Impact of Dividend Policy Onshareholders' Value A Study of Indianfirms BSR

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This is to certify that the project titled IMPACT OF DIVIDEND

POLICY ON SHAREHOLDERS VALUE A STUDY
OF INDIAN FIRMS is an original work of the student and is being
submitted in partial fulfillment for the award of the Masters Degree
in Business Administration of Bangalore University The report has
not been submitted earlier either to this University!"nstitution for
fulfillment of the re#uirement of a course of study
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Dayananda sagar college of arts, science and commerce Page 1
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" BASAVARAJ BUDIWAL bearing register number
$%CQCMA160 hereby declare that this Dissertation titled IMPACT
OF DIVIDEND POLICY ON SHAREHOLDERS VALUE A STUDY OF
INDIAN FIRMS is an original work carried out by me under the
guidance of MR SR SHIVANAGIREDDY towards the
partial fulfillment of re#uirements for the MBA programme of the
Bangalore University This has not been submitted earlier to any
other University or "nstitution for the award of any degree! diploma!
certificate
(S!"#$%r& '( S$%)&"$*
D#$&:
P+#,&: B#"!#+'r&-
BASAVARAJ
BUDIWAL
(REGNO:
1.CQCMA160*
IMPACT OF DIVIDEND POLICY ONSHAREHOLDERS VALUE: A STUDY OF INDIANFIRMS
AC/NOLEDGEMENT
The successful completion of any task would be incomplete without
mentioning the people who made it possible and whose constant
guidance and encouragement secured us our success The study
being first of its kind
" heart fully thank my guide MR SR SHIVANAGIREDDY
D#0#"#")# 1#!#r ,'++&!& '( #r$1 21,&",& #") ,'33&r,& who
spared their value time and gave me practical suggestions and
guidance throughout this study
" am thankful to our &ead of the Department DR- DINA/AR for
this kind of support and help
" e'tend my gratitude to our Director DR- N SURESH ('r this kind
of support and help for the study
" would like to acknowledge with sincere gratitude for the
constructive guidance and encouragement " received from
4D#0#"#")# 1#!#r ,'++&!& '( #r$12 1,&",& #") ,'33&r,& 4(
affiliated to B#"!#+'r& U"5&r1$0 throughout the completion of my
study
" again e'tend my gratitude to all my faculty members for their
support throughout the completion of the dissertation
Basavaraj
budiwal
TABLE OF CONTENTS
S- "'- C'"$&"$1 P#!& "'-
$ "ntroduction
% )eview of the literature
* )esearch objectives
+ )esearch Methodology
, -intner Model. Analysis and findings
/ 0actor Analysis and )egression results on
1'tracted 0actors
2 3uadratic 4olynomial )egression Analysis 5
0indings
6 1vent study. Analysis 5 0indings
7 8onclusion
$9 8hapter plan
$$ :elected )eferences
$% Anne'ure
/EY TERMS
DIVIDEND PAYOUT RATIO. The percentage of earnings paid to
shareholders in dividends
8alculated as.
DIVIDEND POLICY: The policy a company uses to decide how much it
will pay out to shareholders in dividends
SHAREHOLDERS VALUE: The value delivered to shareholders because
of management;s ability to grow earnings( dividends and share price "n
other words( shareholder value is the sum of all strategic decisions that
affect the firm;s ability to efficiently increase the amount of free cash flow over
time
LINTNER MODEL: A model stating that dividend policy has two
parameters. <$= the target payout ratio and <%= the speed at which current
dividends adjust to the target
AGENCY COST: A type of internal cost that arises from( or must be paid to(
an agent acting on behalf of a principal Agency costs arise because of core
problems such as conflicts of interest between shareholders and management
:hareholders wish for management to run the company in a way that
increases shareholder value But management may wish to grow the company
in ways that ma'imi>e their personal power and wealth that may not be in the
best interests of shareholders
DIVIDEND SMOOTHING:
A concept that has its genesis in the dividend model proposed by
?ohn -intner <$7,/="t states that the firms strive towards dividend stability
and consistency The dividend paid during current year is governed by
dividend paid during previous year and variations in the earnings should not be
reflected in the dividend payout
INFORMATION ASSYMETRY.
A situation in which one party in a transaction has more or superior
information compared to another This often happens in transactions where the
seller knows more than the buyer( although the reverse can happen as well
4otentially( this could be a harmful situation because one party can take
advantage of the other partys lack of knowledge
EVENT STUDY:
An empirical study performed on a security that has e'perienced a
significant catalyst occurrence( and has subse#uently changed dramatically in
value as a result of that catalyst The event can have either a positive or
negative effect on the value of the security 1vent studies can reveal
important information about how a security is likely to react to a given
event( and can help predict how other securities are likely to react to
different events
PEC/ING ORDER HYPOTHESIS:
This hypothesis states that a company which prefers retention of
profits for financing the capital e'penditure from internal resources distributes
fewer dividends compared to a firm which finances the investment
e'penditure from e'ternal sources Thus( a negative relationship e'ists
between 8A41@ and dividend payout
ENTRENCHMENT HYPOTHESIS:
The hypothesis suggests an inverted U shaped relationship between
dividends and level of insider ownership Dividend may act as a substitute for
corporate governance below the entrenchment level insider ownership leading
to a negative relationship between these two variables After such critical
entrenchment level( however( when insider ownership increases are
associated with additional entrenchment related agency costs( dividend
policy may become a compensating monitoring force and accordingly a
positive relationship with insider ownership would be observed
DIVIDEND SIGNALING:
A theory that suggests company announcements of an increase in
dividend payouts act as an indicator of the firm possessing strong future
prospects The rationale behind dividend signaling models stems from game
theory A manager who has good investment opportunities is more likely to
AsignalA than one who doesn;t because it is in his or her best interest to do so
ABNORMAL RETURNS:
A term used to describe the returns generated by a given
security or portfolio over a period of time that is different from the e'pected
rate of return The e'pected rate of return is the estimated return based on an
asset pricing model( using a long run historical average or multiple
valuations
FACTOR ANALYSIS:
0actor analysis is a statistical procedure used to uncover
relationships among many variables This allows numerous intercorrelated
variables to be condensed into fewer dimensions( called factors
PANEL DATA:
4anel data is data from a <usually small= number of observations over
time on a <usually large= number of crossBsectional units like individuals(
households( firms( or governments
MULTIPLE REGRESSION ANALYSIS:
:tatistical procedure that attempts to assess the relationship between a
dependent variable and two or more independent variables 1'ample. :ales of a
popular soft drink <the dependent variable= is a function of various factors( such
as its price( advertising( taste( and the prices of its major competitors <the
independent variable=
IMPACT OF DIVIDEND POLICY ON SHAREHOLDERS VALUE: A
STUDY OF INDIAN FIRMS
$ INTRODUCTION
Dividend policy has been an issue of interest in financial literature
since ?oint :tock 8ompanies came into e'istence Dividends are commonly
defined as the distribution of earnings <past or present= in real assets among the
shareholders of the firm in proportion to their ownership C$,D Dividend policy
connotes to the payout policy( which managers pursue in deciding the si>e and
pattern of cash distribution to shareholders over time Managements primary
goal is shareholders wealth ma'imi>ation( which translates into ma'imi>ing the
value of the company as measured by the price of the companys common stock
This goal can be achieved by giving the shareholders a EfairF payment on
their investments &owever( the impact of firms dividend policy on shareholders
wealth is still unresolved

The area of corporate dividend policy has attracted attention of
management scholars and economists culminating into theoretical modelling
and empirical e'amination Thus( dividend policy is one of the most comple'
aspects in finance Three decades ago( Black <$72/= in his study on dividend
wrote( The harder we look at the dividend picture the more it seems like a
puzzle, with pieces that just dont fit together.$9Ghy shareholders like
dividends and why they reward managers who pay regular increasing dividends
is still unanswered
According to Brealey and Myers <%99%= dividend policy has been kept
as the top ten pu>>les in finance *+The most pertinent #uestion to be
answered here is that how much cash should firms give back to their
shareholdersH :hould corporations pay their shareholders through dividends or
by repurchasing their shares( which is the least costly form of payout from ta'
perspectiveH 0irms must take these important decisions period after period
<some must be repeated and some need to be revaluated each period on regular
basis=
Dividend policy can be of two types. managed and residual "n residual
dividend policy the amount of dividend is simply the cash left after the firm makes
desirable investments using I4J rule "n this case the amount of dividend is
going to be highly variable and often >ero "f the manager believes dividend
policy is important to their investors and it positively influences share price
valuation( they will adopt managed dividend policy The optimal dividend policy
is the one that ma'imi>es the companys stock price( which leads to ma'imi>ation
of shareholders wealth Ghether or not dividend decisions can contribute to the
value of firm is a debatable issue

0irms generally adopt dividend policies that suit the stage of life cycle
they are in 0or instance( highB growth firms with larger cash flows and fewer
projects tend to pay more of their earnings out as dividends The dividend
policies of firms may follow several interesting patterns adding further to the
comple'ity of such decisions 0irst( dividends tend to lag behind earnings( that
is( increases in earnings are followed by increases in Dividends and decreases
in earnings sometimes by dividend cuts :econd( dividends are EstickyF because
firms are typically reluctant to change dividendsK in particular( firms avoid
cutting dividends even when earnings drop Third( dividends tend to follow a
much smoother path than do earnings 0inally( there are distinct differences in
dividend policy over the life cycle of a firm( resulting from changes in growth
rat cash flows( and project investments in hand 1specially the companies
that are vulnerable to macroeconomic vicissitudes( such as those in cyclical
industries( are less likely to be tempted to set a relatively low maintainable
regular dividend so as to avoid the dreaded conse#uences of a reduced dividend
in a particularly bad year

