Dividend Decision Case Study
The dividend decision of a firm is intrinsically related to the financing and investment decision. This association has given rise to various questions such as the size of the dividend, the effect on the valuation of the firm and the like. Even after multiple researches carried out, the dividend decision still remains a mystery to be solved. Lintner (1956) contends that it is current earnings and the past dividends which determines the target dividend ratio in the developed market. The firms have to make various adjustments in order to attain such target and thus have to follow a stable dividend policy [2]. Miller and Modigliani(1961) argues that since market perfections, zero transaction costs, perfect certainty and indifferent behavior of …show more content…
The various research studies done abroad and in Indian context have been detailed in the literature review chapter. Enumerated below are the key variables identified as per available literature along with the relationship with dividend payout ratio of the firm.
PROFITABILITY The key determinant of dividend payments is the current earnings which represents the capacity of a firm to pay dividends. Profitability has a positive relationship with dividends. Research studies have used PAT, ROE and RONW as proxies for profitability of the
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This relationship suggests dividend policy decisions have an impact on shareholders wealth which is mirrored by share prices of a company.
CAPITAL EXPENDITURE The extent to which the company decides to finance capital expenditure from internal resources, both dividend and capital expenditure decisions would compete with each other, therefore, capital expenditure is negatively related to its dividend payments.
RETAINED EARNINGS A firm that plans to finance future investment opportunities from retained earnings would distribute lesser profits as dividends. Thus, retained earnings of the current year are negatively associated with dividend paid.
BETA It measures the systematic risk (systemic risk) of the company. Higher the market risk lower will be the dividend payments.
PE RATIO There is a debate in corporate finance literature that out of PE ratio and Dividend Payout ratio which is the cause and which the effect is. However in the present study a positive relationship between PE ratio and dividend payout has been
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