The corporate dividend policy is the one of the very important issue of advance corporate finance. John Linter (1956) developed the dividend model which becomes very famous and known as Linter Partial Adjustment Model. According to the Linter each firms i has target dividend payout ratio (ri). 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. 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). Dependent Variable= Independent Variables Dividend payout ratio= CFO (cash flow) + Sales, + EBIT (earning) + Debt to Equity Ratio (leverage).
Four explanatory variables are used in this study, to find out their impact on the dependent variable as dividend payout.
The liquidity or cash flows position is also an important determinant of dividend payouts. A poor liquidity position means less generous dividends due to shortage of cash. Alli et.al (1993) reveal that dividend payments depend more on cash flows, which reflect the company’s ability to pay dividends, than on current earnings, which are less heavily influenced by accounting practices. They claim current earnings do no really reflect the firm’s ability to pay dividends. 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 affect the decision or behavior of the dividend policy. According to the Belanes et. al (2007) there is a negative relationship between the market liquidity and dividend yield in Tunisian Stock exchange (TSE). OCF= EBIT +Depreciation-Taxes
The leverage has been used as proxy of Debt to equity ratio and control variable in this study. Because leverage is very important variable for the determinants of dividend behavior 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. According to the Higgins (1972) and McCabe (1979) suggested that long term debt had negative impact on the amount of dividend paid. Rozeff (1982) found that the firms with higher leverage paid lower dividends in order to evade the cost of raising external capital of the firm. When reorganization results in a debt-equity swap, the firm becomes an all-equity firm. Since there are no tax benefits or the possibility of bankruptcy in the future, the total value of the firm is exactly the asset value. Debt to Equity ratio =Total debt / Total equity
According to the signaling theory the high growth firms are smoother to pay their dividends to shareholders. Growth is the signals to the Shareholders the firms having high growth opportunities. The sales growth has been used as proxy of Growth in the empirical analysis of the study. The sales growth has been use as percent age change in sales annually as proxy of the growth. Sale is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold. In this study sales calculated by total sales that is included local sales and export.
Profits have long been regarded as the primary indicator of the firm’s capacity to pay dividends. Linter (1956) conducted a classic study on how U.S. managers make dividend decisions. He developed a compact mathematical model based on survey of 28 well established industrial U.S. firms which is considered to be a finance classic. According to him the dividend payment pattern of a firm is influenced by the current year earnings and previous year dividends. Baker, Farrelly and Edelman (1986) surveyed 318 New York stock exchange firms and concluded that the major determinants of dividend payments are anticipated level of future earnings and pattern of past dividends. Pruitt and Gitman (1991) asked financial managers of the 1000 largest U.S. and reported that, current and past year’ profits are important factors influencing dividend payments. Firms’ profitability is argued to be an important factor in determining dividend policy. It can be argued that profitable firms are more able to distribute dividends, and hence a positive relationship is expected between firm’s profitability and its dividend payments. This result is also supported by the signaling theory of dividend policy. In other words, profitable firms pay dividends to convey their good financial performance (Bhattacharya, 1979; Chang and Rhee, 1990; Ho, 2003; Aivazian et al., 2003).This earning is calculated by operating profit at the end of year. A measure of a company’s ability to produced income from its operations in a given year. It is calculated as the company’s revenue less its expenses (such as overhead) but not subtracting its tax liability or interest paid on debt.
Sample size is consisting of twelve sugar companies listed in KSE (Karachi Stock Exchange) and period from 2001 to 2008. There are two types of sources available for data collection concerning research purpose i.e. primary and secondary data. The data in this research is secondary data which we sourced from published annual reports of the sugar companies from internet and also from Karachi Stock Exchange in Pakistan and State Bank of Pakistan.
The instruments used for collecting data for this research consisted of financial report (secondary data) of firms and SPSS as testing tool. During the analysis of data in SPSS, researcher has used technique of Multiple Linear Regression (MLR) model, because the instrument has scale types of date. Therefore, MLR model is the best tool to evaluate this kind of data. The statistical tool that is used to analyze the association between a dependent variable and four independent variables. Multiple Linear Regression estimates the coefficients of the linear equation, involving one or more independent variables that best predict the value of the dependent variable.
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