:hareholders wealth is represented in the market price of the companys
common stock( which( in turn( is the function of the companys investment(
financing and dividend decisions Among the most crucial decisions to be
taken for efficient performance and attainment of objectives in any
organi>ation are the decisions relating to dividend Dividend decisions are
recogni>ed as centrally important because of increasingly significant role of
the finances in the firms overall growth strategy The objective of the finance
manager should be to find out an optimal dividend policy that will enhance value
of the firm "t is often argued that the share prices of a firm tend to be reduced
whenever there is a reduction in the dividend payments Announcements of
dividend increases generate abnormal positive security returns( and
announcements of dividend decreases generate abnormal negative security
returns A drop in share prices occurs because dividends have a signaling
effect According to the signaling effect mangers have private and superior
information about future prospects and choose a dividend level to signal that
private information :uch a calculation( on the part of the management of the
firm may lead to a stable dividend payout ratio
Dividend policy
$
of a firm has implication for investors( mangers
and lenders and other stakeholders <more specifically the claimholders= 0or
investors( dividends L whether declared today or accumulated and provided at a
later date are not only a means of regular income
%
( but also an important input
in valuation of a firm
*
:imilarly( managers fle'ibility to invest in projects is
also dependent on the amount of dividend that they can offer to shareholders as
more dividends may mean fewer funds available for investment -enders may
also have interest in the amount of dividend a firm declares( as more the
dividend paid less would be the amount available for servicing and redemption
of their claims The dividend payments present an e'ample of the classic agency
situation as its impact is borne by various claimholders Accordingly dividend
policy can be used as a mechanism to reduce agency costs The payment of
dividends reduces the discretionary funds available to managers for per#uisite
consumption and investment opportunities and re#uire managers to seek
financing in capital markets This monitoring by the e'ternal
$
Brealey <$77%= poses that dividend policy decisions as Ewhat is the effect of a
change in cash dividends( given the firms capital budgeting and borrowing
decisionsHF "n other words( he looks at the dividend policy in isolation and not as
byproducts of other corporate financial decisions
%
-inter <$7,/= finds that firms pay regular and predictable dividends to investors
whereas the earnings of corporate firms could be erratic This implies that
shareholders prefer smoothened dividend income
*
Bernstein <$72/= observes that given the Mconcocted earnings estimate provides
by firms( the low dividend payout induces reinvestment risk and earnings risk for
the investors
8apital markets may encourage the mangers to be more disciplined and act in
owners best interest
8ompanies generally prefer a stable dividend payout ratio because the
shareholders e'pect it and reveal a preference for it :hareholders may want a
stable rate of dividend payment for a variety of reasons )isk averse shareholders
would be willing to invest only in those companies which pay high current
returns on shares The class of investors( which includes pensioners and
other small savers( are partly or fully dependent on dividend to meet their dayB
toBday needs :imilarly( educational institutions and charity firms prefer stable
dividends( because they will not be able to carry on their current
operations otherwise :uch investors would therefore( prefer companies( which pay
a regular dividend every year This clustering of stockholders in companies with
dividend policies that match their preference is called clientele effect
1-. RELEVANCE OF THE STUDY
4revious empirical studies have focused mainly on developed
economies The study undertaken looks at the issue from emerging markets
perspective by focusing e'clusively on "ndian "nformation Technology( 0M8N
and :ervice sector respectively The major objective of this research is to
empirically e'amine rationale for stable dividend payments by finding the
applicability of -intner Model in "ndian scenario The present research work
also seeks to e'amine and identify the relative importance of some of
known determinants of dividend policy in "ndian conte't The research work
also has made an endeavor to bring to light the influence of ownership groups
of a company on dividend payout behavior of a firm This research tries to
unfold the relationship between the shareholders wealth and the dividend
payout and analy>e whether the dividend payout announcements affects the
wealth of the shareholders
Niven the diversity in corporate objectives and environments( it is
conceivable to have divergent dividend policies that are specific to firms(
"ndustries( markets or regions Through the research an attempt has been
made to suggest how dividend policy can be set at micro level 0inance
mangers would be able to e'amine how the various market frictions such as
asymmetric information( agency costs( ta'es( and transaction costs affect their
firms( as well as their current claimholders( to arrive at reasonable dividend
policies 4revious research studies have focused on dividend payment pattern
and policies of developed markets( which may not hold true for emerging
markets like "ndia "n "ndian 8onte't( few studies have analy>ed the dividend
behavior of corporate firms and focused on "ndian cotton te'tile "ndustry and
Manufacturing sector &owever( it is still not apparent what the dividend
payment pattern of firms in "ndia is Jery few studies have analy>ed the
dividend behavior of corporate firms in the "ndian conte't To date( most
studies have paid attention on influence of cash flows or earnings on the dividend
payment of a firm
0urther( for the dividend policy makers of the "ndian "T( 0M8N 5 :ervice
"ndustry( the study may prove to be useful for reBsketching their dividend policy
keeping in view the analysis( results and discussions presented Through the
research one can have better Understanding of the factors that should
systematically affect firms payout decisions "t also gives insight into what kind
of ownership structure is beneficial for the shareholders
$* SHAREHOLDERS VALUE CREATION AND ITS LIN/AGE
WITH DIVIDEND POLICY DECISIONS
"t has been recogni>ed by various research studies that a dividend
policy could make significant impact on corporate future value when established
and carefully followed The goal of wealth ma'imi>ation is widely accepted goal
of the business as it reconciles the varied( often conflicting( interest of the
stakeholders
The interest in shareholders value is gaining momentum as a result of
several recent developments.
O The threat of corporate takeovers by those seeking undervalued( under managed
assets
O "mpressive endorsements by corporate leaders who have adopted the
approach
O The growing recognition that traditional accounting measures such as 14: and
)P" are not reliably linked to the value of the companys shares
O )eporting of returns to shareholders along with other measures of performance in
business press
O QA growing recognition that e'ecutives longterm compensation needs to be more
closely tied to returns to shareholders
The Eshareholders value approachF estimates the economic value of an
investment <eg shares of a company( strategies( mergers and ac#uisitions(
capital e'penditure= by discounting forecasted cash flows by the cost of capital
These cash flows( in turn( serve as the foundation for shareholder returns from
dividends and share price appreciation
A going concern must strive to enhance its cash generating
ability The ability of a company to distribute cash to its various constituencies
depends on its ability to generate cash from operating its business and on its
ability to obtain any additional funds needed from e'ternal sources Debt and
e#uity financing are two basic e'ternal sources Borrowing power and the
market value of the shares both depend on a companys cash generating ability
The market value of the shares directly impacts the second source of financing(
that is( e#uity financing 0or a given level of funds re#uired( the higher the share
price( the less dilution will be borne by current shareholders Therefore(
managements financial power to deal effectively with corporate claimants also
comes from increasing the value of the shares This increase in value of shares
can be brought about by rewarding shareholder with returns from dividends and
capital gains
The most famous statement about the relationship between dividend
policy and corporate value claimed that( in the presence of perfect markets(
Egiven a firm;s investment policy( the dividend payout policy it chooses to
follow will affect neither the current price of its shares nor the total return to
its shareholdersF &owever( Amarket imperfections as differential ta' rates(
information asymmetries between insiders and outsiders( conflicts of
"nterest between managers and shareholders( transaction costs( flotation
costs( and irrational investor behavior might make the dividend decision relevant
The relevance of dividend policy to corporate value is due to market
imperfections :hareholders can receive the return on their investment either in
the form of dividends or in the form of capital gains Dividends constitute an
almost immediate cash payment without re#uiring any selling of shares Pn the
contrary( capital gains or losses are defined as the difference between the sell and
buy price of shares 0riction costs are one of the market imperfections and are
further distinguished in transaction costs( floatation costs and ta'es Another
market imperfection is that of information asymmetries between the insiders
<eg managers= and the outsiders <eg investors= Agency conflicts( stemming
from the different objectives of company;s stakeholders( form the third
market imperfection 0inally( there are some other issues that are related to
dividend policy and cannot be placed among the previously mentioned
imperfections
.- REVIEW OF THE LITERATURE

The research aims at analy>ing information asymmetry( agent conflicts(
signaling effect and corporate dividend policy determinants This section on
literature review is focused on various models and theories that are relevant to our
study
The review of the literature is organi>ed into various schools of thoughts on
dividend policy which are discussed as follows.
.-1 DIVIDEND IRRELEVANCE PROPOSITION: MODIGLIANI
6MILLER APPROACH (1761*
"n $7/$( two noble laureates( Merton Miller and 0ranco Modigiliani
<M5M= showed that under certain simplifying assumptions( a firms dividend
policy does not affect its value The basic premise of their argument is that firm
value is determined by choosing optimal investments The net payout is the
difference between earnings and investments( and simply a residual Because
the net payout comprises dividends and share repurchases( a firm can adjust its
dividends to any level with an offsetting change in share outstanding 0rom the
perspective of investors( dividends policy is irrelevant( because any desired
stream of payments can be replicated by appropriate purchases and sales of
e#uity Thus( investors will not pay a premium for any particular dividend policy
%
M5M concluded that given firms optimal investment policy( the firms
choice of dividend policy has no impact on shareholders wealth "n other
words( all dividend policies are e#uivalent The most important insight of
Miller and Modiglianis analysis is that it identifies the situations in which
dividend policy can affect the firm value "t could matter( not because dividends
are EsaferF than capital gains( as was traditionally argued( but because one of
the assumptions underlying the result is violated The propositions rest on the
following four assumptions.
$ "nformation is costless and available to everyone e#ually % Io distorting
ta'es e'ist
* 0lotation and transportation costs are nonB e'istent
+ Ion contracting or agency cost e'ists
.-. DIVIDEND POLICY AND AGENCY PROBLEMS

