ijcrb.webs.

com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT 2011 Institute of Interdisciplinary Business Research

390


DECEMBER 2011
VOL 3, NO 8


THE INVESTIGATION RELATIONSHIP OF DIVIDEND BEHAVIOR
AND LIKELIHOOD OF PAYING DIVIDEND WITH FINANCIAL
VARIABLES IN TEHRAN STOCK EXCHANGE


DARIUSH FOROGHI
Assistant Professor
Department of Accounting
University of Isfahan,Iran

FARZAD KARIMI
Assistant Professor
Department of Accounting Mobarakeh Branch,
Islamic Azad University, Mobarakeh, Iran

ZAHRA MOMENI
MA Accounting
Department of Accounting Mobarakeh Branch,
Islamic Azad University, Mobarakeh, Iran


Abstract
The research investigates relationship of dividend behavior and likelihood of paying dividend with financial
variables in Tehran Stock Exchange. The company managers must consider different variables before they
decide how to pay dividend payment. the firms can utilize the method of finding the origin(cause) of financial
variable and its effect on dividend policy, the method will be very important in many financial policies and
especially for investors. In this research, financial variables consist of leverage ratio, asset structure, profitable
investment opportunities, growth opportunities, firm size and institutional ownership. Statistic group consist of
firms existing in Tehran Stock Exchange and. we checked 74 active firms the cases of study in 2002-2008. The
final model was estimated by Tobit panel with random effect for checking dividend behavior, indicated that
profitable investment opportunities, growth opportunities, firm size and the number of institutional ownerships
are affective factors on dividend payout ratio, but the leverage ratio and asset structure are non-affective. More
over, the affective factors of likelihood of paying dividend which computed by Logit panel with fixed effects are
similar to the affective factors of dividend policy. also, the results indicate that profitable investment
opportunities and firm size are the most important factors in this case.
Key Words: Tobit model, Logit model, dividend policy, dividend payout ratio, panel data.
1. Introduction
Dividend is one of issues that have long been regarded researchers and despite the many efforts, it has still
remained controversial issues in the area of financial management. Black gives some suggestions about the
dividend:"The more you look at the picture of the cash benefit, it seems that it s more like a puzzle whose pieces
have no resemblance to each other".
There are many reseans for paying or not-paying Dividend. Accurate detection and identification of factors
affecting the dividend policy can be usefull for corporate managers and shareholders. It is recommended to
managers to make decision about the position their company in terms of dividend. Shareholders can also
recognize that in terms of company when company pay dividend.
In modern corporate finance, dividend policy is linked to the work of Miller and Modigliani. MM irrelevance
theory is based on the assumptions of perfect markets. They argue that dividend policy has no effect on either
the price of firms stock or its cost of capital. Research in the area of dividend policy has been concerned with
relaxing the assumptions of MM model. Bird-in-the-hand theorem suggests that the relationship between
dividend policy and the firms value can be explained by investors preference for dividend payments rather
than the expected capital gains from stocks. This preference exists because dividends represent a sure thing,
being less risky than the expected capital gains. However, MM argue that the riskiness of the firm depends on
the riskiness of the operating cash flows and not on its dividend payout policy. In addition, tax preference theory
comes from the favourable tax treatment of capital gains relative to dividend payments. This leads investors to
prefer firms with lower payout ratios rather than firms with relatively high dividend payout ratios. However,

ijcrb.webs.com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT 2011 Institute of Interdisciplinary Business Research

