is an association between dividend payout and return on equity.

Hypothesis II

Ho: There is no association between dividend payout and corporate taxes.

H1: There is an association between dividend payout and corporate taxes

Hypothesis III

Ho: There is no association between dividend payout and liquidity.

H1: There is association between dividend payout and liquidity.

Key terms Defined

Dividend (D)

A portion of a publicly-traded company or fund's earnings that is distributed to shareholders. The

amount of earnings distributed as dividends is usually determined by the board of directors and

divided by the number ofshares, but preferred stockoften has guaranteed dividends. Dividends

exist in order to encourage investment in the company and to allow shareholders who are really

co-owners to participate in the profits. A rapidly expanding company often pays little or nothing

in dividends, as most of its earnings are reinvested in the company. On the other hand, a well-

established company with solid profits likely pays relatively high dividends.

Return on equity (ROE)

The amount of net income returned as a percentage of shareholders equity. Return on

equity measures a corporation's profitability by revealing how much profit a company
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generates with the money shareholders have invested. ROE is expressed as a percentage and

calculated as: Return on Equity Net Income/Shareholder's Equity Net income is for the full

fiscal year before dividends paid to common stock holders but after dividends to preferred

stock. Shareholder's equity does not include preferred shares. Also known as "return on net

worth (RONW). The ROE is useful for comparing the profitability of a company to that of

other firms in the same industry.

Corporate taxes (CT)

A tax that must be paid by a corporation based on the amount ofprofit generated. The amount of

tax, and how it is calculated, varies depending upon the region where the company is located.

Many countries impose corporate tax or company tax on the income or capital of some types of

legal entities. A similar tax may be imposed at state or lower levels.

Liquidity (L)

The degree to which an asset or security can be bought or sold in the market without affecting

the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be

easily bought or sold are known as liquid assets. The ability to convert an asset to cash

quickly Also known as "marketability". It is safer to invest in liquid assets than illiquid ones

because it is easier for an investor to get his/her money out of the investment.

. Examples of assets that are easily converted into cash include blue chip and money market

securities.
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Chapter 2

Literature Review

Investment and dividend decisions are the basic components of corporate financial

management policy. The basic research related to the determination of the dividend policy is

related to the linter model (1956) after that the work was refined by the Fama and Babiak

(1968). It has been observed that during last 52 years the series of empirical and theoretical

studies have been done. The summarize form of those empirical studies conclude three

important things. Firstly when the dividend payout increases that affect positively to the

market value of the firm. Secondly, when the dividend decreases then it affects the firms

value. Finally the third suggest that dividend policy of the firm does not effect the firm value.

According to the old Linter Model (1956) the level of current and expected future earnings

and the pattern of the last dividends are the most important factors influencing the dividend

decision. It should be noted that John Linter developed this model based on two vital things

that he accounted in dividend policy. Firstly he said that firms go for long term dividend to

earning ratios with the positive NPV available to them. Secondly the dividend policy is not

changed unless the manager finds that the new earnings are sustainable as increase in earnings

can not be assumed to be sustainable always.

Mahapatra and Sahu (1993) also finds the determinants of dividend policy by using the

different model linter (1956) darling (1957) and Brittain (1966). For the study they took

sample of 90 Indian companies for the period (1988-89). Conclude in their studies that cash

flow is the biggest determinant of the dividend policy after net earning. Further their research

shows that past dividend is an important factor in decision making about dividend than the


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past earning of a firm 23. The other empirical work has been done by DeAngelo and Skinner

(1992) Baker Powell (2000) they also support the Linter thoughts and give the same

conclusion. Later in the( 2001) Baker Veit and Powell also study the factors influencing the

dividend policy and gave the conclusion that there are none but four factors which effect the

dividend policy those factors can be sum up as the linter proven factor known as earning

stability, future expected and current level of earnings, the pattern of past dividends. There are

many other studies done on the dividend topic one of the famous research was done by Rozeff

(1982) in which he found out that the determinants of dividend policy are Growth, Agency

Cost and Beta.

Rozeff (1982) Lloyd et al. (1985) and Collins et al. (1996) used beta value of a firm as an

indicator of its market risk. They found statistically significant and negative relationship

between beta and the dividend payout. Their findings suggest that firms having a higher level

of market risk will pay out dividends at lower rate.

DSouza (1999) also finds statistically significant and negative relationship between beta and

dividend payout. Rozeff (1982) presents evidence that dividend payout level is negatively

related to its level of insider holdings. Jensen et al. (1992) and Collins et al. (1996) confirm

that the relationship between dividend payout and insider holding is negatively related.

Xinlei Zhao and Kai Li (2006) found out the firms information environment calculated by

analyst is the important factor in dividend policy. They said that firms with the greater analyst

coverage are recurring with a less proclivity to create dividend payments and initiate it. It was

observed that the amount of dividend was negatively related to the greater analyst coverage in

the profitable and non-profitable companies. This occurred to be negative after the controlling


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for share repurchases, institutional shareholdings, firm risk, across sample sub-periods and

size sub-samples. Frankel and Li (2004) conclude in their research that increased analyst

relates to the reduction of profitability of insider trades. Xinlei Zhao and Kai Li (2006)

conclude that firms choose their dividend policy while taking the presence of asymmetric

information into account.