The level of dividend payments is in part determined by shareholders
preference as implemented by their management representatives &owever(
the impact of dividend payments is borne by a variety of claim holders(
including debt holders( managers( and supplier The agency relationship e'ists
between
O The shareholders versus debt holders conflict( and
O The shareholder versus management conflict
:hareholders are the sole receipts of dividends( prefer to have large dividend
payments( all else being e#ualK conversely( creditors prefer to restrict dividend
payments to ma'imi>e the firms resources that are available to repay their
claims The empirical evidence discussed is consistent with the view that
dividends transfer assets from the corporate pool to the e'clusive ownership of
the shareholders( which negatively affects the safety of claims of debt holders
"n terms of shareholderB manger relationships( all else being e#ual(
managers( whose compensation <pecuniary and otherwise= is tied to firm
profitability and si>e( are interested in low dividend payout levels A low
dividend payout ma'imi>es the si>e of the assets under management control(
ma'imi>es management fle'ibility in choosing investments( and reduces the
need to turn to capital markets to finance investments :hareholders( desiring
managerial the need to turn to capital markets to finance investments
:hareholders( desiring managerial efficiency in investment decisions( prefer to
leave little discretionary cash in managements hands and to force mangers to
turn to capital markets to fund investments These markets provide monitoring
services that discipline managers Accordingly( shareholders can use dividend
policy to encourage managers to look after their owners best interestsK higher
payouts provide more monitoring by the capital markets and more managerial
discipline
-a 4orta( -ope>B de L :ilannes ( :hleifer ( and Jishny <%999= %9(
have argued that a legal environment provides strong protection to shareholders
enables them to force companies to disgorge cash The implication is that
effective monitoring by shareholders in UR( where legal protection is strong(
should be associated with higher dividend payments :tudies for the UR where
empirical evidence on the relationship between dividends and ownership
structures is rather limited show that there is a negative relationship between
Minside ownership and dividends <:hort (Shang and Reasey(%99%(
)enneboog and Trojanowski(%99,( 0arinha( %99*=&owever ( evidence
regarding financial institutions is not only limited but also contradictory.
:hort (Shang and Reasey report a positive relationship between dividends
and shareholding by financial institutions while )enneboog and
Trojanowski find a negative
:ome of the important )esearch studies on agency conflicts are Berle and
Means <$7*%=( 1asterbrook analysis <$76+=( the ?ensen 5 Meckling <$76/= $6(
-ang and -in>enberger <$767=( ?ensen( :olberg and Sorn <$77%= Agrawal and
?ayaraman <$77+= $( Toon and :tarks <$77,=( Denis( Denis( and :arin <$772=
&eaton <%99%=
.-8 DIVIDEND POLICY AND ASYMMETRIC INFORMATION
"n a symmetrically informed market( all interested participants have the
same information about a firm( including mangers( bankers( shareholders( and
others &owever( if one group has superior information about the firms
current situation and future prospects( an informational asymmetry e'ists
Most academics and financial practitioners believe that managers possess
superior information about their firms relative to other interested parties
Dividend changes <increases and decreases=( dividend initiations <first time
dividends or resumption of dividends after lengthy hiatus=( and elimination of
dividend payments are announced regularly in the financial media "n response
to such announcements( share prices usually increase following dividend
increases and dividend initiations( and share prices usually decline following
dividend cuts and dividend eliminations The idea that dividend payouts can
signal a firms prospects seems to be well accepted among the chief financial
officers <80Ps= of large U: corporations "n a survey of these e'ecutives
conducted by Abrutyn and Turner <$779=( /*U of the respondents ranked
signaling e'planation as the first reason for dividend payouts
"nformation about the prospects of a firm may include the firm;s
current projects and its future investment opportunities The firm;s dividend
policy( either e'clusively or in combination with other signals( such as capital
e'penditure announcements or trading by insiders( may communicate this
information to a less informed market 1mpirical studies in this area include
Akerlofs <$729= Bhattacharya model <$727=( ?ohn and Gilliams model <$76,=
Miller and )ock model <$76,= 8onstantinides and Nrundy <$767= ?ohn and
Iachman <$76/= Rale and Ioe <$779=( Allen Bernado ( and Gelch <%999=
4ettit <$72%= documented that announcements of dividend increases
are followed by significant price increases and that announcements of dividend
decreases are followed by significant price drops Three studies of large changes
in dividend policyVAs#uith and Mullins <$76*= <dividend initiations=( &ealy and
4alepu <$766=( and Michaely( Thaler( and Gomack <$77,= <dividend omissions=V
showed that the market reacts dramatically to such announcements/ Pther
research studies which tested the dividend announcement effects include Aharony
and :wary <$769= Pfer and :iegel <$762= %,Q( Dyl and Geigand <$776=
1mpirical studies however showed mi'ed evidence( using the data from
U:( ?apan and :ingapore markets A number of studies found that stock price
has a significant positive relationship with dividend payments <Nordon <$7,7=
(Pggden <$77+= (:tevents and ?ose<$767=(Rato and -oewenstein <$77,= (Ariff
and 0inn<$76/=(and -ee<$76,==(while others found a negative relationship like
-oughlin<$767= and 1aston and :inclair<$767==
Dividends are meant convey private information to the market( predictions
about the future earnings of a firm based on dividend information should be
superior to forecasts made without dividend informationA number of studies
have tested these implications of the information content of dividends which
includes studies by Gatts <$72*= Nonedes <$726= 8harest <$726= Michaely (
Thaler and Gomack <$77,= Benart>i( Michaely( and Thaler <$772= Nrullon(
Michaely and :waminathan <%99%-ipson( Ma#uieira( and Megginson <$776=
Brook( 8harlton( and &endershott <$776= Iissim and Siv <%99$=
$$
.-9 RESEARCH ON CORPORATE DIVIDEND POLICY DETERMINANTS
Black <$72/= in his study concluded with the following #uestion. E
Ghat should the corporation do about dividend policyH Ge dont knowF A
number of factors have been identified in previous empirical studies to influence
the dividend policy decisions of the firm 4rofits have long been regarded as the
primary indicator of the firms capacity to pay dividends -intner <$7,/=
conducted a classic study on how U: managers make dividend decisions &e
developed a compact mathematical model based on survey of %6 wellB
established industrial U: firms which is considered to be a finance classic
According to him the current year earnings and previous year dividends influence
the dividend payment pattern of a firm%%

0ama and Babiak <$7/6= studied the determinants of dividend
payments by individual firms during $7+/B/+ The study concluded that net
income seems to provide a better measure of dividend than either cash
flows or net income and depreciation included as separate variables in the
model Baker( 0arrelly and 1delman <$76/= surveyed *$6 Iew Tork stock
e'change firms and concluded that the major determinants of dividend
payments are anticipated level of future earnings and pattern of past dividends
4ruitt and Nitman <$77$= asked financial managers of the $999 largest U: and
reported that( current and past year profits are important factors influencing
dividend payments and found that risk <year to year variability of earnings=
also determine the firms dividend policy %6Q Baker and 4owell <%999=
concluded from their survey of IT:1Blisted firms that dividend determinants are
industry specific and anticipated level of future earnings is the major determinant
7
"n other studies( )o>eff <$76%=( -loyd et. al. <$76,=( and 8olins et. al.
<$77/= used beta value of a firm as an indicator of its market risk They found
statistically significant and negative relationship between beta and dividend
payout D:ou>a <$777= also found statistically significant and negative
relationship between beta and dividend payout*9 D(:ou>a <$777= however
showed a positive but insignificant relationship in the case of growth and
negative but insignificant relationship in case of market to book value$% Alli
et.al <$77*= reveal that dividend payments depend more on cash flows( which
reflect the companys ability to pay dividends( than on current earnings(
which are less heavily influenced by accounting practicesNreen et. al.
<$77*= #uestioned the irrelevance argument and investigated the relationship
between the dividends and investment and financing decisions Their study
showed that Dividend decision is taken along with investment and financing
decisions The results however do not support the views of Miller and
Modigliani <$7/$= %* Dhrymes and Rur> <$7/2= and Mc8abe <$727= found
that the firms investment decision is linked to its financing decision &iggins
<$72%=(
0ama <$72+=( and :mirlock and Marshall <$76*= documented no interdependence
between investments and dividends
&iggins <$76$= indicated a direct link between growth and financing needs.
rapidly growing firms have e'ternal financing needs because working capital
needs normally e'ceed the incremental cash flows from new sales$/ )o>eff
<$76%=( -loyd et al.<$76,= and 8ollins et al <$77/= all show significantly
negative relationship between historical sales growth and dividend payout
Arnott and Asness <%99*= based their study on American stock
markets <:54,99= and found that higher aggregate dividend payout ratios
were associated with higher future earnings growth Both Shou and
)uland<%99/= and Nwilym et.al. <%99/= supported the findings of Arnot and
Asness Shou and )uland e'amined the possible impact of dividend payouts on
future earning growth Their study used a sample of active and inactive stocks
listed on IT:1 and IA:DA3 with positive( nonB >ero payout ratio companies
covering the period from $7,9B %99*Their regression results showed a strong
positive relation between payout ratio and future earnings growth Mancinelli and
P>kan <%99/= undertook an empirical investigation of the relationship
between the ownership structure of companies and dividend policy using $*7
firms listed in "talian e'change Their results suggested that the dividend payout
ratio is negatively associated with the voting rights of the largest shareholders
Mohammed Amidu and ?oshua Abor<%99/= e'amined the factors affecting
dividend payout ratios of listed companies in Nhana The results of their study
showed that payout ratios were positively related to profitability( cash flow and ta'
but are negatively related risk and growth ,
.-: INDIAN SCENARIO
"n "ndian 8onte't( a few studies have analy>ed the dividend behavior
of corporate firms Rrishnamurty and :astry <$72$= analy>ed dividend behaviour
of "ndian chemical industry for the period $7/%B/2 and undertook crossectional
data of +9 4ublic -imited companies The results revealed that -intner
model provides good e'planation of dividend behaviorDhameja <$726= in
his study tested the dividend behaviour of "ndian companies by classifying them
into si>e group( industry group( growth group and control group The study found
there was no statistically significant relationship between dividend payout( on the
one hand and industry and si>e on the other Nrowth was inversely related to
dividend payout and was found to be significant

The main conclusions were that dividend decisions are better
e'plained by -intners model with current profit and lagged dividend as
e'planatory variable Mahapatra and :ahu <$77*= found cash flows as a major
determinant of dividend followed by net earnings*, Bhat and 4andey <$77+=
undertook a survey of managers perceptions of dividend decisions and found
that mangers perceive current earnings as the most significant factor
Iarsimhan and Asha<$772= observed that a the uniform ta' rate of $9 U on
dividend as proposed by Union Budget $772B76 ( alters the demand of investors
in favor of high payouts*% Mohanty <$777= found that firms( which
issued bonus shares( have either maintained the payout at the pre bonus level
or only decreased it marginally thereby increasing the payout to
shareholders*/Iarsimhan and Jijay-akshmi <%99%= analysed the influence
of ownership structure on dividend payout of $6/ manufacturing firms
)egression analysis shows that promoters holding as of :eptember %99$ has no
influence on average dividend payout for the period $772B%999%/**
Anand Manoj <%99%= analy>ed the results of %99$ survey of 6$ 80Ps of
Business todayB,99 companies in "ndia to find out the determinants of the
dividend policy decisions of the corporate "ndia &e used factor analytic
framework on the 80Ps; responses to capture the determinants of the dividend
policy of corporate "ndia The findings revealed that most of the firms have target
dividend payout ratio and were in agreement with -intner;s study on dividend
policy 80Ps use dividend policy as a signaling mechanism to convey
information on the present and future prospects of the firm and thus affects its
market value The managers design dividend policy after taking into
consideration the investors; preference for dividends and clientele effect
C+$D)eddy T:ubba and )ath :ubhrendu <%99,= e'amined Dividend trends for
large sample of stocks traded on "ndian markets indicated that the percentage
of companies paying dividend declined from over ,2U in $77$ to *%U in %99$(
and that only a few firms paid regular dividends Dividend L paying companies
were less likely to be larger and more profitable than nonBpaying companies(
though growth opportunities do not seem to have significantly influenced the
dividend policies of "ndian firms
The rise of the number of firms not paying dividends is not
supported by the re#uirements of cash for investments C+9D :harma Dhiraj
<%992= empirically e'amined the dividend behavior of select "ndian firms listed
on B:1 from $779 to %99,The study analy>ed whether or not the dividends are
still vogue in "ndia and tried to judge the applicability of one of the two
e'tremely opposite schools of thoughtsBrelevance and irrelevance of dividend
decision The study also analy>ed the applicability of ta' theory in the "ndian
conte't The findings offered mi'ed and inconclusive results about ta' theory
indicating that the change in the ta' structure does not have a substantial effect on
dividend behavior of firmsC+%D
A number of conflicting theoretical models( all lacking strong empirical
support( define recent attempts by researchers in finance to e'plain the
dividend phenomenon But to come with concrete conclusions an intensive study
of all theoretical models together with empirical proof is needed The e'tensive
literature on dividend policy in the last five decades have been unable to reach
a consensus on research on a general dividend theory that can either e'plain the
process of dividend decision making or predict an optimal dividend policy
Therefore it becomes important to study dividend behavior of "ndian
companies using the framework of empirical models
8- RESEARCH OBJECTIVES:
The study is focused on achievement of following four objectives.
$ To empirically e'amine the determinants of dividend smoothing by firms and
find out its linkage with information content of dividends
%To analy>e the influence of firms characteristics like profitability( growth(
risk( cash flows( agency cost and on dividend payment pattern ie to
identify various determinants of dividend payout
* To investigate the association between various ownership groups and dividend
payout policies of "ndian corporate firms
+ To find the impact of dividend announcement on shareholders wealth
9- RESEARCH METHODOLOGY