391


DECEMBER 2011
VOL 3, NO 8

investors have different tax preferences, which lead them to prefer firms with dividend policies that fit their tax
preferences. In financial literature, this is called the clientele effect. Furthermore, the signalling theory reveals
the way investors receive signals from firms due to the asymmetric information. This highlights the problems or
the conflicts that might arise because of the information asymmetry in the market. Moreover, agency theory is
based on the assumption that conflicts of interest arise between corporate insiders, and outsiders and hence
managers may conduct actions according to their own self interest, which may not always be beneficial for
shareholders; such conflicts lead to agency costs. Agency cost models predict that dividends payment can be
used to reduce the problems related to information asymmetry. Finally, the free cash flow hypothesis is rooted in
conflicts of interest between managers and stockholders in the presence of informational and self-seeking
behaviour. In this context, firms prefer to increase their dividends and distribute the excess free cash flow in
order to reduce agency costs. Consequently, markets react positively to this type of information.
In this study, to acheive the first goal of research which is the investigation of relationship between dividend
policy and financial variables, we used the Tobit regression model which is ignored in behaverial sciences.
Since there is no negative amount in the evaluation of dividened policy and, on the other hand the frequency of
division ratio is low so, in many cases the distribution has high Skewness and it is not possible to use Ordinary
Least Square method (OLS) for its analysis because the conclusion was false estimation obtained. So the
obtained estimates using Tobit model have more stability, credibility in comparison with OLS model. To
acheive the second goal of research which is the investigation of relationship between likelihood of paying
dividend and financial variables, we used the Logit regression model. Logit model is one of the most famous
accident models which can explain the probability of election of a decision with two options, so this model can
be used to assess the likelihood of paying dividend.
The paper proceeds as follows: Section 2 reviews relevant prior research. Sectioin 3 provides an insight into the
research methodology used. Section 4 describes the developed models and analyzes the results. Finally, Section
5 presents the concluding remarks.

2. Prior Research
Considerable research effort has been directed to investigate relationship between dividend behavior and
likelihood of paying dividend with financial variables.
Mayers and Majluf (1984), Holder et al. (1998) and Gul and Kealey (1999) showed that firms with higher
growth opportunities have less payment dividend ratio, that this negative relationship is supported by the agency
theory. According to the research Kanwer (2003), AL-Deehani (2003) and Trumm (2004) firms with more
profitable investment opportunities and growth opportunities will distribute less percentage of their profits also
larger firms in comparison smaller firms have more ability to pay dividends to shareholders. Also Zeckhauser
and Pound (1990), Jensen (1986) and Short et al. (2002) support positive relationship between dividends and the
degree of institutional ownership.
Beiner (2001) in a study with the title of " The theories and factors that affect dividend policy " which work on
a sample of 135 swiss firm came to the conclusion that investment opportunities, leverage and firm size affect
dividend policy. Aivazian et al. (2003) are considered to be the leading scholars in investigating the dividend
policy in developing markets. They find that dividends are explained by profitability, debt and the market-to-
book (MB) ratio. Their empirical results (using pooled data) reveal that, profitability affects dividend payments;
high return on equity (ROE) leads to high dividend payments. Similarly, higher debt ratios correspond to lower
dividend payments, suggesting that financial constraints affect dividend policy. In addition, the MB ratio has a
positive effect on dividend payments. Aivazian et al. find little evidence that BR or size affects dividend policy
in a significant or consistent way. Finally, for emerging market companies, they find that dividends are
negatively related to the assets tangibility.
Furthermore, Omran and Pointon (2004) investigate the role of dividend policy in determining share prices, the
determinants of payout ratios, and the factors that affect the stability of dividends for a sample of 94 Egyptian
firms. They find that retentions are more important than dividends in firms with actively traded shares, but that
accounting book value is more important than dividends and earnings for non-actively traded firms. However,
after they combine both the actively traded and non-traded firms, they argue that dividends are more important
than earnings. In the determinants of payout ratios, they find that the leverage ratio and MB ratio are negatively
related to the payout ratios in actively traded firms. Leverage, tangibility ratios and firm size (measured by the
market capitalization) are negatively related to payout ratios. BR, MB and firm size (measured by total assets)
are positively related to payout ratios in non-actively traded firms. However, for the whole sample, leverage has
a positive relationship with payout ratios, while firm size (measured by market capitalization) is negatively
related with payout ratios. Finally, the stepwise logistic regression analyses show that decreasing dividends is
associated with lack of liquidity and overall profitability.

ijcrb.webs.com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT 2011 Institute of Interdisciplinary Business Research

392


DECEMBER 2011
VOL 3, NO 8

Al-Najjar (2009) in " Dividend behavior and smoothing new evidence from Jordanian panel data " showed that
the dividend policy in Jordan, as a developing country, is influenced by factors similar to those relating to
developed countries such as: leverage ratio, institutional ownership, profitability, business risk, asset structure,
growth rate and firm size. Furthermore, the factors affecting the likelihood of paying dividends are similar to
those affecting the dividend policy. Abor& Bokpin (2010) in "Investment opportunities, corporate finance, and
dividend payout policy: Evidence from emerging markets" showed that Asignificantly negative relationship
between investment opportunity set and dividend payout policy is found. There are, however, insignificant
effects of the various measures of corporate finance namely, financial leverage, external financing, and debt
maturity on dividend payout policy. Profitability and stock market capitalization are also identified as important
in influencing dividend payout policy. Profitable firms are more likely to support high dividend payments to
shareholders. However, firms in relatively well-developed markets tend to exhibit low dividend payout policy.

