IMPACT OF DIVIDEND POLICY ON SHAREHOLDERS VALUE AN EMPIRICAL ANALYSIS OF INDIAN FIRMS

NAME- SUJATA KAPOOR RESEARCH GUIDE- DR. KANWAL ANIL ; CO-GUIDE-DR.NASEEM ABIDI DEPARTMENT- MANAGEMENT SEMESTER IV- JAN- JULY08

RESEARCH OBJECTIVES
To empirically examine the determinants of dividend smoothing by firms and find out its linkage with information content of dividends. To analyze the influence of firms characteristics like profitability, growth, size and industry growth phase on dividend payment pattern. To investigate the association between corporate governance and dividend payout policies of Indian corporate firms

To add to the understanding of the effect of dividends on shareholders wealth. To study and analyze the trends in dividend payments pattern of Indian corporate firms.

Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment

Shleifer &Vishney (1997)

LITERATURE REVIEW
RESEARCHER
Easterbrook

DATA
1984

FINDINGS
Positive relationship between leverage &dividend payout.

Jensen

1986

Firm pay dividends and retire their debts to reduce agency costs of free cash flows

Lambert , Lanen and Larcker (1989)

221 companies and Decline in dividend sample period from 1927 payments following to 1980 adoption of executive stock option plans.

Jensen, Soleberg and Zorn (1992)

565 and 632 companies.sample period 1982& 1987

Dividends payouts are negatively related to leverage and insider ownership. Higher dividends are paid by all-equity firms with low managerial holdings than by comparable leveraged firms.

Agrawal and Jayaraman (1994)

71 sample companies from 1979- 1983

Han et. al (1999)

Dividend payout inversely related with degree of institutional ownership. Corporations in countries with strong legal protection of minority shareholders pay higher dividends.

Porta et. al

(2000)

Faccio et.al.

(2001)

Corporations tightly affiliated to a business group pay higher dividends in contrast to other corporations.

Fenn and Liang

2001

Found strong negative relationship between dividends and management stock options.

Short et. al.(2002)

UK firms

Positive association between dividend policy and institutional ownership and negative association with managerial ownership.

Gugler and Yurtoglu (2003)

German and Austrian firms

State controlled firms engage in dividend smoothing while family controlled firms do not.

EMERGING ECONOMIES
Roy and Mahajan 2003 Regulation of dividend should address the inherent conflict of interests between shareholders and lenders. Emerging market firms exhibit dividend behavior similar to firms in US.

Aivazian et.al

2003

Manos (2003)

Cross sectional data of Institutional ownership , Indian firms. foreign ownership and dispersed ownership have positive impact on the payout ratio.

INTERNATIONAL SCENARIO Regulated and dispersed ownership Strict disclosure norms and investor protection Oxley committee in US and Cadbury report in UK INDIAN SCENARIO Mixed Bag CG not homogeneous Family run firms Hybrid system

KEY VARIABLES
Dividend intensity Promoter holding Ratio of equity dividend to total assets Percentage of equity shares held by promoters (persons in overall control of the company ) Aggregate percentage of equity shares held by Insurance companies, Mutual funds, Financial Institutions , banks, Venture capital funds. Percentage of equity shares held by companies registered in country other than the country in which they are currently investing. Percentage of equity shares held by corporate bodies. Ratio of total debt to equity capital, measure of leverage

Institutional holding

Foreign institutional investment

Corporate holding Debt equity

METHODOLOGY
SECTORAL STUDY
Information & Technology sector FMCG sector Service sector

DATA AND SAMPLE

Data has been sourced from Prowess database of CMIE. IT sector (2001 to 2007)- constituent companies of CNXIT index-18 firms FMCG sector (2001-2007)- 15 firms which are constituent of CNX FMCG index. Service sector (2001-2007)- 30 constituent companies of CNX Service sector index.

METHODOLOGY (Contd.)
VARIABLES
Y= Dividend Intensity X1= Promoters holding X2= Institutional holding X3=FII holding X4= Corporate holding X5= Debt equity ratio Correlation & Regression is used to explore the relationship between dividend intensity and these variables.

