Determinants of Dividend Policy Payout Decision on Indian Cement Industry Abstract

Dividend decision is one of the most important functions of finance managers in an organisation. It is depending upon the trend of the turnover and control of management over the expenditure. It is also affecting the decision of potential investors regarding investment in companys equity and overall market value of the companys share. This paper discuss about some of the factors which affects the dividend decision of Indian cement industry i.e. Debts, rofit after tax, !arning per share, "i#e of the $irm, %iquidity ratio on the dividend decision of Indian cement industry for a period of &''()'* to &'+&)+,.

INTRODUCTION
The issue of dividend policy is a very important one in the current business environment. Dividend policy remains one of the most important financial policies not only from the viewpoint of the company, but from that of the shareholders, consumers, employees, regulatory bodies and -overnment. $or company, it is pivotal policy around which other financial policies rotate ./lii et al., +**,0. Dividend or profit allocation decisions are the four main decision areas in finance. Dividend decisions are important because they determine what funds flow to investors and what funds are retained by the firm for investment .1oss et al. &''&0. 2ore so, they provide information to stakeholders concerning the companys performance. $irm investment determines future earning and with future potential dividends, and influence the cost of capital .$oong et al., &''30. 4orporate dividend policy has long been an issue of interest in the financial literature and, despite the vast research on the topic, it remains an open sub5ect. !ver since the work of 6ohn %intner .+*780, followed by the work of 2iller and 2odigliani .+*8+0, dividend policy remains a controversial issue. In fact, this has been true since 2iller and 2odiglianis .+*8+0 irrelevance proposition, according to which dividend policies are all equivalent and there is no particular policy that can increase shareholders wealth in perfect capital markets. $irms can use internal or external sources to finance their investments. Internal sources include retained earnings and depreciation, while external sources basically refer to new borrowings or the issue of stock. Thus the financing decision involves the appraisal of two choices. The first is the dividend choice 9 the fraction of retained earnings to be ploughed back and the fraction to be paid out as dividends. The second is the capital structure choice 9 the fraction of external finance to be borrowed and the fraction to be raised in the form of new equity. $irms are generally free to select the level of dividend they wish to pay to holders of ordinary shares, although factors such as legal requirements, debt covenants and the availability of cash resources impose limitations on this decision. It is thus not surprising that the empirical literature has recorded systematic variations in dividend behaviour across firms, countries, time and type of dividend. +

:ne of the most critical arguments of financial literature has been dividend policy. Dividend has two important aspects. $irst, it is an effective element of corporations investment. :n the one hand, the higher the dividend paid out, the lower will be corporations internal resources for performing investment pro5ects, while outsourcing requirement will increase which is an effective element of the stock price. :n the other hand, many corporate shareholders demand cash dividends ."alehi and ;iglar, &''*0. Thus, managers should always equilibrate between different interests of shareholders so that they could utili#e investment profitable opportunities and would pay required cash dividends for some shareholders ."alehi and 1ostami, &''*0. Therefore, a dividend decision by corporations managers is very sensitive and important as well. There is no doubt that when deciding about income, managers should consider their outcomes. This is why many corporations have a certain purpose in mind while making decisions about dividends. <owever, it is without question that when managers make dividend decisions they inevitably face constraints such as liquidity problems, tax considerations and so on. %isted corporations in the stock exchange use different advertising instruments for internal and external investment. :ne of these financial instruments is the dividend. :n the one hand, dividends will provide a stable income for shareholders who are able to regulate their life expenses with it, and on the other hand investors and stock buyers will pay attention to corporations annual stock dividend news and reports. They will give due attention to the fact that dividend represents corporations power, while profit payment will cause shareholders to have confidence in their yield of capital receipt. Therefore, it is important to understand the factors that affect dividend policies and the managers making decisions about dividend policies in terms of these factors. $irms set long)term target payout ratios, managers were concerned more about the change in the dividend than the absolute level. Dividends had tendency to follow earnings, but smoother path than earnings and dividends were sticky in nature. The present value of dividend to be received by the shareholders affects the market value of a share so as to make it at par with the amount of the. The study declares dividends as irrelevant in a world without taxes, transaction cost, or other market imperfections and investment decision of the firm is not affected by the dividends because investors adds that the homebrew their own dividends by selling a part from or borrowing against their portfolio .%intner, +*780. !ven substitution of cash flow for profit and division of cash flow into profit and depreciation revealed substantial support for %intners argument, particularly in the modified forms adopted for the study .;rittain, +*880 .$ama and ;abik, +*8(0. The firms that issue dividends would incur floatation costs on new securities they have to issue to keep their investment policy intact .2iller and 2odigliani, +*8+0. It has also been termed this as the dividend pu##le .;lack, +*380. The ma5or determinants of dividend payments are anticipated level of future earnings and pattern of past dividends .-ail et al., +*(80. The dividends change follows shift in long)term sustainable earnings .<ealy and alepu, +*((0. Information content of negative changes in dividends is greater than that &

