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Dynamics and determinants of dividend policy in Pakistan (evidence from Karachi stock exchange non-financial listed firms)

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

This study examines the dynamics and determinants of dividend payout policy of 320 non-financial firms listed in Karachi Stock Exchange during the period of 2001 to 2006.\n\nIt is also one of the very first examples which try to identify the potential dynamics and determinants of dividend payout in Pakistan by using the well established dividend models in context of emerging market. For dynamic equation we used the extended model of Lintner, Fama and Babiak and ‘Proposed’ model in dynamic setting. The results\nconsistently support that Pakistani listed non-financial firms rely on both the change in dividends and change in net earnings which clearly demonstrate that the firms rely on both current earning per share and past dividend per share to set their dividend payments. However the study clearly shows that dividend tends to be more sensitive to current earnings than prior dividends. The listed non financial firms having the high speed of adjustment and low target payout ratio show the instability to smoothing their dividend payments. To find out the determinants of dividend payout policy dynamic panel regression has been performed. Firstly, profitable firms with more stable net earnings can afford larger free cash flows and therefore pay larger dividends. Furthermore the ownership concentration and market liquidity have the positive impact on dividend payout policy. Besides, the slack and leverage have the negative impact on dividend payout policy. The market capitalization and size of the firms have the negative impact on dividend payout policy which clearly shows that the firms prefer to invest in their assets rather than pay\ndividends to its shareholders.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1981Biases in Dynamic Models with Fixed Effects 1961Dividend Policy, Growth, and the Valuation of Shares 1984Two Agency-Cost Explanations of Dividends 2001Disappearing dividends: changing firm characteristics or lower propensity to pay?1979Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy 2006Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory☆2004A Catering Theory of Dividends

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