"n this section a brief overview of various dimensions of the research( tools
and techni#ues and methods used to achieve various research objectives has been
discussed
9-1 THE DATA AND SAMPLE
The study is focused on three sectors "T( 0M8N and :ervice sector
IT 1&,$'r

"T sector has been chosen for study because it is a sunshine sector of
"ndia "t currently accounts for almost +6U of "ndias ND4 "t will account
for 2U of "ndias ND4 by %9$9The dividend payment pattern of "T companies
have changed leaps and bounds over past few years They were at the bottom of
the charts in terms of dividend payout in %999 and but after %99+ there was a
sudden spurt in their dividend payout To the best of our knowledge( so far no
study has been undertaken in "ndia to empirically test the above stated four
research objectives in the "ndian "T sector Therefore( this sector has been
chosen for study
FMCG
0M8Ns <0ast Moving 8onsumer Noods= are those goods and products(
which are nonBdurable( mass consumption products( available off the shelf
0M8N industry has been chosen for study because it has played a major role in
the "ndian economy during the last few years and it is registering an uptrend in
growth 0M8N stocks are known as Edividend yieldF stocks 0M8N companies
are consistent dividend payers :o it would be an interesting e'ercise to study
the dividend payment pattern of 0M8N companies

SERVICE SECTOR
"ndian service sector comprises of trade hotels( transport( communication(
"T and software( banking and insurance etc Till %99% service sector was
ignored in "ndia and the main emphasis was on manufacturing and agricultural
sector "t was only after %99% that service sector started growing at a healthy rate
of 6B$9U Today it is the highest contributor to the ND4 of our economy
THE DATA
The research is analytical and empirical in nature and makes use of
secondary data The data has been sourced from 4rowess database of 8entre for
Monitoring "ndian 1conomy <8M"1= The sample period undertaken for study of
each objective is from the year %999 to %996 e'cept for the third objective(
which is from the year %99$ to %996 due to nonBavailability of data for the
year %999 The data has been taken after %999 because of definitional change in
the shareholding pattern
The data used for achieving each objective was made suitable for
analysis as per the methodology Thus( the data collected from 4rowess database
has been complied and used with due care and caution as per the re#uirement
of the study The analysis has been carried out on both panel and pooled data
depending on the re#uirements of the techni#ues used for analysis
The analysis of first and third research objective has been carried out
on panel data as panel data overcomes the various shortcomings of purely
cross sectional or time series data

THE SAMPLE
The sectoral analysis has been done by taking sample of companies(
which are the constituents of 8I@ "T( 8I@ 0M8N and 8I@ :ervice :ector
respectively
"n order to have a good benchmark of the "ndian "T sector( "":- <"ndia "nde'
services and 4roduct -td= has developed the 8I@ "T sector inde' "":- is a joint
venture between I:1 and credit rating agency 8)":"- -td The sample
selected for study consists of all the companies( which are constituents of
8I@ "T inde' of I:1
Akin to 8I@ "T inde'( "":- <"ndian "nde' :ervices and 4roducts -td= has
developed the 8I@ 0M8N sector inde' The 8I@ 0M8N "nde' is a $, stock
"nde' from the 0M8N sector that trade on the Iational :tock 1'change
"n the similar manner to do analysis of research objectives in service
sector( all the companies( which are constituent of 8I@ service sector "nde'(
have been undertaken 8I@ service sector inde' is a %7 stock inde' developed by
"":-
The list of the sample companies for each of the sector has been appended to
the anne'ure <Anne'ure "=

9-. MODELS AND TECHNIQUES
0or the conduct of the study various models have been developed and
used This section discusses these models and various tools and techni#ues used to
carry out the research
9-.-1 LINTNER MODEL
-intner <$7,/= developed a model to study the determinants of the
dividend behavior of American corporations assuming that the dividend payout
is a function of net current earnings after ta' <4AT= and dividend paid during
the previous year ie lagged dividend <Div
tB$
= 8ompanies decide to payout a
fi'ed proportion of their net profits as dividend to common stockholdersK but in
view of their well known preference for stable dividends may try to achieve the
target level only by a fraction of the amount indicated by the target payout ratio
whenever profit changes The above theoretical formulation of -intner has been
used as an estimating e#uation for corporate dividend in the present study( which
is as followsB
DW
it
X O
i
1
it
YYYYYYYYYYYYYYYYYYYYYYYYYY<$=
D
it
LD
i<tB$=
Xa
i
Z 8
i
[DW
it
BD
i<tB$=
\Z
u
it
YYYYYYYYYYYYYYYY<%= Ghere(
DW
it
X desired dividend payment during periodMt D
it
X Actual dividend payment
during periodMt O
i
X Target payout ratio
1
it
X 1arnings of firm during periodMt a
i
X a constant related to dividend growth
8
i
X partial adjustment factor
u
it
X error term
D
it
LD
i<tB$= X
a
i
Z 8
i
[ O
i
1
it
BD
i<tB$=
\Z u
it
YYYYYYYYYYYYYYY<*= D
itX
aZ O
i
8
i
1
it Z
<$B8
i
= D
i<tB$=
Zu
it
YYYYYYYYYYYYYYYY<+=
This model can further be simplified in the form of a multiple regression e#uation
D
tX
aZ O
i
1
it Z
8
i
D
<tB$=
Zu
it
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
<,=
To understand the relationship between dividend and earnings <4AT= a
Multiple linear regression analysis was carried out in respect of companies which
are constituent of 8I@ "T inde'( 8I@ 0M8N "nde' and 8I@ :ervice sector
"nde' respectively( for panel data of 7 years ie from %999 to %9960i'ed effect
<one way= static panel data analysis has been carried
LINTNER MODEL USED:
TX] Z ^
$
@
$
Z ^
%
@
%
; u
it
Z O
it
YYYYYYYYYYYYYYYY YYY</=
Ghere(
TX dependent variable <e#uity dividend in )s crore during period t= @
$
X
independent variable <4AT= in )s 8rore
] X 8onstant
^
$
X regression coefficient of 4AT <target payout ratio= @
%
X 1#uity dividend during
period tB$
^
%
X regression coefficient of dividend during period tB$ ie <$Bc= and c is the
adjustment factor
u
it
X firm specific components O
it
X disturbance term
Therefore(
Target payout ratioW adjustment factor X <
1
OiW 8i X <
1
OiW<$B<
.
* = <
1
T>1 3?+&1 O
"
X target payout ratio X <
1
@(1A<
.
* :peed of adjustment factorX(1A
<
.
*
Thus( t he regression results forms the basis of testing the applicability of
-intner model which is a finance classic in each of the sectors
9-.-.- FACTOR ANALYSIS
To know the key determinants of corporate dividend payout ratios for "ndian
"nformation Technology( 0M8N and :ervice sectors factor analysis is used Pn
the basis of literature review( the following key variables have been identified that
influence the dividend payout ratio of the firm
TX 1#uity dividend <in crores=(@
$
X4AT <in )s crore=(@
%
X-agged
dividend <)s crore=(@
*
X8urrent ratio of firm Mi during periodt( @
+
XDebt
e#uity ratio of firm Mi during periodt(@
,
X 3uick ratio of firm Mi during
periodt(@
/
X Annual sales growth of firm Mi during periodt(@
2
X Iatural log
Iational :tock 1'change adjusted average closing stock prices of the firm i
during period Mt( @
6
X 8ashflows of firm Mi during period Mt(@
7
X )etained
profits of the firm Mi during periodMt(@
$9
X 8apital e'penditure or Nross fi'ed
assets <tB<tB$==(@
$$
X Iifty beta of firm Mi during periodMt(@
$%
XMarket
capitalisation of firm Mi during period Mt(@
$*
X4rice earning ratio of firm Mi
during period Mt(@
$+
X4rice to book value ratio of firm Mi during
periodt(@
$,
X 4romoter holding of firm Mi during periodt(@
$/
X Iatural
-og of Total assets of firm Mi during periodt(@
$2
X "nterest coverage ratio
of firm Mi during periodt(@
$6
X )PIG of the firm Mi during period Mt( @
$7
X
)P1 of firm Mi during period Mt(@
%9
X-agged 4AT <in )s crore=( @
%$
X
:tandard deviation of earnings per share
The statistical techni#ues of 4rincipal 8omponent 0actor analysis and
regression analysis were used to e'plore the relationship between these
variables :ince the variables identified as per the available literature were not
on same scale Therefore all the variables were standardised and converted to
same scale The final analysis was carried by reckoning the following key
variables
TX dividend payout ratio @
$
X4AT to assets ratio
+
@
%
X-agged dividend ratio
@
*
X8urrent ratio of firm Mi during periodt @
+
XDebt e#uity ratio of firm Mi
during periodt
@
,
X 3uick ratio of firm Mi during periods
@
/
X Annual sales growth of firm Mi during periods
,
@
2
X Iatural log Iational :tock 1'change adjusted average closing stock prices of
the firm i during period Mt
@
6
X 8ash flows ratio of firm Mi during periodMt
/