Luciana et al. (2006) study the relationship between the dividend and ownership structure of

the company. Their research reveals the firms opt for the lower payout as ownership structure

of largest shareholder increases. Moreover they also explain that the presence of agreement

among large shareholder may also limit the monitoring power of strong non-controlling

shareholders. Luciana et al. (2006) study the relationship between the dividend and ownership

structure of the company. Their research reveals the firms opt for the lower payout as

ownership structure of largest shareholder increases. Moreover they also explain that the

presence of agreement among large shareholder may also limit the monitoring power of

strong non-controlling shareholders.

According to Mougoue and Rao (2003) the small companies can face greater information

asymmetry as compare to the big companies. As these companies use dividends as the

conveyor mechanism. Further more dividend policy for small companies can be amenable

signaling tool as compare to other alternative methods.

Ooi, (2001) believe that during the same time small companies can face sever condition to

raise the capital from external sources thus like to purse such dividend retention strategy in

which they face higher growth. It is another factor which can influence the dividend policy

decision in a company. A company with high profit, expected to have high payout of


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dividends. Han et al. (1999) and Jensen et al. (1992) find positive relation between

profitability and dividend payout. Stock Exchange Status: The stock market status of a firm

may influence corporate dividend decisions to the extent that firms listed on the AIM tend to

be newer and younger firms, and consequently more likely to suffer from high information

asymmetry and agency problems. Moreover AIM firms may also be inclined to favor the

residual dividend strategy since raising funds on the AIM for future investment is more

expensive than on the LSE (Clatworthy and Peel 1997). It is another factor which can

influence the dividend policy decision in a company. A company with high profit expected to

have high payout of dividends.

Han et al. (1999) and Jensen et al. (1992) find positive relation between profitability and

dividend payout. Baker and Powell (1999) conducted a survey on dividend policy. Most

respondents think dividend policy affects firm value.

Kumar and Lee (2001) examined the determinants of dividend smoothing. Dividend

smoothing is the method of maneuvering the time profile of earnings or earnings reports to

make the reported income stream less variable. They found that by making the stream of

dividend payments constant shareholders are not disappointed or upset by changes in

dividend payout. The earliest major attempt to explain dividend behavior of companies has

been credited to John Linter (1956) who conducted his study on American Companies in the

middle of (1950). Brittain (1964) Modigliani and Miller (1961) Pettit (1972) Black and

Scholes(1973) Michael Thaler and Womack (1995) Dhillon and Johnson (1994)Amibud

and Murgia (1997) Charitou and Vafeas (1998) Naceur (2002) conducted a study on the

relationship between dividend policy financial structure profitability and firm value. The topic

investigates the value creation process in the Tunisia stock exchange. There are many reforms


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since 1889 such as privatization of the stock exchange creation of a Tunisian SEC and a

cleaning house introduction of new financial instruments etc. The value creation process in

the Tunisia stock exchange is measured by a dichotomous response; the econometric

procedure uses probity models estimated on unbalanced panel data. The data was extracted

from the annual reports of 28 listed companies covering the period (1990-1997) the variables

of interest Incorporated in the analysis of market book ratio dividend policy factors Debt,

profitability and its size. All the variables of interest are positively correlated with MBR, with

a correlation exceeding 40% for profitability 40.9%. There is also a high correlation between

debt & size 82.8%.The value creation is also affected by nature of property. This finding

suggests that the progressive reforms of the Tunisian stock exchange have attracted new

investors, who have contributed by their purchase to the appreciation of the value of listed

shares.

Bhat and Pandey (1994) examined the managers perception about the dividend decision for

the company in the period of (1986-87 to 1990-91). The research concludes the study of the

425 Indian companies, the result reflect that on an average the profitable Indian companies

have distributed one-third of their net earnings which has an average dividend payout ratio

comes to be 43.6%.

Mishra and Narender (1996) analyze the dividend policies of 39 state-owned enterprises in

India for the period (1984-85 to 1993-94.) Concluded that earning per share is the important

determinant of dividend policy.

Lazo's survey (1999) revealed that 87% of dividend paying companies believe that dividends

do signal information regarding future earnings of the company. 110 senior financial officers


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from S&P 500 companies responded to the survey, representing a response rate of 22%.

Results show that of corporations having a buyback program in place in the last two years,

72% increased their dividend payout. 25% used cash flow to fund repurchase programs, rather

than to increase dividend payments. 93% of the responding officers felt that initiating a stock-

buyback program is believed to be more effective than raising dividends in providing

downside stock-price protection in a falling market. 79% of respondents stated that stock

repurchase programs do not receive a higher priority use of corporate cash flow than

dividends, even if corporate profitability were to come under pressure. Carlson (2001)

discusses the factors that affect the dividend decision. He concludes that stock repurchases

explain a small part of the decline in dividend yield.

Anil Kapoor (2008) conducted a study on the determinants of dividend pay-out ratios-A study

of Indian Information Technology sector. The harder we look at the dividend the more it

seems to likes puzzle with pieces thatjust dont fit together.

