INTRODUCTION:

Dividend policy is considered as the one of the most arguable topic in the modern corporate
finance. It is considered as one of the most important aspect in corporate Finance since it has many
implications to group of stakeholders like investors, managers, lenders. Black (1976) argued that
dividend is a like a puzzle “the harder we look at the dividend picture, the more it seems like a
puzzle, with pieces that just don’t fit together”. He termed dividend as puzzle because there is an
emerging consensus upon the fact that no single factor can uncover the behavior of the dividend.
Many Researchers try to find out the issue concerning the dividend behaviour or dynamics and
determinants of dividend policy but we haven’t reached to an acceptable explanation for the
observed dividend behaviour of firms (Black, 1976; Allen and Michaely, 2003 and Brealey and
Myers 2005).

Dividends are the rewards or compensation for the investment made by the shareholders in the
business. It is like a distribution of corporate income to its shareholders proportionate to the
number of shares they hold. This reward or compensation could be either in the form of cash
dividend or it can be in the form of stock dividends, which depends upon the company policy.
Investors are interested in dividends because it provides them certainty about the financial well-
being about the company.

Dividend is helpful in providing information to the outsiders. It serves as a signal or provide

information about the market. Besides, these signals also provide information about the market
performance. Sometimes there is a dividend cut, which means that either the firm want to retain
its future cash flows for future expansion or it is uncertain about its future earnings and as a result
they evade their dividend payout. (Bushra ,2012).

Since the dividend policy is also related to value of the firm. Financial managers go all out to take
important decisions to increase the value of the firm. They take important decisions like investment
portfolios, product development, and financing with the objective to increase market value of the
firm (Afza & Mirza, 2011). Yet another important decision the firm has to take is distribution of
profits in the form of dividends. It should be take into account carefully that how much amount of
earnings should be distributed to shareholders and how much portion of earnings should be
reinvested in the business. While, the most important point to ponder is to focus on the
maximization of shareholder wealth. (Al-Malkawi et al., 2010).
The Pakistanis capital market has strong potential and the economy have several important
landscapes for examining the dynamics of dividend policy. Firstly, Pakistan is moving towards the
development and improving the economy position in the world since the 1980. The capital markets
of Pakistan are much develops as before. Many studies come out with fact that many firms are
likely to pay stable dividend during the high growth period and it is fascinating to find that how
dynamic dividend policy is determined in growing economy like Pakistan. (Hafeez Ahmed et al.,
2008)
Secondly, because of feeble corporate governance, ownership structure of Pakistani firms is
categorized by the ascendency of one primary owner who has to be manage large number of firms
that are affiliated with having small number of shares, therefore, agency conflicts arise. These
agency problems give rise to conflicts in distribution of dividend
Thirdly, the tax calculation is totally different from the developed countries. In fact, in Pakistan
there is no gain on capital tax on stocks, while, withholding tax charged on dividend income is 10
%. Foremost, according to rules of government of Pakistan, if the firm has earned the profit and
not do not announced the dividend then 35% of the income tax is charged.