+
"n 0M8N and :ervice sector respectively 4AT has been e'pressed as U of
total assets At the same time to obtain better results total assets was substituted by
gross fi'ed assets in "T sector
,
"n case of constituent companies of 8I@ :ervice sector the annual sales
growth was replaced with growth in revenue as majority of the constituents of this
"nde' are banks where sales growth figure is not available
/
"n case "T and
0M8N sector cashflows have been e'pressed as a percentage of
Ietsales&owever( in case of :ervice sector cashflows ratio has been computed by
e'pressing cashflow as aU of 4B"T
@
7
X )etained ratio of the firm Mi during periodMt
@
$9
X 8apital e'penditure or Nross fi'ed assets <tB<tB$== to fi'ed asset ratio @
$$
X
Iifty beta of firm Mi during periodMt
@
$%
XIatural log of Market capitalisation of firm Mi during period Mt @
$*
X4rice
earning ratio of firm Mi during period Mt
@
$+
X4rice to book value ratio of firm Mi during period Mt @
$,
X 4romoter holding
of firm Mi during period Mt
@
$/
X -og of Total assets of firm Mi during period Mt @
$2
X "nterest coverage ratio
of firm Mi during period Mt @
$6
X )PIG of the firm Mi during period Mt
@
$7
X )P1 of firm Mi during period Mt
@
%9
X-agged 4AT to lagged assets ratio <in )s crore=
2
@
%$
X :tandard deviation of
earning per share
A twoB step multivariate procedure is employed where the data are
first subjected to a factor analysis and then multiple regressions are performed on
e'tracted factors
6
"n the first step( a set of dimensions <unobservable
attributes= were measured by relating them to observable pro'y variables using
factor analysisC$*D "n the second step( the relationship between e#uity dividend
and dimensions obtained from first step was estimated using regression
analysis The e#uity dividend payout ratio <T= is the dependent variable and
other variables
<@
$
(@
%
(@
*
(@
+
(@
,(
@
/
(@
2
(@
6
(@
7
(@
$9
(@
$$
(@
$%
(@
$*
(@
$+
(@
$,
(@
$/
(@
$2
(@
$6
(@
$
7
(@
%9
(@
%$
(@
%%
= are taken as independent variables
The first model can be e'pressed as
@XBTZ 1 YYYYYYYYYYYYYYYYYYYYYYYYYYYYY
<2=
Ghere @ is a matri' of independent variables( T is a vector of unobservable
factorsK B is the vector of error terms
The regression model for second step is shown in e#uation <6=
D4) X ]
9 Z
_
iX$ to n
]
i
`i Z a
YYYYYYYYYYYYYYYYYYYYY<6= Ghere(
`i represents factor i ( ]
i
its regression coefficient (]
9
is the intercept ( and a is
the error term
The :cree plot method has also been used
9-.-8 QUADRATIC POLYNOMIAL REGRESSION ANALYSIS USING
PANEL DATA
The results in "T sector are reported by e'pressing lagged 4AT as aU of gross
fi'ed assets
Dillion and Nolstein ($76+= Alli - Rasin( Rhan 3ayyum()amire> N Nabriel (
Determinants of 8orporate Dividend 4olicy . A factorial Analysis( The 0inancial
)eview ( Jol%6Io+ ( Iovember $77*
Apart from the above determinants of corporate dividend policy( influence of
ownership groups on dividend payout has also been reported by the previous
studies The key ownership variables that can affect Dividend 4ayout <D4 ratio=
are as follows.
O 4romoter holding <4ercentage of e#uity shares held by promoters ie persons in
overall control of the company=
O "nstitutional holding <Aggregate percentage of e#uity shares held by
"nsurance companies( Mutual funds( 0inancial "nstitutions( banks( Jenture capital
funds=
O 0oreign institutional investment <4ercentage of e#uity shares held by
companies registered in country other than the country in which they are currently
investing=
O corporate holding <4ercentage of e#uity shares held by corporate bodies=
O Debt e#uity ratio <)atio of total debt to e#uity capital( measure of
leverage "t is used to address debt holders and shareholders conflicts=
The basic reason of using a #uadratic polynomial regression is that the
relationship is supposed to have only one knot ie increasing effect up to the
threshold and decreasing thereafter or vice versa 4revious studies have
hypothesised that the ownership control would have nonBlinear relationship ie
positive up to a threshold level and negative thereafter due to shift in priorities
and benefits to owners
0or the analysis the s#uare of the variables namely( <promoters=
%
K
<institutional=
%
( <foreign=
%
and <corporate=
%
to e'amine the presence of nonB
linearity in ownership effect after a certain threshold has been included The
s#uared percentages have been taken in the model to test for the hypothesi>ed
parabolic relation between dividend payout and ownership groups A
negative coefficient for ownership variables and a positive coefficient for
s#uared ownership variables support the postulated relation 1#uation 7 and $9
shows the model developed for analysing the third research objective The
techni#ue of #uadratic polynomial regression analysis has been used for data
analysis
LINEAR MODEL:
Dividend
payout
it
X]iZ^
$
@
$it
Z^
%
@
%it
Z^
*
@
*it
Z^
+
@
+it
Z^
,
@
,it
Zu
it
ZO
it
ZO
it
YYYYYY
<7=
TX Dividend payout ratio of firm Miduring time period Mt @
$it
X 4romoter holding
of firm Miduring time period Mt
@
%it
X "nstitutional holding of the firm Miduring time period Mt @
*it
X 8orporate
holding of the firm Miduring time period Mt
@
+it
X 0oreign institutional holding of the firm Miduring time period Mt @
,it
X Debt
1#uity ratio of firm Miduring time period Mt
QUADRATIC POLYNOMIAL MODEL
Dividend payout
it
X ]i Z ^
$
@
$it
Z ^
%
@
%it
Z ^
*
@
*it
Z ^
+
@
+it
Z ^
,
@
,it
Z ^
/it
@
/it
Z ^
2
@
2it
Z^
6
@
6it
Z^
7
@
7it
Zu
it
ZO
it
ZO
it
YYYYYYYYYYYYYYYYYYYYY
Y<$9= Ghere (
u
it
X firm specific components( O
it
X time specific components ( O
it
X disturbance
term
TX dividend payout ratio of firm Miduring time period Mt @
$it
X 4romoter holding
of firm Miduring time period Mt
@
%it
X "nstitutional holding of the firm Miduring time period Mt @
*it
X 8orporate
holding of the firm Miduring time period Mt
@
+it
X 0oreign institutional holding of the firm Miduring time period Mt @
,it
X Debt
1#uity ratio of firm Miduring time period Mt
@
/it
X:#uare of promoter holding of firm Miduring time period Mt
@
2it
X :#uare of "nstitutional holding of the firm Miduring time period Mt @
6it
X
:#uare of 8orporate holding of the firm Miduring time period Mt
@
7it
X :#uare of foreign institutional holding of the firm Miduring time period Mt
"f the coefficients are assumed to be fi'ed then the coefficients are
estimated by dummy variable models This estimation approach is known as fi'ed
effect approach which yields consistent estimates regardless of correlation
between firm specific error component and regressors "f the dummy variables are
taken for the firms only then the model is called one way fi'ed effect model( and
if taken both for firm and time then the model is known as Two way fi'ed
effect model *2
The results were obtained by estimating the above Lmentioned static panel
models( 0 Ltest <Moulto and )andolph( $767=( -angrange Multiplier <-M= test
<Breusch and 4agan ($769= (and &ausman specification test <&ausman ($726="t
was necessary to carry out these tests to know the significance of the firm and
time effects in the data sets( and to find out a appropriate panel data method for
estimation of the mode
The -agrange Multiplier <-M= test shows the acceptability of panel data
models over classical regression models -angrange Multiplier test statistics
indicate that either the fi'ed effect firm and firm and models or the random
effect firm and firm and time models are to preferred to 8lassical -inear
)egression model */&igh values of &ausman statistics indicate the use of
fi'ed effect models over )andom 1ffect models and the low value of &ausman
statistics induces to use the )andom effect models The 0 test and -ikelihood
)atio<-)=test results show that both the firm and time effects are present in the
data
9-.-9- EVENT STUDY

To analyse the impact of dividend announcements on shareholders; wealth
in the selected sectors in "ndia 1vent study
7
approach has been used The
following steps were followed to perform event study
O The first step was to find out the dividend announcement dates in each of the
sector respectively from %99$ to %9968onse#uently $/6 dividend
announcements dates were obtained in "T sector and $77 and %9% dates in the
0M8N and service sector respectively
O 1stimation window of $,9 days was chosen based on literature survey
7
This section has been taken from MA beginners guide to event studiesby
Gilliam & Gells
O The event window of %9 days before the event and %9 days after the event ie +$
days has been taken
O 0or calculating e'pected returns as per Market model daily adjusted closing
prices were taken
O 8umulative abnormal returns were calculated with the help of average
abnormal returns to see the reaction over a period of time
O 0inally( t statistics were calculated to cross Lsectionally by using standard
deviation of abnormal returns
O To estimate the stock price response to dividend announcements( )eturns <)
it
=
which is the time t return on security Mi were calculated as <4
it
L 4
itB$
=!4
itB$
where 4
it
is the adjusted closing price of the stock Mion day t 4
itB$
is the
adjusted closing price of stock i on day tB$
)
it
X <4
it
L 4
itB$
=!4
itB$
YYYYYYYYYYYYYYYYYYYYYYY
<$$=
:imilarly returns on Market "nde' were calculated using the following formulae.
)
mt X
<"
t
L"
tB$
=!"
tB$
YYYYYYYYYYYYYYYYYYYYYYYYY<$%=
Then( abnormal returns were calculated for each of the days in the event
window according to the e#uation.
A)
it
X )
it
L1 <)
i(t
= ( tX<B%9(B$7YY%9=(YYYYYYYYYYYYYYY
<$*=
The e'pected return is estimated by employing the market model$$ The
market model parameters were estimated prior to the event window "n the
present study an estimation window of $,9days have been used
1<)
it
= X a Z bi )
m(t
Ze
i(t
YYYYYYYYYYYYYYYYYYYYYY
<$+=
Ghere( )
m(t
is the return on the market portfolio on day Mt pro'ied by
specific sector indices
$9
( e
i(t
is the random error term and a
i
and b
i
are the
market model parameters
The abnormal returns may be positive or negative as per the response of
investors to the occurrence of event <"n this case dividend announcement= 0or
this one has to apply as many regressions as the numbers of dividend
announcement dates are
The A)s are then averaged across the sample of firms according to the formula.
AA)s XAvg<A)
t
= X <$!I= A)
it
YYYYYYYYYYYYYYYYYY<$,=
Ghere(
I is the number of sample observations
$9
Iote that 8I@ "T inde' has been taken
as pro'y for market inde' in "T sector while in 0M8 N and :ervice sector( the
pro'ies used are B:1 0M8N and I"0TT ,9 respectively B:1 0M8N and I"0TT
,9 "nde' have been taken because the values of 8I@ 0M8N and 8I@ :ervice
sector are not reported by I:1
Thus( the abnormal returns were averaged by dividing it by the number of days to
find out daily average abnormal returns The process was repeated for all the
dates and finally average cumulative abnormal returns were obtained This is the
second measure <8A)=( it measures the investors total return over a period
starting from before the announcement of dividend to after the dividend
announcement day The cumulative abnormal returns from day t
$
through t
%
(8A)
t
( are .C*7D
8AA)
t X
_ Avg <A)t= where t X t
$
to t
%
YYYYYYYYYYYYYYY
<$/=
8AA) may be positive or negative "f 8AA) is negative in periods after
dividend announcements( this suggests dividend announcements do not carry
information about future earnings and cash flows of the companies A positive
8A) indicates distribution of dividend adds to shareholders value by conveying
good news to the market Ge use a +$ day event window period
starting from L%9to Z%9 day relative to the dividend
announcement day <9 day= 0or the purpose of analysis both interim and final
dividend announcements has been taken
To compute the tBstatistic( first( all abnormal returns are standardi>ed as.
:A)
it
X A)
it
! :i <A)=YYYYYYYYYYYYYYYYYYYYYYY
<$2=
where (:i <A)= is the standard deviation of the abnormal returns of stock Mi in the
estimation period The tBstatistic for the sample of N observations for each day Mt
in the event window is calculated as.
t<:A)= X <_
iX$ to I
:A)
it
= $!bI
YYYYYYYYYYYYYYYYYYY<$6 : ANALYSES AND
FINDINGS
:-1- LINTNER MODEL IN ITS SECTOR
The regression results <refer to Anne'ure %= of one way 0i'ed effect
model shows that divided paid during previous year is significant at ,U level of
significance The Adjusted ) s#uare is 69U0 statistics is significant at ,U
level of significance showing overall validity of the model The results
highlight that there is -ow dividend smoothing in this sector as it is
characteri>ed by high target payout ratio and high speed of adjustment
coefficient
:-.- LINTNER MODEL IN FMCG SECTOR
The regression results <refer to Anne'ure %= show that 4AT and
dividend paid during previous year are significant at ,U level of significance The
value of Adjusted ) s#uare is 7,U The 0 statistics are also significant at 7,U
confidence interval showing the overall validity of the model in the 0M8N
sector Target payout is high but speed of adjustment factor is between the range
suggested by -intner<$7,/=Therefore( it can be said that in this sector dividend
signaling and smoothing effects are present