Black (1976) concluded with this question. What should the corporation do about dividend

policy? We dont know. Among theories some factors are identified in previous empirical

studies that influence dividend policy such as profitability risk cash flows, agency cost,

growth, taxes, price earning ratio etc. Linton (1965) conducted a classic study on U.S

managers dividend decision. He develops compact mathematical model & survey 28 well

established industries. According to him the dividend payment pattern of a firm is influenced

by the current year earnings & previous year dividends. Baker Farrelly and Edelman (1986)

surveyed 318 New York Exchange firms and concluded that major determinants of dividend

payments are anticipated level of future earnings and pattern of past dividends.


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Pruitt and Gitman (1991) asked 1000 U.S financial managers and concluded that current and

peat years profits are important factors influencing dividend payments. Baker and Powell

(2000) survey of NYSE-listed firms & concluded that determinants are industry specific and

anticipated level of future earnings is major determinant. Pruitt and Gitman (1991) find that

risk also determinant of dividend policy. Rozeff (1982) used beta value as an indicator of

market risk and found statistically significant and negative relationship between beta and

dividend payout. They suggest that firms having higher level of market risk will payout

dividends al lower rate. D Souza (1990) also finds statistically significant and negative

relationship between beta and dividend payout.

Alli (1993) reveal that dividend payments more on cash flows. They claim current earnings

do not really reflect the firm s ability to pay dividends. DSouza (1990) however shows a

positive but insignificant relationship in the case of growth and negative but insignificant

relationship in the case of market to book value. The data of Indian IT sector (2000-2006) had

chosen it has been source from Prowess database of CMIE. Hinduja TMT Ltd and I-Gate

Global Solutions Ltd. Have been excluded from aalysis due to non-availability of data. The

following variables are identified which are: dividend payout ratio. EBIT total assets, cash

from operations, annual sales growth, corporate tax profit before tax, Market to book value

ratio. The statistical techniques of correlations & regression were used to explore the

relationship between these variables. The dividend payout was used as dependent variables

and other variables were used as independent. The result of study show positive and

significant association between dividend payout and cash flows. There is insignificant

relationship with corporate taxes, sales growth and MTBV ratio. So these are not important

factors that influence the dividend payment behavior of firms in IT sector. The existing


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variables explain just 27 % of Indian IT dividend behavior future research can be focused on

discovering variables that explain the remaining 70 % of the behavior.

jayesh Kumar review that there is a relationship between ownership structure, corporate

governance and firms dividend payout policy in the emerging market India. For this research

he examines the Indian corporate firms over the period 1994-2000 for payout behavior of

dividends and the association of ownership structure. Explain the analysis with the help of

well established dividend models of Linter (1956) Waud (1966) and Fama and Babiak (1968).

Narasimhan and Vijayalakshmi (2002) observe the effect of ownership structure of 186

manufacturing firms on dividend payout. The empirical research (regression analysis) shows

that the promoters holding of 2001 has no effect on average dividend payout for the period of

(1997-2001)

S.Dhatt conducted a study on the financial leverage, ownership concentration and the

dividend payout ratio. There are many studies that focused on investigating the relationship

between investment financing and dividend policy decisions of firms and found conflicting

evidence. This study uses regression analysis to estimate the relationship. The estimates of

regression coefficients indicates that there is a relationship between debt and equity and

payout ratio in air transport, chemicals, drugs, paper & forest products and the semi-

conductor industries. The relationship positive up to a certain level of debt and equity ratio

and after it becomes negative. It indicates that at higher level of the debt and equity ratio the

management is concerned about their financial risk. The industries with higher business risk

have lower tolerance level of debt and equity ratio.


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Adelegan conducted a study to examine the impact of growth prospect, leverage and firm size

on dividend behavior of corporate firms in Nigeria. John linter (1956) make earliest attempt to

explain dividend behavior of companies, who conducted his study on American companies in

middle of 1950s. Oyejida (1876) empirically tested for company dividend policy in Nigeria

using linters model as modified by brittain. He concluded that the available evidence

provides a strong and unequivocal support for the conventional devices for explaining the

dividend behavior of Nigeria limited liability business organization.

Odife (1977) criticized Oyejidas study for failing to adjust for stock dividend. He empirically

analyzing the determinants of dividend policy on a sample of 63 quoted firms in Nigeria over

a period from 1984-1997 and also introduced dummy variables to capture economic policy

changes. Dividend behavior was tested using the linter-brittain model and its variants on the

pooled cross sectional time series data for the full sample of observations from 1984-

1994.The models are estimated using the Ordinary Least Square (OLS) method. The result

shows that there are no significant interactions between the conventional Linter and Brittain

model and dividend decisions of Nigeria firms. Jensen (1986) and Chariot and Vafeas (1998)

hypothesize that the relationship between the traditional determinants and dividend behavior

of Nigerian firms depends on growth prospects, level of gearing and firms size. The

empirical results revealed that the dividend policies of Nigerian companies are influenced by

after tax earnings, economic policy changes, growth potentials and long term debt. However,

the validity of the model and its variants on dividend policy of Nigerian firms which is

somehow remote, party depends on the growth prospect firm size and level of gearing of

corporate firms. Kowalewski, Stetsyuk and Talavera (2007) conducted a study on the

Corporate Governance and Dividend Policy in Poland and explore the determinants of the


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dividend policy in.& test whether corporate governance practices determine the dividend

policy in the non-financial companies listed on Warsaw Stock Exchange. Black (1976) finds

no convincing explanation of why companies pay cash dividends to their shareholders. Since

that introduction of the dividend puzzle a voluminous amount of research offers alternative

and appealing approaches to solve it.