3. RESEARCH METHODOLOGY
We used data from 74 Iranian companies listed in Tehran Stock Exchange over the period 2002-2008 and used
Stata software package 11 version for data analyzes.
Also we used two techniques Tobit regression and Logit regression which are briefly explained below.
3.1. Tobit regression
This paper applies pooled and panel tobit models to investigate the dividend policy (level and amount), the
formula of the tobit model is:

(1)


where is the dividend payout ratio measured by dividend per share/earning per share.
the obtained estimates using Tobit model have more stability, credibility in comparison with other models.
3.2. Logit regression
Logit model is one of the most famous accident models which can explain the probability of election of a
decision with two options.
the pooled and panel logit models are applied to test the variables that may determine the likelihood of paying
dividends. The response probability has the following form:

(2)
where is a matrix of unknown parameters. Equation (2) represents the logistic distribution function.
ranges from - to + ranges between 0 and 1. In addition, is non-linear related to . If the
likelihood of a firm to distribute dividend is then 1- is the likelihood of not distributing dividends is:
Thus, = = Exp( (3)

Given the fact that is the odds ratio for paying dividends, the ratio of the probability that the firm will
pay dividends to the probability that it will not pay dividends. The natural log of this ratio
, where L is considered to be the logit, and therefore this model is the logit
model. The following equation is used to estimate the logit model:
(4)

The dependent variable is a dummy variable. It takes 1 if the firm distribute dividends and 0 otherwise. . is
a column vector of financial variables of firm i at time t, this vector is made up of the following:

X1 (LEV) : Leverage ratio measured by total debt / Owner Equity
X2 (TANG) : Asset structure (tangibility) measure by fixed assets / total assets
X3 (PIO): Profitable investment opportunities measured by the Price stock / earnings per share

ijcrb.webs.com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT 2011 Institute of Interdisciplinary Business Research

393


DECEMBER 2011
VOL 3, NO 8

X4 (MB): Growth opportunities (market-to-book ratio) measured by market value per share / book value per
share
X5 (LNSIZE) : Firm size measured by the natural logarithm of the total assets
X6(IO): The number of shares owned by institutional investors
: residual error for firm i at year t
3.3. Variables in the Models
The variables used in the study are calculated using the balance sheets and the income statements of the selected
firms. In the selection of these variables, the previous studies in the literature were used. In this regard, we
determined 6 financial variables to be included in the study. financial variables consist of leverage ratio, asset
structure, profitable investment opportunities, growth opportunities, firm size and institutional ownership. These
variables and the reasons for selecting them are explained below.
Dividend payout ratio is elected as the dependend variable of Tobit model that is Dividend Per Share to Earning
Per Share (DPS/ EPS) and dividend per share is elected as the dependend variable of Logit model. The variable
choose 1 if cash dividend was paid (DPS ) and in the situation of no cash dividend payment (DPS ), 0
is choosen. The criterion of Total Debt to Owner Equity is usead to calculate the Leverage ratio (TD/OE). We
obtained Asset structure by the means of Fixed Assets to Total Assets (FA/TA) , also we used Price stock to
Earnings Per Share for the measurement of Profitable investment opportunities (P/ EPS). The Growth
opportunities (Market-to-Book ratio) means Market Value Per Share to Book Value Per Share of the firm
(MVPS/BVPS). Firm size is Natural Logarithm of the total assets (LN SIZE). To calculate the number of
institutional owners, we used Iran Accounting Standard NO.20 and assertion accounting principles board
NO.18. This variable is calculated in capital firm by number of ownership percentages of 20 and above this
amount.