"t may be noted that -M test results show that 8lassical linear regression model
could also be used
%*
:-8 LINTNER MODEL IN SERVICE SECTOR
Dividend paid during the previous year and 4AT both <refer to Anne'ure
%= are found to be significant at ,U level of significance The value of adjusted
) :#uare is 2/$6U The overall validity of the model has been found out with the
help of 0 statistics
The findings show very high target payout ratio of *$,U combined with high
adjustment coefficient of ,%26%/, indicates absence of dividend signaling and
smoothing effects
6- FACTOR ANALYSIS AND REGRESSION RESULTS ON
EBTRACTED FACTORS
6-1- ANALYSIS OF ITS SECTOR
Table %$ <refer to Anne'ure *= shows RaiserBMeyerBPlkin Measure
of :ampling Ade#uacy values "t is measure that judges the sampling ade#uacy
The value obtained is ,/9 which ensures the sample si>e is ade#uate to apply
0actor Analysis
6-1-1 FACTOR EBTRACTION
4rincipal 8omponent Analysis method was used to e'tract the factors The
Table %% <refer to anne'ure *= shows the factor pattern matri'( which
highlights variance e'hibited by e'tracted factors Nenerally( the identification
of the factors is determined by the factor loadings( and the relationship of the
factor with the variable is based on the signs of factor loadings A factor loading
is simply the correlation of an original variable with factor As suggested by
Dillion and Noldstein( variables with factor loadings greater than absolute value
of 9*9 or more are considered significant and( thus( used in labelling of factors
As shown in the factor pattern matri' a set of 6 factors have been been
e'tracted These factors have been labelled as 0actor of dividend signaling and
promoter holding( 0actor of li#uidity ratios( 0actor of longterm solvency(
0actor of financial and systematic risk( 0actor of firm si>e( 0actor of retained
earnings and dividend stability( 0actor of growth and e'pansion and 0actor of
valuation and capital market ratios
FIGURE 1: SCREE PLOT :cree 4lot
,
+
*
%
Eigenvalue
$
9
$ * , 2 7 $$$*$,$2$7%$
8omponent Iumber
An elbow in the scree plot indicates the point at which the inclusion of
additional factors does not contribute significantly in e'plaining the variance in
data set 0actors above the elbow of the plot are retained The :cree plot
shown above has an elbow at 0actor 6Therefore a set of 6 0actors were chosen
which accounts for about 22U of the variations in the data
6-1-. REGRESSION RESULTS ON EBTRACTED FACTORS
The Table %*<refer anne'ure *= shows the regression results on e'tracted
factors 0actors *( +(,(/ and 6 have e'pected signs Put of these factors only two
factors ie 0actor / and 6 have regression coefficients( which are statistically
significant at ,U level of significance Both factor $ and % have e'actly
opposite signs of regression coefficients compared to what was e'pected based
on previous research studies The value of Adjusted )
%
is 92,2 The 0 values are
also significant at ,U level of significance
6-1-8- FINDINGS
A set of 6 factors has been e'tracted through the techni#ue of 4rincipal
8omponent analysis The regression results show that 0actor of dividend
signaling and ownership( li#uidity ratios are significantly negatively related
with D4 ratio Also a positive significant relationship e'ists between )1
earnings and D4 ratio This shows that in "T sector capital gains are preferred
are cash dividends The information environment is highly symmetrical
Therefore( cash dividends are not used to signal their profitability to
shareholders
6-. ANALYSIS OF FMCG SECTOR
The first step was to calculate RMP The value obtained is /79 which
ensures the sample si>e is ample to apply 0actor Analysis <refer to Table %+ in
anne'ure * for test values=
6-.-1 FACTOR EBTRACTION
The Table %, in anne'ure * shows the factor pattern matri'( which
highlights variance e'hibited by e'tracted factors "t also depicts the loadings
of each variable on a given factor The e'tracted factors has been labeled as
0actor of Dividend
:ignaling and :moothing( 0actor of cash flow #uality and firm si>e( 0actor of
future e'pansion and growth( 0actor of ownership and li#uidity( 0actor of
earning variability and systematic risk( 0actor of long term solvency and financial
leverage
FIGURE .: SCREE PLOT
S,r&& P+'$
/
,
Eigenvalue
+
*
%
$
9
As discussed( 0actors above the elbow of the plot are retained The :cree plot
shown above has an elbow at 0actor /Therefore a set of / 0actors were chosen
which accounts for about 2/U of the variations in the data
6-.-. REGRESSION RESULTS OF EBTRACTED FACTORS
Table %/ <refer to anne'ure *= shows 0actors $(%(* and / have
e'pected signs Put of these factors only one factor ie 0actor % has regression
coefficient( which is statistically insignificant at ,U level of significance
0actor + and , have e'actly opposite signs of regression coefficients compared
to what was e'pected based on previous research studies The value of Adjusted
)
%
is 9/*% 0 statistics are significant at ,U level of significance
6-.-8 FINDINGS
Put of si' e'tracted factors , were found to be significantly related to D4
ratioA 4ositive and significant relationship between factor of systematic risk(
Dividend signaling and smoothing( -ong term solvency and financial
leverage Iegative and significant relationship has been found between
0actor of li#uidity and ownership and 0actor of growth and e'pansion This
implies that if the systematic risk increases these firms increase their
dividend payout The agency conflicts are not so grave since 0M8N firms
operate with low levels of debt &igher the growth opportunities available to a
firm lower will be the dividend payout ratio in the 0M8N sector
6-8- ANALYSIS OF SERVICE SECTOR
As done in the other sectors the first step was to calculate RMP "t is a
measure that judges the sampling ade#uacy The value obtained is ,9/ which
ensures the sample si>e is sufficient to apply 0actor Analysis<refer to table %2
in anne'ure *= Bartlett test of sphere city is the statistical test for overall
significance of all correlations with in a correlation matri' "t also judges the
appropriateness of factor analysis
6-8-1 FACTOR EBTRACTION
The table %6<refer to anne'ure *= shows the variance e'hibited by
e'tracted factors "t shows that the first factor accounts for highest amount of
variance( the second factor accounts for second highest and so onThe principal
components analysis using Mvarima' rotation method of correlation matri' of
the %% variables have led to the e'traction of seven broad components of
dividend policy of the corporate "ndia These factors accounted for
%9U($%U($9U($9U(2U(2U and ,U of the total variance e'plained(
respectively Accordingly( these factors have been labeled as 0actor of dividend
signaling and profitability( 0actor of li#uidity ratios and systematic risk( 0actor of
firm si>e( 0actor of agency conflicts and ownership( 0actor of cash flow
#uality and dividend stability( 0actor of growth and e'pansion and 0actor of
longterm solvency
FIGURE 8: SCREE PLOT
S,r&& P+'$
,
+
Eigenvalue
*
%
$
9
$ % * + , / 2 6 7 $9 $$ $% $* $+ $, $/ $2 $6 $7
%9
%$ C'3?'"&"$ N%3C&r
An elbow in the scree plot indicates the point at which the inclusion of
additional factors does not contribute significantly in e'plaining the variance in
data set 0actors above the elbow of the plot are taken The procedure involves
certain amount of subjectivity( if no clear elbow appears in the curve The
:cree plot shown below shows a clear elbow at 0actor 2 These seven factors
account for about 2%U of the variations in the data 8onse#uently these
seven 0actors are retained in the analysis
6-8-. REGRESSION RESULTS OF EBTRACTED FACTORS
The regression results are highlighted in the Table %7<refer to the anne'ure
*= Put of 2 factors / factors have statistically significant regression
coefficients Pnly one 0actor ie0actor of dividend signaling and profitability
has statistically insignificant regression coefficient at ,U significance level
0actor * and , have e'actly opposite signs as established by previous
research studies The value of Adjusted )
%
is /,2 which indicates that these
factor combined together e'plain //U of the dividend payout pattern of "ndian
:ervice sector The 0 values are also found to be significant at ,U level of
significance
6-8-8 FINDINGS
A set of / factors out of 2 are found to be significantly related to D4 ratio This
shows that capital gains are preferred to cash dividends The regression
results have indicated a negative and significant relationship between D4
ratio and 0actor of li#uidity( firm si>e( growth 5 e'pansion &owever( the
0actor of longBterm solvency is significantly positively related Thus "t can be
said( :maller firms tend to pay more dividends in order to allure shareholders
and compensate them for risk involved %+ 0irms in :ervice sector prefer to
retain funds whenever any future investment opportunity is foreseen for further
growth and e'pansion
D- QUADRATIC POLYNOMIAL REGRESSION ANALYSIS AND
FINDINGS
D-1 ANALYSIS OF IT SECTOR
Tables *$ and *%<refer to anne'ure += show the hypothesis testing results of
the different models Table*$ show that the null hypothesis &
9
$ K O
O
% X 9 and
&
9
% K O
O
%X O
O
% X9 are rejected The 0B test results show that both firm
and time effects are present in the data-angrange Multiplier test statistics
presented in the Table *% indicate that either the fi'ed effect firm and firm and
time models or the random effects firm and firm and time models are to be
preferred to 8lassical -inear regression model&ausman specification test results
presented in this Table*% conclude to prefer random effect model to fi'ed
effect model But we restrict our interpretation to fi'ed effect firm and time models
<two way=
Table **<refer to anne'ure += depicts the results from 0i'ed effect firm
Model estimation assuming nonBmonotonic relationship between regressors and
regressand Table *+<refer to anne'ure += shows regression results of 0i'ed effect
two way model Model represented in Table *+ assumes linear relationship
between D4 ratio and ownership variables and Table *,<refer to anne'ure +=
depicts the 0i'ed 1ffect firm and time effects results of #uadratic polynomial
model
"n Model " none of the variable is found to be significant at ,U and $9U
respectively 0 statistics also show that this model does not fit well in "T sector in
"ndia "n Model "" only debt e#uity and time effects are found to be significant
The regression coefficient of debt e#uity ratio is positive at $9U level of
significance This implies that conflicts of interest do not e'ist between debt
holders and shareholders and they do not consider dividend payment a way to
e'propriate their value
A panel data #uadratic polynomial regression analysis increased the value of
Adjusted ) s#uare to *$U from $6U in Model """ &owever none of the
regression coefficient is significant at ,U level of significance The regression
coefficients of "nstitutional holding areL6$*9 in level and %+*+2+2 in s#uare
These coefficients are significant for confidence interval of 79UThis implies a
non monotonic <inverted U shaped= relationship between "nstitutional holding and
dividend payout of "T firms in "ndia 0or $9U level of significance the
regression coefficient of debt e#uity ratio is also found to be positive and
significant The 0 values are also significant at ,U level of significance <refer to
anne'ure +=
Thus the results show that relationship between institutional ownership and
dividends is nonBlinear Ghen institutional ownership is low( an increase in
ownership percentage tends to reduce agency costs At the margin( as agency
costs falls( cash dividends become less desirable as a tool for further reducing
agency costs( and thus dividends tend to decrease At( high levels of institutional
ownership agency costs tend to rise with further increases in ownership percentage
and the increased scrutiny placed on the firm by higher dividends become
necessary Thus (dividends are e'pected to decrease over range of "nstitutional
ownership( and increase after the point of entrenchment indicating a parabolic
relation
D-. ANALYSIS OF FMCG SECTOR
The techni#ue of panel fi'ed effect firm and time model has been applied
for analysis 0 Test results indicate the presence of firm and time effects Table
*7<refer to anne'ure += depicts the results from 0i'ed effect firm Model
estimation assuming an inverted U shaped relationship between regressors and
regressand Table *7 shows regression results of 01 firm and time estimations
assuming linear relationship between D4 ratio and ownership variables and
Table *$9 depicts the 0i'ed 1ffect firm and time effects results of #uadratic
polynomial model&ausman Test shows random effect model should be preferred
to fi'ed effect firm and time model Therefore Table *$$ reports PneBway
random group effect model using Neneralised -east s#uare Model
The 0N-: estimates show that corporate holding is only the
significant ownership determinant of D4 ratio A significant negative
relationship has been observed between corporate holding and dividend payout
ratio The results of Model " shows promoter holding have a positive
relationship with dividend payout in level and negative in s#uare This implies at
lower level of promoter holding( Dividend payments are high but gradually as
their holding increases they prefer lesser dividend distribution 0inally according
to the results of Model """ corporate holding has negative significant relationship
with D4 ratio in level and promoter holding has negative statistically significant
relationship with Dividend
payout in s#uare &owever we do not consider the results of
Model """ in data interpretation as &ausman test suggests use of )andom
effect Model over this model Thus( it can be stated there is no significant
influence of ownership pattern on dividend payout ratio in the 0M8N sector
CAARs/AARs
D-8 ANALYSIS OF SERVICE SECTOR
Table*$+ <refer to anne'ure += depicts the results from 0i'ed effect firm
Model estimation assuming nonBmonotonic relationship between repressor
and regress and Table*$, portrays regression results of fi'ed effect twoBway
model assuming linear relationship between dependent and independent
variables Table *$/ depicts the 01 firm and time affects results of #uadratic
polynomial regression model
&ousman test results show that fi'ed effect firm and time model is preferred to
random effect model Model " <Table *$+= and "" <Table *$,= do not fit well as
0 values are not significant Also the results presented in these two models are
corroborated by the results of fi'ed effect firm and time model estimations The
results of Model """ <Table *$= show 0"" negative relationship in level Ione of the
other ownership variable is significant at ,U and $9U level of significance
Thus( it can be said that in :ervice sector -inear relationship holds well 0""
holding (
corporate holding and promoter holding are inversely related to D4 ratio
E- EVENT STUDY: ANALYSIS AND FINDINGS
E-1 "T SECTOR
FIGURE 9: Average abnormal and 8AA)s of %9 "T companies over a window
period starting from day L%9 to day Z%9 relative to dividend announcement day <9B
day=
,
B$9 AA)s
8AA
B%9
B%,