Gmes (1996) Fluck (1998) Myers and Majluf (1984) recognize that dividend policies

address agency problems between corporate insiders and shareholders. Grossman and Hart

(1980) point out that the dividend payouts mitigate agency conflicts by reducing the amount

of free cash flow available to managers, who do not necessarily act in the best interests of

shareholders. Jensen (1986) argues that a company with substantial free cash flows is inclined

to adopt investment projects with negative net present values. LLSV (2000) argue that

differences among countries in the structure of laws and their enforcement may explain the

prevailing differences in financial markets and also show that financial market development is

promoted by better protection of investors The financial data comes from Euro money ISI

Emerging Market and NotoriaS data bases as well as from the annual reports of the

companies listed on the WSE. Our sample consists of 110 non-financial publicly traded firms

with 760 observations over a seven-year period. It is divided into three sub-samples (1998-

2001) and (2002-2004).In order to analyze the determinants, they estimate pooled Tobit

regression model similar to the study of Bebczuk (2005) our results suggest that large and

more profitable companies have a higher dividend payout ratio. Further more riskier and more

indebted firms prefer to pay lower dividends. The findings based on the period (1998-2004)

demonstrate that an increase in the sub-indices that represent corporate governance practices

brings about a statistically significant increase in the dividend-to-cash-flow ratio. Moreover


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the estimates prove to be significant after the inclusion of standard additional controls Saxena

and Wansley (1996) conducted a study on the role of insiders & dividend policy. The purpose

of this study is to examine the role of insiders in determining dividend policy for unregulated

firms, utilities, and financial-services firms. (1982) Rozeff presents evidence that the

dividend payout level for unregulated firms is negatively related to its level of insider

holdings & result is that firms with higher levels of insider holdings have less need to signal

firm value through dividends.

Myers and Majluf (1984) show that the level of insider holdings is itself a signal oSf firm

value. Other studies reveal that dividend policy is significantly intertwined with other

corporate policy choices .Most recently Hansen Kumar and Shome (1994) find that payout

ratios of electric utilities respond in much the same fashion as unregulated firms when the

concentration of ownership changes. Their findings suggest that as the concentration of

ownership increases, the level of monitoring increases and the need for a higher dividend

payout decreases. Our sample consists of observations on 500 firms drawn randomly. The

unregulated firms cover 21 different industries where the number of firms representing a

particular industry ranges from 8 to 50. Of the 45 utilities, there are 29 electric utilities and 16

natural gas firms. Of the 53 financial-services firms, there are 38 commercial banks BHCs

and 15 insurance companies. Rozeff (1982) a regression model is developed that relates the

firm average payout ratio to its past and expected future growth rate, its level of systematic

risk, the number of shares outstanding as a proxy for firm size and its level of insider

holdings. Results indicate that the payout ratio is negatively related to the firms past and

expected future growth rates in earnings its level of systematic risk and its insider holdings.

Payout levels are positively related to the number of shareholders. The regression model is


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expanded to include binary variables for whether or not the firm under consideration is a

financial-services firm or a utility. Under the Smith (1986) hypothesis utilities will possess

larger payouts than unregulated firms. For financial-services firms, no such difference is

anticipated. The regression model also captures any differences in the behavior of these two

regulated groups based on insider holdings. If fixed-rate deposit insurance increases equity

risk, then financial firms will have dividend policies that respond more drastically to changes

in insider holdings. If regulatory commissions act as low-cost monitors for utility

shareholders, then changes in insider holdings will not produce significant changes in

dividend policy for these firms.

Erioris (2005) conducted a study on "the effect of distributed earnings and size of the firms to

its dividend policy. The objective of this paper is to examine the corporate dividend policy for

the Greek market. John Lintner (1956) conducted a series of interviews with corporate

managers about dividend policies of their companies. The total number of companies that he

used was 600 from which he finally has chosen only 28 to survey and interview. One of the

most important conclusions is that companies have a long-run target dividend payout ratio.

That meant that companies aim to distribute, in the long run, a constant portion of their

earnings each year. Another interesting remark of Lintners study concerns the managers that

proved to be more interested on changes on dividend than on absolute levels. Fama and

Babiak (1968) undertook a more comprehensive study of Lintner models performance. Their

starting point was the work of Lintner (1956). Their sample consists of 392 industrial firms

over the period (1946) through (1964). Fama and Babiak tested the Lintner s model with their

data and methodology and found that it performed well but it can be improved by introducing,

as an additional explanatory variable, the earnings from the previous year without the


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constant term. This paper is based on the work of Vasiliou and Eriotis (2003) and Eriotis &