4. ANALYSIS AND RESULTS
Section 4 reveals the regression analysis using pooled and panel models. The study will start examining the
dividend policy determinants, and then the factors the may affect the probability of paying dividends are
discussed.
Table (1) shows, the descriptive statistics for variables related to models that it is indicated, descriptive
parameters for each variable separately.
4.1.Estimation of Tobit regression results
We want to use the combined data, therefore we used F-leamer test to determine the kind of data. The amount
of statistics is 55.16 and probability values (P-value) of this statistic is zero, so data are panel. Achievements of
the Tobit model estimated using Stata software (Table 2). We assess the correctness of the estimated model. The
probability of Wald test is zero, so it means that regression is totally meaningful. Since the Tobit
regression, does not have the necessary creditability and validity, we used the Log Likelihood Statistics as a
criterion of the correctness of the estimated model. The amount of statistics is -620.20156 .It shows that the
model is reliable and significant, and the presented values indicate that the correctness of estimated model. Then
we use Z-test to assess the significance of variables.
Z-test results show that the influence of variables Profitable investment opportunities (PIO), Growth
opportunities (MB), Firm size (LNSIZE) and the number of institutional owners (IO) to dividend payout ratio is
confirmed. Between these independent variables, Profitable investment opportunities (PIO) has the most effect
on the dependent variable. But between the other financial variables such as Leverage ratio (LEV) and Asset
structure (TANG) with the dividend there is no significant relationship. LEV and TANG variables are negative,
it shows the reverse effect of these variables, and possitiveness of IO, LNSIZE, MB and PIO variables indicate
the direct effect of variables on dividend payout ratio.
4.2.Estimation of Logit regression results
We used F-leamer test to determine the kind of data. The amount of statistics is 73.16 and probability values (P-
value) of this statistic is zero, so data are panel. Accordingly Husman test was performed to determine the type
of panel data. chi2 value of this test is 17.99 and the probability values of this statistic is 0.0063. Therefore the
type of data is Panel data with Fixed effects. Achievements of the Logit model estimated using Stata software
(Table 3). We assess the correctness of the estimated model. chi2 value of LR statistic is 66.88 and the
probability values of this statistic is zero, therefore the model is meaningful and reliable. we used the Log
Likelihood Statistics as a criterion of the correctness of the estimated model. The amount of statistics is -
47.60408 .It shows that the model is reliable and significant, and the presented values indicate that the
correctness of estimated model. Then we use Z-test to assess the significance of variables.
Z-test results show that the influence of variables Profitable investment opportunities (PIO), Growth
opportunities (MB), Firm size (LNSIZE) and the number of institutional owners (IO) to likelihood of paying

ijcrb.webs.com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT 2011 Institute of Interdisciplinary Business Research

394


DECEMBER 2011
VOL 3, NO 8

dividend is confirmed. Between these independent variables, Firm size (LNSIZE) has the most effect on the
dependent variable. But between the other financial variables such as Leverage ratio (LEV) and Asset structure
(TANG) with the likelihood of paying dividend there is no significant relationship. LEV and TANG variables
are negative, it shows the reverse effect of these variables, and possitiveness of IO, LNSIZE, MB and PIO
variables indicate the direct effect of variables on likelihood of paying dividend.
Overall, one can argue that the probability of paying dividends and the dividend policy in the Iranian case
somehow have the same determinants.

5. Conclusions
This paper investigates the relationship of dividend behavior and likelihood of paying dividend with financial
variables and we used data from 74 Iranian companies listed in Tehran Stock Exchange, in years between 2002-
2008. we apply pooled and panel tobit and logit models to investigate the determinants of the dividend policy
and the factors that may affect the likelihood of paying dividends. The dependent variable in the tobit model is
the dividend payout ratio while it is a dummy variable that takes 1 if the firm pays dividend or 0 otherwise in the
logit model. The independent variables are: LEV is Leverage ratio, TANG is asset structure, PIO is profitable
investment opportunities, MB is growth opportunities, LNSIZE is the natural logarithm firm size and IO is the
number of institutional ownership.
The final model was estimated by tobit panel with random effect for checking dividend behavior, indicated that
profitable investment opportunities, growth opportunity, firm size and the number of institutional ownerships
are affective factors in financial variabes, but the leverage and asset structure are non-affective. More over, the
affective factors of probability of paying dividend which computed by logit model and panel model with fixed
effects are similar to the affective factors of dividend policy.
Future research could be directed towards various directions .First, the inclusion of additional non-financial
variables such as the number of directors, or the complexity of the firm could be examined. Second, the
application of other financial variable is another potential extension of the present research. Also Tobit
regression model is considered a modern metod in research which has high sufficiency in comparison with other
usual regression models, it provides more possibilities. We suggest researchers to utilize this method if they use
Truncated variables and Censored variables in their research.



























ijcrb.webs.com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT 2011 Institute of Interdisciplinary Business Research