The results show that abnormal returns are negative during the entire
window period e'cept for the dividend announcement day Though small
positive abnormal returns are generated on dividend announcement but they are
not statistically significant at $9 U This shows that dividend announcements
do not contain signaling effect in this sector Pther reason may be that
investors prefer other modes of dividend distribution to cash dividends
7
9
11
13
15
17
19
1
CAARs/AARs
E-.- EVENT STUDY OF FMCG SECTOR
FIGURE : . AA)s and 8AA)s of $, 0M8N companies over a window period
starting from day L%9 to day Z%9 relative to dividend announcement day <9B day=
*9
%9
$9
9
-19
-17
-15
-13
-11
-9
-7
-5
-3
-1
1
3
5
B$9
B%9
B*9
B+9

8AA)s
AA)s

EVENT WINDOW
&uge abnormal returns are created * days post dividend announcement and
sustained till $6
th
day<refer anne'ure ,= in the event window with minor
fluctuations 4ositive Abnormal returns are also witnessed * days before dividend
announcements
E-8 EVENT STUDY OF SERVICE SECTOR
FIGURE 6 .AA)s and 8AA)s of :ervice companies over a window period
starting from day L%9 to day Z%9 relative to dividend announcement day <9B day=
CAAR1@AAR1 (F*
AA)s
8A
A)s
$
CAARs AND AARs
9,
EVENT WINDOW
Abnormal returns are generated prior to dividend announcements but are not
sustained as 8AA)s start falling 4ositive abnormal returns occur from 2
th
till
%
nd
day pre dividend announcement as shown in Table+*<results appended to
Anne'ure,
7- CONCLUSION
This study has tested empirically the agency cost theory( -intner model(
dividend signaling and smoothing effects using a framework of various
econometric models
Put of the chosen sectors -intner model fits well in the 0M8N sector signifying
dividend signaling and smoothing effects are present in this sector Thus these
firms follow stable dividend payments year on year basis( even though earnings
might change dramatically The findings in the 0M8N sector are in alignment
with Brave etal that mangers are very reluctant to cut dividends once they are
initiated This reluctance leads to dividends that are sticky( smoothed from year
to year and tied to long run profitability of the firm &owever "T sector and
service sector demonstrate a pattern( which is seen in emerging economies like
Tunisia( Simbabwe and Turkey These sectors are characteri>ed by high target
payouts coupled with high speed of adjustment coefficient
Through the analysis of second objective it was found that there are sectoral
differences in corporate dividend policy determinants The results are
consistent with conclusion of Baker( 0arrelly( and 1delman <$76,= and &o
&orace <%99%= that firms industry type influence dividend policy A factor
which may be relevant for one industry becomes irrelevant for another
depending upon the "ndustry characteristics like growth phase( ownership
pattern( si>e( systematic risk and earnings variability
0M8N companies score high on dividend stability and consistency as -agged
dividend and 4AT are important factors governing dividend distribution The
#uality of cash flows( which is measure of li#uidity of the firm and firm si>e
are found be inconse#uential in determining the dividend payout The
opportunities for future growth and e'pansion are found to be negatively
related to dividend payout ratio -arger is the growth and investment
opportunities available to the firm( lesser is the incentive to pay dividends by
retaining larger proportion of profits The regression results also disclose
negative and significant relationship with )etained earnings and 8apital
1'penditure during the current year which is in conformity with the e'isting
literature A company which prefers retention of profits for financing the
capital e'penditure from internal resources distributes fewer dividends compared
to a firm which finances the investment e'penditure from e'ternal sources
Also larger the retention of profits by a company lesser is the dividend
distributed <4ecking order hypothesis= Thus( the e'tent to which the company
decides to finance 8A41@ from retained earningsK both retained earnings and
8A41@ would be negatively related to dividend payments The results
establish a negative relationship between li#uidity and Dividend payout ratio and
promoter holding Though systematic risk and earning variability obstruct the
stable dividend payout but the results report that Dividend 4ayout ratio is
positively related to risk Dividend 4ayout ratio is found to be significantly
positively related to longterm solvency of the firm The firms in 0M8N
sector operate with very low level of debt These firms are highly li#uid
firms( any increase in debt proportion in capital structure do not put pressure on
firms capacity to pay dividend A positive and significant relation has been
obtained between Debt 1#uity ratio and Dividend 4ayout ratio through the
results( which is consistent with 1asterbrook
analysis This positive relation can also be attributed to the fact that 0irms in
0M8N sector use dividends as a source to allay conflicts that may arise
between bondholders and shareholders with increase in Debt e#uity ratio
"t has been noted that "T sector score high on the dividend stability The
dividend paid during previous year is an important governing factor 0irms in
"T sector do not use dividends as a medium to signal their prosperity to the
shareholders This also reflects that there is lesser information asymmetry in this
sector "T sector is a human intensive sector and do not re#uire huge capital
asset base like manufacturing companies for their operations The major asset
of this sector is manpower The funds re#uired for recruitment and retention of
manpower is comparatively less than funds re#uired for purchasing capital assets
:o these firms can easily release funds for payment of dividends Also a
negative relationship between profitability can be attributed to the fact that agency
problems are not very relevant and thus Dividend payout as a monitoring
mechanism may be less needed The results demonstrate that 4romoters holding
in this sector also negatively influence the Dividend 4ayout ratio
A negative regression coefficient of 0actor of li#uidity ratio and Dividend
4ayout ratio can be attributed to the fact that in "T sector capital gains are
preferred to cash dividends &igher debts e#uity ratio and changeability in the
earnings per share may negatively influence the dividend payout of company
But in case of "T firms which are very low debt or >ero debt companies eg
"nfosys is a >ero debt company( these variables may not be an important
determinant of dividend payout Therefore( 0actor of financial and systematic
risk has not emerged as an imperative factor affecting the dividend payout
ratios of firms in "T sector
The results signify that :ervice companies do not score high on
dividend stability 4rofitability is not a primary determinant of dividend
payout though it is positively associated with Dividend payout ratio 0irms in
service sector do not use cash dividends to signal their prosperity to the
shareholders The results are in contrast to
the previous studies on banking industry( which state that banks use
their dividend history to set their dividend These results were established by
Dickens I)oss and IewmanA?oseph in their study EBank Dividend policy.
e'planatory factorsF and 4al Raram and Noyal 4uja E-eading determinants of
Dividend policy. A case study of the "ndian Banking "ndustryF Their study
displayed that stable dividend policy is followed by "ndian banking industry as
lagged dividend emerged as the most significant determinant of dividend payout
A negative relationship between systematic risk and earnings variability
potray that higher the earnings variability lower will be dividend paid by the
companies in :ervice sector The results also highlight that promoter holding is
positively related to dividend payout The results also show that there is a
negative relationship between growth and investment opportunities and dividend
payout ratio This result is in alignment with pecking order hypothesis
0irms with high leverage are those whose value shifting is potentially
costly :uch firms are e'pected to pay large dividends Also low leverage
firms are high growth firms Therefore they pay low dividends This positive
relationship between debt e#uity and dividend payout in :ervice sector can be
considered consistent with 1asterbrook Analysis
A finding in the :ervice sector that refutes the e'isting literature is a
negative relationship between firms si>e and the dividend payout ratio This
finding is not in agreement with 4ecking order hypothesis and stands in sharp
contrast with results of :mith and Gatts <$77%= -arger companies despite
having the opportunity to tap easily the financial markets by issuing stocks
or bonds prefer to retain dividends so as to avoid the costly e'ternal financing
Moreover( small firms( which are more risky( need to have a high payout
ratio( in order to attract investors to but their stocks
The analysis of third objective demonstrates that the influence of
ownership pattern on the dividend payout is heterogeneous "t has been observed
that there are sectoral differences in impact and influence of ownership groups on
dividend payout "ndia is a common -aw country characteri>ed by strong
investor protection and dispersed ownership <the role of the insider is played by
the manager=( hence the agency conflicts are not so severe and cash dividends
may not be essential to mitigate the agency conflicts According to -aporta etal
greater the investor protection in a country dividend payouts tend to be higher "n
the "T sector results are consistent with Manager 1ntrenchment hypothesis
depicting that institutional holding regression coefficient is positive in level and
negative in s#uare This implies that upto a certain threshold
$%
( dividends
act as substitute for corporate governance After the threshold the direct
monitoring efforts of institutional holders are insufficient or become too costly
Therefore( dividend payments are increased so that managers are forced to
raise finance from e'ternal capital markets and acts as an e'ternal monitoring
device These results are in agreement with the findings of :hort( Shang and
Reasey %99%( and 0arinha( %99*= A nonBmonotonic and parabolic relationship
has been established by the research in "T sector for the period under study
&owever in the 0M8N sector none of the ownership groups were found to
have considerable influence on dividend payout As regards :ervice sector( the
relationship between dividend payout and various ownership groups ie 0""(
8orporate holding and
"nstitutional holding has been found to be linear These ownership
groups negatively impact dividend payout of the companies supporting the
hypothesis that dividend payments are the means to alleviate the agency conflicts
These ownership groups act as monitoring device reducing the need of high
dividend payments
Through the analysis of the fourth objective it has been found that cash
dividends may not always create abnormal returns for the shareholders "n the
modern scenario a gradual drift to other modes of payment of dividends has
been observed :mall abnormal returns on dividend announcement can also be
attributed to the fact that the dividend announced is below the investors
e'pectations More so( dividend income( being a marginal constituent in
investment return( may not inspire much to the over enthused investors in rising
capital markets The findings of the research highlight that in 0M8N sector
investors respond positively to cash dividends announcements whether increasing
or decreasing Thus( 8ash dividends are welcomed by the investors in this
sector This implies that signaling