Vasiliou (2003). Vasiliou and Eriotis (2003) test the model of Lintner and suggest two

different versions that improve the original model introduced by Lintner. In their first version

of the Lintners model they consider as dependent variable the change in dividend between

time t and as independent variables the change in the earnings of the firm between time and

the change in dividend between time and the findings of Vasiliou and Eriotis (2003) suggest

that the Greek firms follow a discrete dividend policy. That is the dividend payout of a firm

depends upon the firms long-run target dividend that is adjusted according to the net earnings

of the firm. The empirical investigation conducted for a large sample of the companies listed

in the Athens Stock Exchange market during the period (1996 2001). For a firm to be

included in the sample two criteria had to be met. First, the firm had to be listed in the Stock

Exchange market for the whole of the period under consideration. Second, the firm would be

required to be listed in the year (1995). The final sample consists of 149 firms in a 5 year

period; that is, a panel of data with 718 observations, since some data were missing. The key

variables of interest are the: measures of dividends distributed earnings sales and changes in

this years distributed earnings and dividend from this year to the year before (DE and D).

for the analysis panel data was used. This models is a powerful research instrument, since it

combines the cross-sectional data with time-series data, and provides results that could not be

estimated and studied if only time-series or cross-section data were used. e empirical results

verified the hypothesis that the Greek companies prefer to distribute, each year a rather

constant dividend, which they adjust from year to year according to their distributed earnings

and size. Omran Pointon (2003) conducted a study on "dividend policy trading

characteristics and share prices. The dividend policy of a firm is a significant aspect of


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corporate financial management, for it has potential implications for share prices and hence

returns to investors the financing of internal growth through retentions the size of the equity

base within the firm again through retentions and hence its gearing leverage ratio. For

developing economies growth through the realization of investment opportunities is likely to

be an important element of an economic reform program. There are three issues we attempt to

address: Shares price determinations. Dividend payout ratios Dividend stability. For a sample

of 94 firms using data up to (1999) we find that retentions are more significant than dividends

in determining prices of shares that are actively traded on the Egyptian stock market.

However for non-actively traded shares the accounting book value is the most important

determinant. Reductions in dividends are associated with a lack of liquidity and profitability.

Dividend increases are linked to higher pre-tax operating profit effects which outweighed

post-tax effects. As to aspects that influence dividend payout ratios of actively traded firms,

important factors are gearing and the market to book value, the latter a surrogate for

investment opportunities. For non-actively traded firms, a more complex pattern emerges

.Aivazia Booth and Clearly (2003) use the return on capital employed as a measure of

profitability, although they do not distinguish between a dividend increase and a dividend

decrease.

D'Souza and Saxena (1999) although they do not find significant relationship between

dividends and investment opportunities. Aivazian et al. (2003) also use the market to book

value, i.e. q-ratio, but find that emerging market firms do not exhibit the expected sign in their

regressions unlike in their study of the US. Ramcharran (2001) finds support for the aspect of

pecking order theory (Myers 1984) that retentions lower dividend desire associated with

greater growth. According to the pecking order theory Myers (1984) o firms should prefer to


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finance investment by retentions rather than by debt. The data were drawn from the financial

information provided by the Kopsas Egypt Financial Year Book (1999/2000) Fiani and

Partners (2000).

DeAngelo et al (2004), conducted the study on dividend policy, agency cost and earned

equity. The study consists on why firms pay dividends? If they didnt have their assets and

capital structure, would eventually become unsustainable as the earnings of successful firms

exceed their investment opportunities. The gives the analysis of 25 largest long standing in

2002 dividend payers firms would have cash holdings of $ 1.8 trillion which is 51% of total

assets, up from $ 160 billion 6 % of assets and $ 1.3 trillion in excess of their collective $ 600

billion in long term debt .

They find that their dividend payments prevented significant agency problems since the

retention of the earnings would have given the managers command over an additional $1.6

trillion with out access to better investment opportunities and without any monitoring. This

sense suggests that firms with high retained earnings are especially like to pay dividends. In

this view firms pay high dividend when earned equity to total equity is high, and decline

when this ratio decline and when this ratio is zero or near to zero, it means firms dont have

the earned equity. The 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 and history of dividends. The

methodology can be explained in terms of three stages to the research multiple regression

analyses are performed to explain the share price in terms of three attributes namely the

retention the dividend and the book value per share. Comparisons are made between firms

that are actively traded on the Egyptian Stock Market and those that are not further multiple


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regression analyses are performed to assess a range of possible determinants of the dividend

payout ratio. The choice of variables is consistent with other empirical work reviewed in the

previous section. Once again, comparisons are made according to stock market trading. The

stability of dividends, comparing dividends for the current year with those for the previous

year, is analyzed by means of logistic regressions.

The first logistic regression assesses the relevance of various factors, including profitability

and liquidity, to the decision to decrease dividends, or to let them remain fixed. On account of

the smaller data-set see later firms are not distinguished according to stock market activity.

