Determinants of Corporate Dividend Policy: A Factorial Analysis

Abstract

This paper re‐examines the dividend policy issue by conducting a simultaneous test of the alternative explanations of corporate payout policy using a two‐step procedure that involves factor analysis and multiple regression. Several new proxies for theoretical attributes that have appeared in the literature are introduced, including the role of managerial dimensions in determining dividend policy. Strong support is found for the transaction cost/residual theory of dividends. pecking order argument, and the role of dividends in mitigating agency problems. Strong support is also found for the role of managerial consideration in affecting the firm's payout policy; specifically, firms that maintain stable dividend policies and firms that enjoy financial flexibility pay higher dividends. The results appear to support the tax clientele argument.

The Relationship between Dividend Payout And Firm Financial Performance

“…Basically the dividend policy is one of the important financial policies not accordingly of the shareholder, employees, consumer and government but also firm point of view (Alii, Khan, & Ramirez, 1993).…”

Are Large Shareholders Conducting Influential Monitoring in Emerging Markets? An Investigation into the Impact of Large Shareholders on Dividend Decisions: The Case of Kuwait

“…SIZE is measured as a natural logarithm of market capitalization. Jensen and Meckling (1976), Smith (1977), Lloyd et al (1985), Eddy and Seifert (1988), Alli et al (1993), Jensen et al (1992), Redding (1997), Holder et al (1998), and Fama and French (2001 indicate that large firms will choose to pay a higher dividend ratio than small firms in order to reduce agency costs. Large companies are associated with high agency costs, since widespread ownership has more bargaining power and the influence of widespread ownership increases agency costs.…”

“…Most previous studies that investigate the impact of dividend-agency theory employ dividend payout ratios as a determinant of dividends in lieu of dividend per share and dividend yield (See, for example, Rozeff, 1982;Lloyd et al, 1985;Jensen et al, 1992;Dempsey and Laber, 1992;Alli et al, 1993;Moh'd et al, 1995;Holder et al, 1998;Chen and Steiner, 1999;Saxena, 1999;Mollah et al, 2002;Manos, 2002;Travlos, 2002).…”

“…BETA, which is a mathematical measure of the sensitivity of the rates of return on a given stock compared with the rates of return in the market as a whole, is used as a proxy for business risk (e.g., Rozeff, 1982;Lloyd et al, 1985;Jensen et al, 1992;Alli et al, 1993;Moh'd et al, 1995;Holder et al, 1998;Chen and Steiner, 1999;Saxsena, 1999;Manos, 2002). Business risk increases the uncertainty of the direct relationship between current and expected future profit.…”

“…GROW is measured as the growth rate of sales (e.g., Rozeff, 1982;Lloyd et al, 1985;Jensen et al, 1992;Alli et al, 1993;Moh'd et al, 1995;Holder et al, 1998;Chen and Steiner, 1999;Saxena, 1999;Manos, 2002;Travlos, 2002). Rozeff (1982), Lloyd et al (1985), Dempsey and Laber (1992), Moh'd (1995), andFama andFrench (2001) show that firm growth rate is a significant and negative explanatory variable of dividend payment.…”