International Journal of Pure and Applied Management Sciences; 2016 Vol.

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A Study on Profitability Management of Restaurants in

Tamilnadu
by

B. Kayathiri Bai
Research scholar, Assistant Professor in Commerce,
P. G. Department of Commerce, S. T. E. T. Womens College,
Sudarkkottai, Mannargudi, Thirvarur District, Tamilnadu, India.
&

Dr.V.Buvaneswaran
Assistant Professor in Commerce, P. G. and Research Department of Commerce
Rajah Serfoji Governement College (Autonomous), Thanjavur- 612005.

Date of revised paper submission: 7th June 2016; Date of acceptance: 31st July 2016
Date of publication: 14th August 2016; *First Author / Corresponding Author; Paper ID: MS16101

Abstract
Several theories have been documented on the basis of relevance and irrelevance of dividend policy.
Many authors continue to come up with various findings from their studies on the relevance of
dividend policy. The main thrust of this study is to find out the relationship between dividend payout
and firm profitability among listed hotels and restaurant companies in the Chennai Stock Exchange
(CSE). Regression and correlation analysis were carried out for establishing the relationship between
dividend payout and firm profitability. The findings showed that dividend payout was a necessary
factor affecting firm performance (R = 0.725 & R2 = 0.526). Their relationship was much strong and
positive. This showed that dividend policy was relevant. It can be concluded, based on the findings of
this research that dividend policy is suitable and that managers should pay attention and also devote
adequate time for designing a dividend policy that will enhance firm profitability and therefore
shareholder value.
Keywords: Dividend Payout, Chennai Stock Exchange, Share holder value.
1. Introduction
The issue of dividend policy is much important one in the current business
environment. Dividend policy is the guidelines and regulations that a company uses for deciding the
dividend payments for their shareholders (Nissim & Ziv, 2001). The dividend policy decisions of
firms are primary tool of corporate policy. Dividend that is basically the benefit of shareholders in
return for the risk and investment is determined by different factors in an organization. Generally,
these factors include investment chances and choices, financing limitations, firm size, pressure from
shareholders and regulatory regimes.
2. Research Problem
Despite the numerous studies (Arnott & Asness 2003; Farsio et al 2004 and Nissim &

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Ziv 2001) that have been done, dividend policy remains an unresolved issue in corporate finance.
Several theories have been proposed to explain the relevance of dividend policy and whether it affects
firm value as there has not been any universal agreement (Stulz, 2000; Pandey, 2003; DeAngelo,
2006). Researchers Amidu (2007), Lie (2005), Zhou & Ruland (2006), Howatt et al. (2009), continue
to come with various findings about the relationship between dividend payout and firm performance.
A study by Amidu (2007) given that dividend policy affects firm performance i.e., measured by its
profitability. The results showed some positive and significant relations between return on the assets,
return on the equity, growth in the sales and the dividend policy. Howatt., (2009) also concluded that
positive changes in the dividends are associated with the positive future changes in earnings per share.
In contrast, Lie (2005) argues that there is limited evidence that dividend paying firms experience
subsequent performance improvements.
A number of studies (Arnott & Asness 2003; Farsio et al 2004 and Nissim & Ziv
2001) have been done in regarding to dividend policy and firm performance i.e., in developed
economies. Can the findings of those studies (Aivazian et al., 2001 and Al-Haddad, et al., 2011) be
replicated in some developing countries? In Tamilnadu, few empirical studies have been done to
establish the relationship between dividend payout and firm profitability. This study therefore comes
in to fill the gap by establishing whether there is a relationship between the dividend payout and firm
profitability between the listed various hotels and restaurant companies in Tamilnadu.
3. Research Questions
In order to gain an insight and understand the relationship, if any, between dividend payout and
profitability in the profit-oriented business, following questions below are addressed in course of the
study.
1. What association exists between dividend payout and firm profitability among listed companies
in Tamilnadu?
2. What is the extent of the association between the dividend payout and firm profitability?
4. Objectives of the Study
The general objective of the research was to establish the relationship between
dividend payout and firm performance among listed companies in Tamilnadu. The research was
guided by the following particular research objectives;
1. To establishing the association between dividend payout and firm profitability between the
listed companies in Tamilnadu.
2. To establish the extent of association between the dividend payout and firm profitability.
5. Review of Literature