ANALYSIS- IT SECTOR
CORRELATION MATRIX

Y Y X1 X2 X3 X4 X5 1

X1 .160 1

X2 .023 -.515 1

X3 .082 -.467 .899 1

X4 -.205 -.435 .011 -.083 1

X5 -.120 -.179 -.142 -.089 -.089 1

ANALYSIS- IT SECTOR
LINEAR REGRESSION Multiple regression analysis Y=+b1x1+b2x2+b3x3+b4x4+b5x5

R SQUARE

ADJ. R SQUARESTD. ERROR .055 3.99E-02

.310

.096

ANALYSIS- IT SECTOR
Regression coefficients constant X1 (Promoters holding) X2 (Institutional holding) X3 (FII ) X4 (Corporate holding) X5 (Debt Equity) SS REGRESSION RESIDUAL TOTAL 1.886E-02 .175 .194 4.177E-02 1.183E-02 -5.23E-02 7.852E-025 -4.98E-02 -9.68E-03 Df 5 110 115 MS 3.1332E-03 1.594E-03 Prob. .021* .615 .333 .202 .130 .070 F VALUE 2.342 PROB. .046

*values are significant at 5% sig. level

ANALYSIS-FMCG SECTOR
CORRELATION MATRIX

Y Y X1 X2 X3 X4 X5 1

X1 .232 1

X2 .021 -.543 1

X3 .203 -.237 .680 1

X4 -.234 -.305 .196 .022 1

X5 -.312 -.070 -.170 .152 .164 1

ANALYSIS-FMCG SECTOR
LINEAR REGRESSION Multiple regression analysis Y=+b1x1+b2x2+b3x3+b4x4+b5x5

R SQUARE

ADJ. R SQUARE .243

STD. ERROR 6.219E-02

.531

.282

ANALYSIS-FMCG SECTOR
Regression coefficients constant X1 (Promoters holding) X2 (Institutional holding) X3 (FII ) X4 (Corporate holding) X5 (Debt Equity) SS REGRESSION RESIDUAL TOTAL .141 .360 .501 6.537E-02 3.635E-02 -.158 .513 -.131 -4.43E-02 Df 5 93 98 MS 2.826E-02 3.867E-03 Prob. .022* .283 .056 .000* .275 .000* F VALUE 7.308 PROB. .000

*values are significant at 5% sig. level

ANALYSIS-SERVICE SECTOR
CORRELATION MATRIX

Y Y X1 X2 X3 X4 X5 1

X1 -.005 1

X2 -.116 -.542 1

X3 -.042 -.529 .848 1

X4 -.081 -.157 .026 -.071 1

X5 -.225 -.361 .383 -486 -.036 1

ANALYSIS-SERVICE SECTOR
LINEAR REGRESSION Multiple regression analysis Y=+b1x1+b2x2+b3x3+b4x4+b5x5

R SQUARE

ADJ. R SQUARE

STD. ERROR 4.015E-02

.334

.112

.086

ANALYSIS-SERVICE SECTOR
Regression coefficients constant X1 (Promoters holding) X2 (Institutional holding) X3 (FII ) X4 (Corporate holding) X5 (Debt Equity) SS REGRESSION RESIDUAL TOTAL 3.460E-02 .276 .310 5.467E-02 -2.94E-02 -7.77E-02 8.577E-02 -8.83E-02 -6.63E-02 Df 5 171 176 MS 6.920E-03 1.612E-03 Prob. .000* .033* .008* .027* .209 .000* F VALUE 4.292 PROB. .001

*values are significant at 5% sig. level

CONCLUSION
Developing Economy
Common Law country Credit Lyonnais Securities Asia- India ranks after Argentina , China , HongKong and Hungary- Average payout of 22% CLSA companies with good Corporate Governance have outperformed their indices in recent years. IT firms ranks high on good corporate governance. Information symmetrical Infosys was the first firm to adhere to norms of Kumar Manglam Birla Committee(1999). Increasing the shareholders wealth and safeguarding the interests of stakeholders not incompatible. Wipro and Satyam also on same lines.

FMCG SECTOR Cash rich companies Low level of debt FII affect dividend policy decisions. SERVICE SECTOR Debt equity ratio is significant RESEARCH GAP Applying non linear regression model

REFERENCES
Avizian, Varouj, Laurence Booth and Sean Cleary (2003) , Do emerging market Firms follow different dividend policies from Us firms , Journal of Financial research,371-87 Easterbrook, (1984), Two agency cost explanations of dividends, American Economic Review,74(4):220-30 Faccio , Mara , Lary , H.P. Lang and Leslie Young (2001), Dividends and Expropriation ,American Economic Review,91:54-78 Gugler, Klaus and B. Burcin Yurtoglu (2003), Corporate Governance and dividend payout policy in Germany , European Economic Review, 47:731-58 Jensen, Gerald R., Donald P. Solberg and Thomas S.Zorn(1992), Simultaneous Determination of insider ownership, debt , and dividend policies , Journal of Financial and Quantative analysis,27(2):247-63 Jensen , Michael C. (1986), Agency cost of free cash flow, corporate finance , and takeovers , American Economic Association Papers and proceedings, 76(2):323-29 Han , Ki C. , Suk Hun Lee and David Y. Suk(1999), Institutional shareholders and dividends, Journal of Financial and Strategic Decisions , 12 (1):53-62

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