The second logistic regression follows a similar approach, but classis firms according to

whether dividends increased or remained the same. The right-hand side of each logistic

regression looks the same as a standard multiple regression equation. However each logistic

regression assesses the logarithm of the odds ratio as a linear function of the explanatory

variables. In the first logistic regression the odds ratio is chosen to represent the ratio of the

probability that the dividend stayed the same to second the probability that it decreased. In the

second logistic regression, the ratio refers to first the probability of an increased dividend, to

third the probability of the dividend staying the same. In each respective spreadsheet the

binary variable, to represent each firm's dividend choice, is assigned a zero or one. So in the

first logistic regression the value one represents the dividend staying the same, whereas in the

second the value one arbitrarily represents the dividend increasing. The logic for our choice is

that the higher the value of the binary variable, the higher the dividend. Right-hand side

variables with positive coefficients would then be associated with a higher dividend

propensity. This paper has addressed three issues concerning dividend policy of Egyptian

firms: its role in share price determination; the identification of key factors affecting dividend


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payout ratios and the importance of factors that would cause a shift from keeping the

dividends at a stable level. Share Price Determination. For a wide portfolio of both actively

and non-actively traded shares on the Egyptian Stock Market, dividends are more important

than earnings. However, for actively traded shares, retentions are more significant than

dividends. But for non-actively traded shares, the accounting book value is the most important

determinant of the share price, and not dividends or earnings.

Dividend Payout Ratios For a wide portfolio of actively and non-actively traded shares,

gearing and firm size affect the dividend payout ratio. The sign of the regression coefficient

for gearing suggests that the traditional pecking order of retentions being preferred to debt

may not hold for Egyptian firms. Small firms pay out less for actively traded firms important

factors are gearing and the q-ratio, the latter a surrogate for investment opportunities. The

result suggests a role for reducing dividends and retaining more in order to finance investment

opportunities. For non-actively traded firms, a more complex pattern emerged. In particular,

the sign of the coefficient for the q-ratio suggests that, as far as investment opportunities in

such firms are concerned, dividend policy patterns contrast with those of actively traded

firms. In order to finance investment opportunities, firms whose shares are not actively traded

tend not to pay out a smaller proportion of earnings as dividends. Dividend Stability.

Dividend stability is denned as maintaining the same level of dividends as for the previous

year. To de-stabilize dividends by decreasing them is associated with a lack of both liquidity

and overall profitability. Finally, to de-stabilize dividends by actually increasing them is

associated with higher overall profitability. In terms of that overall profitability, pre-tax

operating profit effects outweighed post-tax operating profit effects. Al- Najjar conducted a

study on dividend behavior and smoothing new evidence from Jordanian panel data. This


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paper aims to investigate the dividend policy behavior in Jordan. In which Amman Stock

Exchange is considered to be one of the updated emerging markets in the region. Miller and

Modigliani (1961) provided their irrelevance theory of dividend policy; this theory is based

on the assumptions of perfect markets. They concluded that dividend policy has no effect on

either the price of firm's stock or its cost of capital. Research in the area of dividend policy

has been concerned with relaxing the assumptions of MM model. Ho (2003) presented a

comparative study of dividend policies in Australia and Japan. He examined a 10-year panel

dataset, consisted of 332 firms in the Australian and Japanese markets from (1992 to 2001).

He found the following relationships: dividend policy is positively affected by size in

Australia and by liquidity in Japan, and negatively by risk only in Japan. These results

supported the agency, signaling, and transaction cost theories of dividend policy. Aivazian et

al. (2003) found that emerging market companies exhibit dividend behavior similar to US

companies, in the sense that dividends are explained by profitability, debt, and the market-to-

book ratio. Their empirical results (using pooled data) revealed that for both US companies

and emerging market companies, profitability affects dividend payments; high ROE (return

on equity) lead to high dividend payments.

Crutches and Hansen [1989] examine the relationship between ownership, dividend policy,

and leverage and conclude that managers make financial policy tradeoffs to control agency

costs in an efficient manner. More recently, researchers have attempted to establish the link

between firm dividend policy and investment decisions. Smith and Watts [1992] investigated

the relations among executive compensation, corporate financing, and dividend policies. They

conclude that a firm's dividend policy is affected by its other corporate policy choices. In

addition, Jensen, Solberg, and Zorn [1992] linked the interaction between financial policies


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(dividend payout and leverage) and insider ownership to informational asymmetries between

insiders and external investors. They employed a simultaneous system of equations and found

that corporate financial decisions and insider ownership are interdependent. Despite this rich

literature, most prior work implicitly recognizes differences in determinants of financial

decisions between regulated and unregulated firms by excluding regulated firms from the

analysis.

Rozeff [1982] was among the first to explicitly recognize the role of insiders as one of

monitoring the managers. He finds that dividend policy for unregulated firms is negatively

related to its level of insider holdings. One interpretation of his result is that firms with higher

levels of insider holdings have less need to signal firm value through dividends than

comparable firms with lower levels of insider holdings. Additionally, in the context of the

investment and financing decision, Myers and Majluf [1984] showed that the level of insider

holdings is itself a signal of firm value. In a study of electric utilities, Hansen, Kumar, and

Shome [1994] focused on the role that dividends play in the monitoring process to reduce

equity agency costs. Hansen et al. focusd on electric utilities since they do not seem to fit

current dividend theory explanations in the literature. They act differently, perhaps because

they are subject to regulatory oversight and insulated from most market disciplines like

takeovers.

Their paper concludes that the use of higher payout raises the likelihood of monitoring by

both management and the regulatory authority. If the regulator sets the rate of return to

shareholders (dividend yield) below that required by market, then assuming efficient markets,

the marginal investors will drop out. This lowering of the demand for the company's stock

will adversely affect its price reflecting greater difficulty in raising equity funds. Moreover,


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the associated costs (e.g., transactions and opportunity costs) will go up. Therefore, even if

one assumes that this does not affect the costs of other sources of financing, the increased cost

of equity financing will result in a higher overall cost of capital for the firm.