of positive changes .%ang and %it#enberger, +*(*0. !ven current and past year profits are important factors influencing dividend payments . ruitt " = and -itman % =, +**+0. 4ompanies are very hesitant to slash dividends, in spite of the purpose for such a cut. !ven when the companies commence stock buyback program, they do not reduce the dividends to support the repurchase .%a#o, +***0. Dividend payout ratio has a positive but insignificant relationship in the case of growth and negative but insignificant relationship in case of market to book value .D "ou#a, +***0. ;oth dividend and capital structure policies of the firm act together to make available noteworthy predictive information about future free cash flows of the firm .>och and "henoy, +***0. Dividend determinants are industry specific and anticipated level of future earnings is the ma5or determinant .;aker et al., &''+0. Dividend policies are positively affected by si#e in /ustralia while their counterparts in 6apan have them positively affected by the liquidity, while risk has a negative effect. The dominant favourable tax effect of dividends in /ustralia, and the positive side effect suggest that transactions cost is a key determinant of distributing payments to shareholders in /ustralia but not in 6apan, possibly because of its relatively small si#ed firms .<o, &'',0. There is a positive relationship between the current earnings of a company and the cash dividend they pay, and a significant negative relationship between the debt to total assets and dividends .<u and %iu, &''70. Dividend paying firms are significantly larger and more profitable, having greater cash flows, ownership structure and some growth opportunities .>ent and Dutta, &''30. The Indian cement industry is one of the oldest industries. It is highly regulated because of presence of private sector organisations in the industry. It has been catering to Indias infrastructure and housing requirements since its inception. =ith liberalisation and globalisation, an increase in government spending on infrastructure and housing, as well as rapid urbanisation and industrialisation activities by private players has resulted in increased demand for updated quality building material? including cement. In India, fifty companies are listed in the @ational "tock !xchange .@"!0, which is the one of the reputed stock exchange firm in the country. %isted companies fall into two main segments, that is, the main market segment and the alternative investment market segment. The @ational "tock !xchange classified these companies into many sectors. These are? agricultural, commercial and services, telecommunication and technology, automobiles and accessories, banking, insurance, investment, manufacturing and allied, construction and allied, energy and petroleum .@"!, &'+&0. !nhancing shareholders wealth and profit making are among the ma5or ob5ectives of a firm . andey, &''70. "hareholders wealth is mainly influenced by growth in sales, improvement in profit margin, capital investment decisions and capital structure decisions ./#hagaiah A riya, &''(0. $irm performance in this case can be viewed as how well a firm enhances its shareholders wealth and the capability of a firm to generate earnings from the capital invested by shareholders. Dividend policy can affect the value of the firm ,

and in turn, the wealth of shareholders .;aker et al., &''+0. /mong the requirements that companies that want to be listed in the @ational "tock !xchange must fulfil, is that they should have a clear future dividend policy. This makes dividend policy worthy of serious management attention. Dividend policy is therefore, considered to be one of the most important financial decisions that corporate managers encounter .;aker and owell, +***0. It has potential implications for share prices and hence returns to investors, the financing of internal growth and the equity base through retentions together with its gearing and leverage .:mran A ointon, &''B0. $rankfurtet A 2c-oun .&'''0 concluded that the dividend pu##le, both as a share value)enhancing feature and as a matter of policy is one of the most challenging topics of modern financial economics. 2i#uno .&''30 agrees to the fact that a firm ought to pay dividends to shareholders if it cannot identify suitable investments which would bring higher returns than those expected by the shareholders. There are dividend theories that have been put across by academicians ."tul#, &'''? andey, &'',?