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5.1 Theoretical Framework: Bird-in-the-hand theory
The "Bird in Hand" theory of Gordon (1962) argues that the outside shareholders prefer a
higher dividend policy. They prefer a dividend today to the highly uncertain capital gain from their
questionable future investment. A number of studies demonstrate that this mode fails if it is posited in
a suitable and perfect market with investors who behave according to the notions of rational behavior
(Miller and Modigliani, 1961; Bhattacharya, 1979).
5.2 Signaling Theory
According to information content of signaling theory or dividends, firms, despite the
distortion of investment decisions to capital gains, may pay dividends to signal their future prospects
(Amidu, 2007). The intuitions underlying this argument are based on the information non-symmetry
between managers i.e., insiders and the outside investors, where managers have private information
about the current and future fortunes of firm that is not available to outsiders.
5.3 Agency theory
Even if any firm does not have free cash flow, dividend payments can still be much useful for
the shareholders to control the overinvestment problem. Easterbrook (1984) argues that dividends
reduce the problem of over investment due to the payment of dividends increases the frequency with
that firms have to go for equity markets in order to raising additional capital. In the process of
attracting the new equity, firms subject themselves to disciplining and monitoring of these markets.
This lowers the agency cost.
5.4 Empirical studies
The behavior of the dividend policy is the most debatable issue in corporate finance literature
and still keeps its prominent places in developed an emerging market (Hafeez & Attiya, 2009). Many
researchers have tried to uncover the issues regarding the determinants of dividend policy and
dividend dynamics but we still dont have any acceptable explanation for the observed dividend
behavior of the firms (Black, 1976; Brealey & Myers 2005). Dividend policy has been analyzed by
many decades, but no universally accepted explanation for the companies observed dividend behavior
has been established (Samuel & Edward, 2011). It has long been a puzzle in the corporate finance.
6. CONCEPTUALIZATION
In Brigham (1995), a firms dividend policy is taken as a major determinant for a
firms performance. Similarly, Zakaria and Tan (2007) also stressed on the fact that investments made
by different firms influences the future dividends potential and future earnings.
Nissim & Ziv (2001) showed that the dividend increases were directly related to
future that increases in earnings in each of the two years after the dividend change Likewise,

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Zeckhauser & Pound (1990) in a related study found that there is no meaningful difference between
the dividend payouts with or without large block of shareholders.
Kale and Noe (1990) suggest that dividend acts as the signal of the stability for the
firms future cash flows. A survey related to extant literature argues that the key determinants of
dividend decisions include after tax earnings of the firm, liquidity, cash flow considerations, past
dividend practices, future earnings, returns on investment, growth prospects, legal requirements,
inflation and interest rates. Brigham (1995) submit that dividends provide the most reliable signal.
According to him, the increase in the dividend the future earnings will be much stronger and enough
to support of a new and higher dividend and vice versa. This view is corroborated by Foong, et al
(2007) when they noted that there is a evidence to support the view that the investors respond to the
dividend changes. For example, Fama and Babiak (1968) found a time series relationship been
earnings and annual dividends that is consistent with the view that dividend paying firms increase
their dividend only when the management is relatively confident that their higher payments can be
maintained.
7. Hypotheses of the Study
The hypotheses below are operationalized as the basis for the analysis and conclusion
on the relationship between the dividend payout and profitability.
H1: There is a significant relationship between the dividend payout and the net profit.
H2: There is a significant relationship between the revenue and the net profit.
H3: There is a significant relationship between the total assets and the net profit.
H4: There is significant impact of dividend payout, revenue and total assets on net profit.
Hypotheses 1, 2 & 3 are evaluated based on correlation analysis while regression analysis the basis
of evaluation of the hypothesis 4.
8. Methodology
8.1 DATA SOURCE:
The present study used the secondary data for the analysis. The data utilized in this
study is extracted from comprehensive income statements and financial position of sample hotels and
restaurant companies quoted in Chennai Stock Exchange (CSE) database. In addition to this, the
scholarly articles from academic journals and the relevant textbooks were also used.
8.2 SAMPLING DESIGN
Sampling design is the definite plan for obtaining the sample from a given
population. It refers to the procedure or the technique the researcher would adopt on selecting the

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items for the sample (Kothari, C.R., 2004). The sample of this study is confined to trading sector
consists of 16 hotels and restaurant companies listed in Chennai Stock Exchange (CSE).
8.3 MODE OF ANALYSIS
In present study, we analyze data by employing correlation; multiple regressions and
descriptive statistics. For study, entire analysis is done by personal computer with the help of
statistical package Statistical Package for Social Sciences (SPSS) 16.0 Version. The following
profitability and liquidity ratios are taken that are given below.

Table-1: Calculations of Dependent and Independent variables.

Dependent Variable
Net Profit (NPT)
Independent Variable
Dividend Payout (DIVP)
Control Variables
Revenue (RVN)
Total Assets (TA)

= Net Profit After Tax (NPAT) / Total Revenue (TR) X100

= Total Amount of Dividend Paid during the Particular Period
= Amount of Sales
= Amount of Total Assets

Multiple regression analysis was performed to investigate the impact of the dividend payout
on the profitability. Which the model used for study is given below.
Profitability = f (DIVP; RVN; and TA)
It is important to note that Profitability depend upon Revenue (RVN), Dividend
Payout (DIVP) & Total Assets (TA). The following model is taken to analyze the impact of the
dividend payout on the Profitability.