?ayesh Rumar in his study on association between corporate Novernance and
dividend payout identified this threshold level to be %, hypothesis holds &owever
abnormal returns are created in service sector but they are not sustained over the
event window and gradually 8AA)s <8umulative average abnormal returns=
become negative 0inally it can be stated that dividend announcements create
shareholders wealth in the 0M8N and :ervice sector Thus( the investors tend to
applaud the dividend announcements
&owever( inspite of the fact that managers view dividend decisions as
important it cannot be concluded that market rewards a carefully managed
dividend policy with higher share price"n "ndia financial managers typically view
dividend decisions as an important part of their job The typical firm does not
follow a residual policy nor leave its dividend payout to chance )ather( firms
manage their dividends as proposed by -intners model and partially follow
stable dividend policy
10- CHAPTER PLAN
The study is organi>ed in following nine chapters.
C>#?$&r 1: I"$r')%,$'"
This chapter introduces the dividend pu>>le "t throws light on the theoretical
background( genesis( concept and meaning of dividends The primacy and
importance of dividend decision has also been discussed in this chapter
C>#?$&r .: L$&r#$%r& R&5&G
8hapter two reviews the literature in detail and discusses the various research
studies on the topic under study
C>#?$&r 8: R&1&#r,> M&$>')'+'!0
8hapter three traces the research methodology and discusses in detail the various
models developed( tools and techni#ues used for analy>ing the research objectives
C>#?$&r 9: O5&r5&G '( $>& ")%1$r0
This chapter gives brief overview of the financial performance( growth
prospects( characteristics of the various sectors under study
C>#?$&r :: D#$# #"#+011: L"$"&r )5)&") 3')&+
This chapter covers the empirical analysis of the -intner model proposed by ?ohn
-intner <$7,/= in the three sectors under study The chapter highlights the target
payout ratios and speed of adjustment coefficients of each sector respectively using
panel data analysis
C>#?$&r 6: D#$# #"#+011: C'r?'r#$& )5)&) ?'+,0 )&$&r3"#"$1
8hapter si' contains the analysis and findings of factor analysis( which is used to
develop model of corporate dividend policy determinants in each of the sector
respectively
C>#?$&r D: D#$# #"#+011: I3?#,$ '( 5#r'%1 'G"&r1>? !r'%?1 '" )5)&")
?#0'%$ r#$'1
8hapter seven discusses in detail the data analysis and findings of #uadratic
polynomial regression analysis This model has been developed to find the
impact of various
Pwnership groups on the dividend payout ratios in all the three sectors
undertaken for study
C>#?$&r E: D#$# #"#+011: E5&"$ 1$%)0
This 8hapter unfolds the impact of dividend announcement on shareholders
wealth as reflected by the shareprices through the use of most sophisticated
techni#ue in 8orporate 0inance ie 1vent study
C>#?$&r 7: C'",+%1'"
This chapter summari>es and concludes the research Areas for future research
are also discussed in this chapter
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handbook of 1conomics and 0inance( Gharton 0inancial "nstitutions center
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/ As#uith( 4 and Mullins( D <$76*=( MMThe impact of initiating dividend
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influencing dividend policy decisions of Iasda# firmsF( The 0inancial )eview( pp
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dividend policy. a survey of IT:1 firmsF ( 0inancial 4ractice and education 7
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winter $72/( pp/*+B/*7
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ournal of !inancial #conomics( Jol 6( pp %9,B%,6
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<August %99$=(FDividend 4olicy. "ts "mpact on 0irm JalueF( 0inancial
management Association :urvey and synthesis series( &arvard Business :chool
4ress(
%% -inter( ? <$7,/=( EDistributions of incomes of corporations among dividends(
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%* Miller( M& and Modigliani( 0 <$7/$=( MMDividend policy( growth( and the
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%+ Iaceur Ben :amy( Noaied Mohamed( Belanes Amel<%99/=( EPn the
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0inance(Jol/(pp$B%*
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%2 4etit( ) <$72%=( MMDividend announcements( security performance and capital
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%7 )odrigue>()?<$77%=( E3uality dispersion and the feasibility of dividends as
signalsF( ?ournal of 0inancial research( Jol$,(pp+$$B**
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*$ Golmaran( &4 <%99*=( EDoes -intner Model e'plain :outh African
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*% Iarasimhan( M: and 8 Asha <$772=( E"mplications of Dividend Ta' on
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PUBLICATIONS AND PAPER PRESENTATIONS
$ Rapoor :ujata (E)elevance of information asymmetry models in "ndian
conte'tF "ndian ?ournal Pf 0inance( "ssue $<?uneB ?uly 92issue=
% Rapoor :ujata (EDividend policy L A reviewF Management review( a
#uarterly journal by Delhi Management association( :eptember (%992
* Rapoor :ujata( Anil Ranwal E)elevance of "nformation asymmetry
ModelsBa study of "ndian "nformation technology :ectorF( "nternational ?ournal Pf
Business research and presented same paper at "AB1B%992 international
conference held at -as Jegas "n Pctober92
+ Anil( Ranwal( and Rapoor(:ujata( Determinants of Dividend 4ayout
ratiosB A study of "ndian "nformation Technology sectorK "nternational )esearch
?ournal Pf 0inance and 1conomics( "ssue $,( May %996( pp /*B2$( %996
, Ranwal( Anil( and Rapoor(:ujata( )elevance of :ignaling and
:moothing approaches to dividendB A study of "ndian 0M8N sector(
Business 4erspectives(Jolume$9(Io$ <?une %996 issue=
/ Ranwal( Anil( and Rapoor(:ujata( )elevance of "nformation Asymmetry
Dividend modelsB A study of "ndian 0M8N sectorK 1ffulgence (?uly %996
2 Rapoor(:ujata(Ranwal( Anil and Abidi( Iaseem(Determinants of dividend
payout ratiosB A study of "ndian 0M8N sector( The "nternational 8onference on
Nlobal "ssues in Business and Technology( Iational "nstitute of 0inancial
Management( "ndia( August %996
6 Ranwal( Anil( and Rapoor(:ujata( )elevance of :ignaling and
:moothing Approaches to Dividend. A study of "ndian "T :ector( Asia
4acific Business )eview( Jolume "J Io+(PctoberBDecember%996
7 Rapoor(:ujata(Ranwal( Anil( Determinants of 8orporate Dividend 4olicy in
"ndian "nformation Technology :ector. A factorial Analysis( "nternational
0inance 8onference (""M 8alcutta (December %997

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