Rao and Moyer [1994] developed a theoretical model to study the role of regulatory climate

in capital structure decisions of regulated electric utilities. Their model predicts that utilities

will react to their regulatory climate by adjusting capital structure. They also provide cross

sectional and time series empirical support for their model from their data. They do not,

however, comment on the dividend policy issues of (regulated) public utilities that are an

integral part of a firm's capital structure decisions.

Omran and Pointon (2004) investigated the role of dividend policy in determining share prices,

the determinants of payout ratios, and the factors that affect the stability of dividends for a

sample of 94 Egyptian firms. They found that retentions are more important than dividends in

firms with actively traded shares, but that accounting book value is more important than

dividends and earnings for no actively traded firms.

he current study investigates the issue of dividend behavior in emerging markets using Jordanian

non-financial companies. The dataset is drawn from the Jordanian Shareholding Companies

Guide (1999, 2000, 2001, 2002, and 2003). From this dataset, 86 firms are selected these firms

maintained their identity and reported their financial accounts without any significant gaps, for

the period from (1994 to 2003). However due to missing observations the total number of

observations in the estimated models is 743. This study applies pooled and panel to bit models to

investigate the dividend policy. The paper finds that the dividend policy in Jordan as a

developing country is influenced by factors similar to those relating to developed countries such


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as leverage ratio, institutional ownership, profitability, business risk, asset structure growth rate

and firm size. Furthermore the factors affecting the likelihood of paying dividends are similar to

those affecting the dividend policy. Finally the results show that the Lintner model is valid for

Jordanian data and that Jordanian firms have target payout ratios and they adjust to their target

relatively faster than those in developed countries.

Dobrisan conducted a study on monetary policy and capital market efficiency. Howe and Lee

(2004) examine three corporate governance characteristics of preferred stock issuers relative to

non-issuer managerial equity ownership, board size, and block shareholder ownership. Stieglitz

(2002) explains that one must keep in mind that in post-1989 Russia there wan no housing

market nor was there any real social safety net. He discusses the nexuses between institutions,

privatization, and the impact of suggested economic remedies on the most vulnerable sections of

Russian society.

(2004) Giudici and Roosenboom examine the determinants of the long run stock price

performance of Initial Public Offerings on Europes new stock markets. Habra (2002) examine

the underlying factors which influence and cross-sectionals explain differences in the degree of

dividend smoothing of firms. Differences in corporate dividend smoothing are documented by

estimating the sensitivity of corporations dividend payout ratios to changes in earnings.

Theoretical determinants of dividend smoothing are investigated by cross-sectionals regressing

the degree of dividend smoothing of firms against firm characteristics.

Kontonikas and Ioannidis (2005) analyze the relationship between monetary policy and asset

prices using a structural rational expectations open economy model that allows for the effect of

asset prices and exchange rates on aggregate demand. Sundaram et al. (2001) find that wealth


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effects are significantly and positively related to board size and to share ownership by

independent outside directors and inside directors. Sub-samples based on board size reveal that

for small boards. Williamson shows that equilibrium credit rating may be a result of optimal

contract under the ex post type of information asymmetry; in a dynamic setting, the repeated

game between banks and borrowers is considerably harder to model. Using the Flow of Funds

data Christiano et al show that var impulse responses of business liability increase for about a

year after a monetary contraction, possibly because facing a fall in sales and a rise in inventories

firms find it necessary to raise funds to cover expenses they are unable to cut in the short-run; as

recessions deepen firms scale back in production and net borrowing declines. Under the ex post

type of information asymmetry Carlstrom and Fuerst simulate a general equilibrium model

assuming loan contract depends only on a borrowers net wealth instead of the history of loan

repayment. Townsend proves that if there is a cost of verification then the optimal structure of

the loan contract is risky debt. Mazur argues that globalization is about more than actual trade

openness and penetration of the economy with FDI; globalization imposes a particular set of neo-

liberal policies on countries.

Bhagwati (2004) finds that FDI and trade benefit society on dimensions other than just the

narrowly economic. Brown (2001) notes that the bulk of the evidence supports the argument that

skill-biased technological change is more important than trade as an explanation. (2006)Naceur

Goaied and Belanes conducted a study on the determinants and dynamic of dividend policy.

Fisher Black (1976) wrote that the harder we look at the dividend picture, the more it seems like

a puzzle with pieces that just do not fit together. More recently Brealey and Myers (2005) list

dividends as one of the top 10 important unresolved problems in finance. The situation is pretty

much the same today and the words of Fisher Black (1976) may well apply in todays context. In


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a recent survey Allen and Michaely (2003) conclude that much more empirical and theoretical

research on dividends is required before a consensus can be reached. Tunisian case presents at

least three interesting features that make its study relevant in terms of policy recommendations

for this country and others in the Middle East and North Africa region. First the Tunisian

ownership structure is highly concentrated and ultimate ownership identification is opaque.