NPT= 0 + 1DIVP + 2RVN + 3TA+e -------------------------------------------- (1)

Where, 0, 1, 2, 3 are the regression co-efficient
NPT

Net Profit

DIVP

Dividend Payout

RVN

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Revenue

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TA

Total Assets

9. Correlation Regression and Reliability Analysis

Table 2: Correlation, Regression & Reliability Value
Model
1

Dependent
NPT

Independent

P value

DIVP

0.441*

0.027

RVN

0.671**

0.004

TA

0.747**

0.001

R2

F-Value

Durbin-Watson

52.6

4.433

1.815

(0.026)

*, Correlation is significant at the 0.05 level (2-tailed)

**, Correlation is significant at the 0.01 level (2-tailed).
The above table indicates the relationship between the various dependent and independent
variables used in the study. As it is observed in the table, the values of correlation were found to be
positive between the variables. The Dividend payout has 44.1% relation i.e., moderate positive with
the net profit which is significant at 5 percent level of significance. As well as revenue and the total
assets have 67.1% and 74.7% relation i.e., strong positive with the net profit respectively. These are
significant at 1% level of significance.
9.1 Regression
Regression analysis is generally used to test the impact of the dividend payout on
profitability of the listed hotels and restaurant companies in CSE. As we already mentioned in
mode of analysis, a model was considered and the results are summarized in the Table-2.
The specification of three variables such as RVN; DIVP; and TA in the above model argued
the ability to predict profitability (R2 = 0.526). In this model R2 value of the above Mentioned
profitability measures give that 52.6% to the observed variability it can be analyzed by the differences
in three independent variability namely revenue dividend, payout and total asset. The remaining 47.4
% are not explained due to the remaining part of variance in profitability is related to the other
variables those are not depicted in our model.
An examination of the model summary in conjunction with ANOVA (Fvalue) indicates that
the model explains most possible combination of the predictor variables that could contribute to
relationship with the dependent variables. The Model given by the researcher is significant at 5%
level of significance. F value is 4.433 and respective P value is 0.026 which is statistically

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significant at the 5% level of the significance. It reveals that only DIVP has the significant impact on
NPT at 5% level of significance. However, it should be noted that there may also be some other
variables which can have an impact on profitability, which need to be studied. In addition to this
analysis Durbin-Watson test also carried out for checking the auto correlation between the
independent variables. The Durbin-Watson statistic ranges in value from 0 to 4. A value near 2
denotes non-auto correlation. Model has the value is 1.815. This shows that there is no auto
correlation.
10. Hypotheses Testing

Table3: Testing of Hypotheses

No

Hypotheses
Results

Tools

the dividend payout and net profit

There is significant relationship between

Accepted

Correlation

H2

revenue and net profit

There is significant relationship between

Accepted

Correlation

H3

total assets and net profit

There is significant impact of dividend

Accepted

Correlation

Accepted

Correlation

There is significant relationship between

H1

payout, revenue and total assets on net

H4

profit.

11. Conclusion
This study is mainly looked at the dividend payout and profitability in Tamilnadu. The study
came up with the findings that are of salient importance to the scholars investigating dividend issues
in the context of Tamilnadu. Based on first hypothesis, the study observed that the dividend payout
has a significant impact on profitability of listed firms in the state Tamilnadu. That is an increase in
the financial status of a firm and tends to positively affect the dividend payout level of the firms. The
findings from the second hypothesis give that there is a significant positive relationship between the
profitability of firms and revenue. The findings given by the third hypothesis assure that there is
significant positive relationship between the profitability of firms and total assets. Also the final
hypothesis says that all used independent variables have significant impact on the profitability of the
hotels and the restaurant companies.
References

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1. Aivazian, V., Booth, L., & Clearly, S., 2003; Do emerging market firms follow different
dividend policies from U.S. firms? Journal of Financial Research, 26(3), 371 387.
2. Al-Haddad, W. et al., 2011; The effect of dividend policy stability on the performance of
banking sector, International Journal of Humanities and Social Science, 5(1).
3. Ali, K.L., Khan, A.Q. & Ramirez, G. G., 1993; Determinants of corporate dividend policy: A
factorial analysis, Financial Review, vol. 28: 523-47.
4. Amidu, M., 2007; How does dividend policy affect performance of the firm on Ghana stock
Exchange, Investment Management and Financial Innovations, 4(2), 104 112.

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