De/ngelo et al., &''80. The theories view dividends as either relevant or irrelevant in making financial decisions. 2iller and 2odigliani theory ."tul#, &'''0 proposes that in a capital market where there are no imperfections such as taxes, transaction costs, asymmetric information and agency costs, the dividend policy of a company is irrelevant for the market value of its shares. It therefore implies that financial managers cannot alter the value of their firms by changing their dividend policy. They showed that firm value is enhanced by investing in productive assets and not by the way in which income is distributed to shareholders ."tul#, &'''0. /ccording to their theory, dividend policy is therefore irrelevant and a rational investor does not have a preference between dividends and capital gains. "everal researchers have come up to oppose the theory developed by 2iller and 2odigliani stating that it does not apply in the real world where there are a lot of imperfections .Dhanani, &''70. The signalling theory proposes that dividend policy can be used as a device to communicate information about a firms future prospects to investors. 4ash dividend announcements convey valuable information, which shareholders do not have, about managementCs assessment of a firmCs future profitability thus reducing information asymmetry. Investors may therefore use this information in assessing a firms share price. Dividend policy under this model is therefore relevant ./l)>uwari, &''*0.

REVIEW O !ITERATURE
B

/ lot of research has been done on dividends. The aims of these studies were to determine the characteristics that corporations deal with to pay income. 1o#eff .+*(&0 investigated the dividend policies and their relation with variables such as beta rate, growth rate, and management ownership ratio in D"/. In +**&, 6ensen et al studied D." corporations. They concluded that debt ratio has a reverse relationship with the dividend payment ratio, so that the higher the debt ratio, the higher is the financial risk and lower the dividend distribution. /fter +*3(, the dividend percentage reduced dramatically in the D" corporations. It reduced from 7&.(E in +*3, to &'E in +***. This motivated $ama and $rench .&''+0 to examine the reasons for dividend reduction of listed corporations in the @ew Fork "tock !xchange. 1esults revealed that profitability, firm si#e, and investment opportunities were the main factors influencing dividends. $urthermore, the results also showed that big si#e corporations paid higher dividends. <owever, corporations with lower investments opportunities paid low dividends. /ccording to results of "tiglit# .+*3,0, before firms reach their efficient si#e .maturity0 they do not distribute dividends. This is why larger firms distribute dividends. andey investigated the dividend payment behaviour in .&''+0 2alaysia. In which he concluded that dividend payment ratios among different industries are different in 2alaysia. /gricultural and consumer product corporations had the highest level of dividend payment, because they had limited investment opportunities and more working capital. The results also indicated that profitability, firms si#e and investment opportunities affect dividend payments. These results also suggested that larger and more profitable companies pay higher dividends. <owever, a firm with profitable opportunities pays fewer dividends. The results also suggested that corporations that never pay dividends are more profitable than corporations that only distribute dividends in the first years of their activities. The results suggest that one of the basic characteristic of dividend payers is the firmssi#e 9 firms that pay dividends are ten times larger than firms that dont. In many authorities opinion, management fields have been accepted. The organi#ations also would have life cycles with lower growth opportunities and higher residual cash. ;uilding industries had the lowest level of dividend payment, because they needed higher cash flows to finance growth opportunities. :n the other hand, commercial and service departments paid lower dividends, because their profitability was low. /lso, it was determined that dividend payment ratios are not the same in different time periods. The results indicated that when 2alaysian corporations revenues increased, they also increased the dividend payment level. ;ut when they faced loss, they stopped dividend payments very rapidly.