Second there are no taxes on dividend and capital gains contrary to other developing and

emerging markets. Third the Tunisian Stock Exchange has witnessed several reforms, especially

the introduction of an electronic system for transactions in phase with international standards,

and this innovation is expected to have an impact on the way firms set their dividend policy. The

data used are provided by the TSE and the Council of Capital Market through respectively, their

official bulletins and their annuals reports covering the period (19962002). The sample is made

up of 48 firms of which 29 belong to regulated industries financial institutions, transport and

telecommunication firms. The period of study covers seven years from (1996 to 2002) which

appears according to Rozeff (1982) a period long enough to smooth out variables fluctuations.

Linters model is applied using static and dynamic panel data regressions. Our results show that

Tunisian firms rely more on current earnings those past dividends to fix their dividend payments

in the way that dividends tend to be more sensitive to current earnings rather than prior

dividends. Any variability in the earnings of the corporation is directly reflected in the level of

dividends. This is confirmed by the high value of adjustment speed, which is around 96%

86.68% when excluding the non-dividend-paying firms and 75.4% when excluding the regulated

ones. Tunisian managers, just like their counterparts in other emerging markets, do not smooth

their dividend payments. Additionally, the target dividend payout ratio is too low 14% for the

full sample and 32% with the dividend-paying firms using gmm estimations. Therefore a low


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target ratio and high adjustment speed indicate the low smoothing and instability of dividend

policy in Tunisia. We also highlight some determinants that may influence the dividend policy

pattern. First the results indicate that highly profitable firms with more stable earnings can afford

larger free cash flows and thus pay out larger dividends. Moreover fast-growing firms distribute

larger dividends so as to appeal to investors. This agrees with the informative content of

dividends. On the other hand ownership concentration does not have any impact on dividend

payment. In fact being closely held Tunisian firms witness less agency conflicts and shareholders

do not resort to dividends in order to reduce managerial discretion and protect their interests.

Moreover the liquidity of the stock market has a negative influence which confirms that the

implementation of the electronic transaction system in the TSE has facilitated the realization of

capital gains which has reduced the need for dividend payments. Finally the negative coefficient

on size found in the full sample has disappeared when regulated firms are excluded, which

reduces the robustness of this factor Ferris Noronha (2007) conducted a study on The More the

Merrier An International Analysis of the Frequency of Dividend Payment. The previous

literature in corporate payout policy examines the decision to pay or not to pay dividends

DeAngelo et al. (2004) Baker and Wurgler (2004) how much to pay Rozeff (1982) Miller and

Rock (1985) or how to pay repurchases versus dividends (Stephens and Weisbach, 1998

Jagannathan et. al. 2000). But no study examines how frequently the firm should pay dividends

once the decision to pay has been made.

Thaler (1980) subsequently describes the process of mental accounting by which investors

evaluate their gains separately from their losses, and thereby increase their overall utility. These

arguments suggest that an investor receives a higher level of utility from a sequence of smaller

discrete payments than a single aggregate payment. Barberis and Thaler (2003) describe how the


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concave utility function of prospect theory allows an investor to receive greater utility from a $2

dividend and an $8 capital gain compared to a $10 capital gain in spite of an identical dollar

increase in shareholder wealth.

(2003) Barberis and Thaler note that this differential bundling of the shareholder distribution

produces two different levels of investor utility. The investor that receives the ten dollars

bundled as a $2 dividend and a $8 capital gain experiences a higher level of utility compared to

the investor who receives only a $10 capital gain. Barberis and Huang (2001) make the case that

if a stocks recent performance is good, an investors utility increase from the gain leads that

investor to become less concerned about future losses from the stock and, consequently, to view

the stock as less risky. Thus, the investor is willing to discount future cash flows from the stock

at a lower rate. To the extend that investors code more frequent dividends as more frequent

gains, a situation which closely parallels the bird-in-the-hand argument, we should expect stocks

paying dividends more frequently to have higher valuations because investors perceive them to

be less risky, other things equal. Kahneman and Tversky (1979) and the confirming simulations

and modeling of Barberis and Thaler (2003) and Barberis and Huang (2001) imply that a more

frequent payment of dividends increases total investor utility we nevertheless observe that there

is significant international cross-sectional variability in the frequency of dividend payment.

LaPorta ET. al. (2000), find that firms in strong investor protection countries pay more dividends

than those incorporated in less favorable regimes.

LaPorta et.al. (2000) argues that shareholders in these countries are better able to force cash

disgorgement, thus precluding insiders from using a high percentage of the firms earnings for

personal benefits. Lintner (1956) establishes in the literature that firms are reluctant to cut

dividends for their shareholders. Subsequent studies Ghosh and Woolridge (1988) Denis et al.


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(1994) show that firms are penalized in the marketplace when they do reduce them. The data

used in this study are drawn from a variety of sources. We obtain annual financial and

accounting data from the Compustat Global Industrial database while monthly market return

information is collected from the Composted Global Issues database. From the research

conducted by Al-Twaijry and Abdulrahman Ali (2007) on the dividend policy and payout ratio

for Kuala Lumpur stock exchange (KLSE) during the period of year 2001 to 2005, the

companies size were considered as an independent variable that has an effect on the dividend per

share .The difference between large companies and small companies gave significantly (p

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