395


DECEMBER 2011
VOL 3, NO 8

References
Al-Najjar, Basil(2009).Dividend behavior and smoothing new evidence from Jordanian panel data
Aivazian, V., Booth, l. and Cleary, S. (2003), Do emerging market firms follow different dividend policies
from US firms?, Journal of Financial Research, Vol. 26 No. 3
AL-Deehani T. M. (2003), "Determinants of Dividend Policy: The Case of Kuwait, " Journal of Economic &
Administrative sciences, Vol.19, No.2,(December)
Amidu, Mohammed, and Joshua Abor (2006). Determinants of Dividend Payout Ratios in Ghana, The Journal
of Risk Finance, Vol. 7 No. 2
BeinerS. (2001) "Theories and Determinants of Dividend Policy", Journal of Corporate Finance June.
Black,F.Dividend puzzlemodern development in financial management in financial management,Dryden
press,1976
Gul, F.A. and Kealey, B.T. (1999), Chaebol, investment opportunity set and corporate debt and dividend
policies of Korean companies, Review of Quantitative Finance and Accounting, Vol. 13 No. .
Holder, M.E., Langrehr, F.W. and Hexter, J.L. (1998), Dividend policy determinants: an investigation of the
influences of stakeholder theory, Financial Management (Financial Management Association), Vol. 27
No. 3
Jensen, M. (1986), Agency costs of free cash flow, corporate finance, and takeovers, American Economic
Review, Vol. 76
Kanwer,A,(2003)The determinants corporate dividend polices in Pakestan
Myers, S.C. and Majluf, N.S. (1984), Corporate financing and investment decisions when firms have
information that investors do not have, Journal of Financial Economics, No. 13.
Omran, M. and Pointon, J. (2004), Dividend policy, trading characteristics and share prices: empirical evidence
from Egyptian firms, International Journal of Theoretical and Applied Finance, Vol. 7 No. 2
Short, H., Zhang, H. and Keasey, K. (2002), The link between dividend policy and institutional ownership,
Journal of Corporate Finance, Vol. 8
Trumm,K,(2004) Determinants of dividend policy on Stonian interprises working paper university of tartu,8
Zeckhauser, R. and Pound, J. (1990), Are large shareholders effective monitors? An investigation of share
ownership and corporate performance, in Hubbard, R.G. (Ed.), Asymmetric Information, Corporate
Finance and Investment, University of Chicago Press, Chicago, IL




























ijcrb.webs.com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT 2011 Institute of Interdisciplinary Business Research

396


DECEMBER 2011
VOL 3, NO 8

Annexure
Table 1: Descriptive statistics


Variable name symbole Mean Median SD Maximum Minimum
leverage LEV 2/43 1/80 4/16 87/06 0/20
asset structure TANG 0/25 0/21 0/17 0/89 0/00
profitable investment
opportunities
PIO 0/33 0/00 1/70 8/84 0/00
growth opportunities MB 4/78 2/59 8/10 103/34 0/00
firm size LNSIZE 12/94 12/80 1/37 17/55 9/78
the number of institutional
owner
IO 0/92 1 0/75 3/00 0/00


Table 2: Estimation of Tobit regression results


variable Financial
Coef Std. Err z z-value
Variable name symbole

leverage LEV -0/02243 0/01437 -1/56 0/119
asset structure TANG -0/19981 0/21658 -0/92 0/356
profitable investment
opportunities
PIO 0/05289 0/00970 5/45 0/000
growth opportunities MB -0/01213 0/00596 -2/04 0/042
firm size LNSIZE 0/09153 0/02784 3/29 0/001
the number of
institutional owner
IO 0/15707 0/05090 3/09 0/002

Wald chi2
Prob Wald chi2
Log Likelihood













53/08
0/00
-620/20156















ijcrb.webs.com
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT 2011 Institute of Interdisciplinary Business Research

397


DECEMBER 2011
VOL 3, NO 8

Table 3: Estimation of Logit regression results


















































variable Financial
Coef Std. Err z z-value
Variable name symbole

leverage LEV -0/12127 0/14825 -0/82 0/413
asset structure TANG -2/29637 2/82362 -0/81 0/416
profitable investment
opportunities
PIO 0/06696 0/02924 2/29 0/021
growth opportunities MB -0/00826 0/00386 -2/14 0/040
firm size LNSIZE 2/70089 0/65629 4/12 0/000
the number of
institutional owner
IO 0/98556 0/32790 3/01 0/003
LR chi2
Prob LR chi2
Log Likelihood












66.88
0/00
-47/604082