-erman firms dividend determination behaviour is examined by the -oergen et al, .&''B0. They found out whether -ermany firms will target a long)term dividend payment ratio consistent with findings, and whether this targeted dividend payment is based on expected revenues or cash flows. /rgentina dividend policies is investigated by ;eabc#uk .&''B0 <is goal was to investigate deterministic elements in dividend policies of listed corporations in the /rgentina !xchange during +**8)&''&. 1esearch results indicated that larger and more profitable firms without good investment opportunities paid more dividends. 2eanwhile, corporations with higher risk and borrowing paid fewer dividends. The results of the studies of !i5e and 2egginson .&''80? and $erri, "en, and Fui .&''80 showed the differences that in terms of dividend payment between /merican firms and non)/merican firms. :n the one hand, results of !i5e and 2egginson .&''80 revealed that in the !uropean countries accumulated dividends affect dividend payment. "harma and "ingh .&''80 examined deterministic factors of stock price in Indian corporations. They studied +8' firms samples during &''+)&''7. 1esults indicated that revenue and book value per share and dividends are important and effective factors in determining stock price and that they signalled the financial health of corporation. Therefore, corporations need to adopt an expansible policy in dividend distribution, because high dividend ratio is effective in increasing market value per share. The 6ordan country determinant of corporate dividend policy is examined by the /l)2alkawi .&''30. <e used a firm)level panel that consisted of all publicly traded firms on the /mman "tock !xchange between +*(* and &'''. The results suggest that the proportion of stocks held by insiders and the state significantly affected the amount of dividends paid. "i#e, age, and profitability of the firm seem to be determinant factors of corporate dividend policy in 6ordan. The findings provide strong support for the agency costs hypothesis and are broadly consistent with the pecking order hypothesis. The results provide no support for the signalling hypothesis. / study conducted on dividend decision covered 8(companies 9 +& each in chemicals and electrical goods, +B in general engineering, and +7 each in sugar, and cotton textiles revealed that only half of the companies under examination were able to follow a stable dividend policy by >huranas .+*(70. / study conducted on managers of B&7 Indian companies for the period +*(8)(3 to +**')*+ perceive current earnings as the most significant factor influencing their dividend decision, followed by patterns of past dividends by ;hat and andey .+**B0. They also find two other variable .i.e., increasing equity base

and expected future earnings0 to have a significant influence. <owever, they find Gindustry to have the least influence on dividend, which has been contrary to the expectations. / study is conducted in Indian textile industry .BB 5oint stock companies0 by -arg et al. .+**80 although none of the models has proved the best fit, %inters model of dividend behaviour has been proved the best fit than any other model analy#ed. The most significant factor that influenced the dividend decision in the textile industry in India turned out to be sustained growth in earnings of the companies. The importance of dividend policy and liquidity constraints !lston .+**80 in the context of the firms investment behaviour, suggesting that after controlling for the firms dividend payment, liquidity constraints remain an important determinant of the firms investment behaviour. /fter +**8 another studies by 2ohanty .+***0, whether the firms offering bonus issue have been able to generate greater returns for their shareholders than those which have not offered any bonus issue but have maintained a steadily increasing dividend rate, and found that a few firms increased the dividend rate after a bonus issue, while the bonus issuing firms fielded greater returns to their shareholders than those which did not make any bonus issue but maintained steadily increasing dividend rate. The Goutcome model and found that dividends are paid because minority shareholders pressure corporate insiders to disgorge cash? the Gsubstitute model reveals that insiders are interested in issuing equity in the future pay dividends to establish a reputation for decent treatment of minority shareholders %a orta et al. .&'''0. In &''+ another studies comes of >umar and %ee .&''+0 tells about how to develop an empirically dynamic model of discrete dividend policy based on an inter)temporal signalling framework, in which dividend ad5ustments signal only substantial variations in the permanent earnings of the firm, and showed that dividend smoothing is positively associated with factors such as, earnings variance, low liquidity, and high probability of bankruptcy, as well as the expected return on capital investment by the firm. In &''& another studies by /hmed et al. .&''&0 which uses both a market)based and an accrual)based measure of conservatism, and found that the firms facing more severe conflicts over dividend policy tend to use more conservative accounting? they document that accounting conservatism is associated with a lower cost of debt after controlling for other determinants of the firms debt costs. 6ohn -raham and <arvey .&''&0 examined finance theory, as well as aspects that are hard to reconcile and found systematic relationships between corporate financial choices and managerial factors, such as the extent of top managements stock ownership, and the age, tenure, and education of the chief executive officer .ceo0. In &''B a study comes which analy#ed by /nand .&''B0 most valuable public sector undertakings .psus0 in India to find out the determinants of the dividend policy decisions of the corporate firms in India, and revealed that the findings are in agreement with %intners study on dividend policy. The dividend policy is 3

used as a signalling mechanism to convey information on the present and future prospects of the firm, and thus affects its market value. In &''8 a study comes, which examined the focuses on the dividend trends of selected Indian firms, found a strong confirmation for the signalling theories of ;hattacharya .+*3*0, and 2iller and 1ock .+*(70, which gives inconclusive results about the tax)effect theory "harma .&''80. $aulkender, 2ilbourn, and Thakor .&''80 studied an integrated theory of capital structure and dividend policy, in which both financial policy choices are driven by the same underlying factors and 5ointly determined as implicit governance mechanisms to allocate control over real decisions between managers and investors. In &''( an important studies comes that tells about profitability has always been considered as a primary indicator of dividend payout ratio, while there are numerous factors other than profitability that also affect the dividend decisions of an organi#ation e. g., cash flows, corporate tax, sales growth, market to book value ratio, and si#e. Dividend payout ratio is positively related to profits, cash flows, and si#e and, it has an inverse relationship with corporate taxes, sales growth and market to book value ratio. Though an ample number of research studies have been undertaken in the field of capital structure and dividend policy, very few of them have associated the effect of capital structure on dividend policy based on si#e of the firms /nil and >apoor .&''(0. / study was conducted by $adaeine5had .&''70 in Iran by investigating the effect of ;H2 ratio and firm si#e on profitability of corporations. The result of the study suggested that there is a reverse linear relationship between ;H2 ratio and profitability. /lso, results indicated that the return on owners equity had no significant relationship with the firm si#e and that it could not be expected its profitability regarding to future firm si#e. In &'+' another studies comes which also tells about the if profitability is increasing and operating activities does not always results into increase in the dividend pay)out ratio of pharma players in -u5arat. Decrease in taxation results into increase in dividend pay)out ratio while increase in annual sales growth, favourable capital market activities and higher liquidity affects the dividend pay)out ratio to rise.

Ob"ective of t#e $tudy

(

+0 To study the dividend payout ratios in Indian cement industry. &0 To find out factors influencing the dividend decisions of Indian cement industry. ,0 To analy#e impact of various determinants on dividend decisions by using the regression.

$co%e of t#e study

The study depicts the determinants of dividend policy for the period from &''()'* to &'+&)+,. This study only limited to the Indian cement industry. $or analy#ing we consider five ma5or companies on the basis of their total sales by an individual company these companies are) Dltra Tech 4ement /44 %imited /mbu5a 4ement %imited India 4ement industry ;irla 4orporation

Researc# &et#odolo'y
In this study descriptive research is done which give the following answer about what are the factors which affects dividend payout ratio in Indian cement industry, how much it can be distributed, when it is given to the investor. In this study only the secondary data will be use because this study is limited to the table work thats why no primary data will be use. In this report we are going to use a multiple regression model to establish the relation between the dividend payout by the Indian cement industry and the factors effecting the decision. The key independent variables are debts of the company .long term or short term0, /T .profit after tax0, !arning per share, "i#e of the $irm, %iquidity 1atio, etc. and as dependent variable we use dividend payout.

Com%lete (or) Plan (it# timelines

*

$e%tember to November (or) %lan In "eptember month we have go through with the different research to study the different aspects of the determinants of the dividend policy. In :ctober month we have completed the introduction and review of literature of the research paper. In @ovember month we have completed the research ob5ective, "cope of the research paper and the research methodology. *anuary to &ay (or) %lan In 6anuary to $ebruary month we will collect different data from the selected company. In 2arch to /pril month we will analy#e the collected data by using the regression In the month of 2ay we will conclude the whole study what we have done.

E+%ected outcome of t#e study

In this study the expected outcome is that dividend policy of any industry is how much effected by the certain factors and how these factors influence the dividend decision of the Indian cement industryI

+'

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+&