Interindustry Dividend Policy Determinants

in The Context of an Emerging Market

Table of contents

Abstract
1. Introduction
2. Literature review
2.1 literature review on dependent variable
2.2 literature review on independent variable
3. Methodology
3.1 data and selection of firm
3.2 model specification
3.3 hypothesis development
4. conclusion
Abstract
This article examines the determinants of the dividend policies of public listed firms in Malaysia.
A panel regression estimation model is used to identify the determinants of dividend policy
within Malaysian firms. These determinants are then examined across eight different industries
Technology, Industrial, Consumer Noncyclical, Basic Material, Communication, Consumer
Cyclical, Diversified and Energy – to investigate possible divergences in the determinants of
dividend payouts in the context of an emerging market. Empirical findings show that firm size,
leverage position, and profitability are significantly and inversely related to the dividend policy
of firms in Malaysia. However, the industry-specific determinants of dividend policy display a
number of variances that could plausibly be used as an indication of the selection of stocks in
specific industries by potential investors. The results indicate that agency cost is positively
related to dividend policy for the Basic Material industry. In addition, size and leverage play an
important role in determining dividend payout for firms in the Technology and Consumer
Noncyclical industries. For the Industrial sector, the size and profitability significantly affect the
dividend policy of firms. However, the results failed to display any significant results for the

Energy and Consumer Cyclical industries.

1. Introduction
Capital budgeting is related to the firm choice on type of acquisition of asset whereas financing
is the decision on which type of asset that the company want to acquisition. The type of asset and
the decision for the acquisition of an asset will reflect whether the firm will generate sale and
generate profit. When the company are making profit another decision can arise that is whether
to distribute a portion of earning to the shareholders or to reinvest the profit back into the
business for further use and development. The reason to distribute a portion of profit to the share
holder at the beginning of the time when public listed company required fund or capital to
expand or grow the business.

The objective of this study is to examine the determination of dividend policy in intraindustry
company in Malaysia by investigating the relationship between dividend policy which is
dependent variable and five independent variable agency cost, size, profitability, financial
leverage and growth opportunity so the main objective of this study is to examine the
relationship between dividend policy and agency cost, relationship between the dividend policy
and size of the firm, relationship between the dividend policy and profitability of the firm,
relationship between the dividend policy and the financial leverage of the firm and the
relationship between the dividend policy and the growth opportunity of the firm.

This study is helpful for the investor to make the good investment decision investor can take
advantage and revise their strategies by understanding the factor that determine the dividend
policy, this study is also helpful for the house hold customer to increase their saving in order to
avoid any unpredictable economic downturn in the future, it’s also helpful for
ourselves(students) to enhance their general knowledge regarding the factor that determine the
dividend policy and at the last but not the least this term paper is also helpful for the government
to predict the future action in order to inject the fund in interindusrty.

2. Literature review
Dividend policy is the one of the most important controversial issues in modern corporate
finance Black (1976) argues that “the harder we look at the dividend picture the more it seems
like a puzzle, with pieces that just don’t fit together’ dividend policy refers to the payout policy
that the firm follow in determining the size and pattern of cash distributions to the shareholder
over the time. After two decades of nonstop research the dividend policy is still listed as one of
the top 10 un resolved issues in the world of finance in which no consensus has been reached
according to Nurul Shahnaz Mahdzan there is no consensus on the factor that influence firm
dividend payout policies because the study have nonetheless found that dividend policy pattern
differ overtime and across countries difference in dividend policy across the country can be
explained by the variation in the policies, including corporate governance and legal system in
countries
2.1 Literature review on dependent variable
The dependent variable use in this study is the dividend payout ratio defined as dividend paid by
net income this variable measures the percentage of company earning distributed to shareholders
the dividend payout ratio indicates the ration of profit distributed by the company among the
shareholders out of the net profit the dividend payout ratio also used in this rather than dividend
per share and dividend yield

2.2 Literature review on independent variable

According to the study profitable firms are willing to pay higher amount of dividend to convey
their good financial performance so therefore positive relationship between profitability and
dividend payment, a negative relationship is expected between firms financial leverage and its
dividend payment, high growth firm tend to retain most of their earning to reduce their
dependency on external financing where non growth firm pay high dividend at their maturity so
therefore negative relationship expected between firm growth and its dividend payments,

3. Methodology

3.1 Data and Selection of Firms

The financial data obtained for the study obtained from the Bloomberg database and all the firms
are listed at the Malaysian stock exchange in the period from 2005 to 2009. There are two selection
criteria set to enhance the quality of the study. The first criteria is to exclude the financial
institutions and the utilities companies from the selection process. Secondly, those firms are also
excluded which announced the dividend just once in the period of the study. There are total 640
firms selected for the study after applying the selection criteria and all these firms segregated into
8 different industry types based on the Global Industry Classification Standard.

3.2 Model Specification

To study the determinants of Malaysian firms’ dividend payout policies, an unbalanced panel
regression estimation model was used. The dependent variable is dividend payout, while the
independent variables are agency cost, firm size, profitability, leverage, and growth.
The dividend payout is estimated using a panel regression model:
Div_PAYOUTit = β0 + β1 AGENCYit + β2 SIZEit + β3 PROFIT + β4 LEVERAGEit + β5 GROWTHit
+ ⅇit + vit
Where; β0 is the intercept, DIV_PAYOUTit represents dividend yield, AGENCY_COSTit is the
firm’s free cash flow, SIZEit denotes the natural log of the firm’s market capitalization, PROFITit
refers to earnings per share, LEVERAGEit represents the debt-to-equity ratio, GROWTHit refers
to free cash flow, εit is the error term, and νit is the cross-sectional error term (for the random
effects model). To identify the suitability of the fixed or random panel estimation process to the
tested series, the Hausman test was employed.

3.3 Hypotheses Development

There are five hypotheses developed in this study: Agency Cost Hypothesis, Firm Size Hypothesis,
Profitability Hypothesis, Financial Leverage Hypothesis and Growth and Investment
Opportunities Hypothesis.
All the hypotheses are mentioned below:

Hypothesis 1: There is a significant positive relationship between dividend payments and agency
costs.
Hypothesis 2: There is a significant positive relationship between dividend payouts and firm size.
Hypothesis 3: There is a significant positive relationship between paying dividends and
profitability.
Hypothesis 4: There is a significant negative relationship between dividend payments and
financial leverage.
Hypothesis 5: There is a significant negative relationship between dividend payments and growth
opportunities.

4. Conclusion
To conclude the study, it is found that the firm size, profitability and the leverage position were
found the significant negative relationship with the dividend policy but agency cost is insignificant
with the dividend policy. As far as the full model is concerned, firm size, profitability and the
financial leverage is significant with all the different sectors and had the mix of negative and
positive relationship. The growth opportunities is not significant with the dividend policy.
As the implications for the managers, this study provides the support to the managers that they
must focus and look on to the profit and size of the firms before making an investment and to
ignore the firm’s free cash flow.
The results of this study demonstrated that most of the factors on dividend policy have shown the
same results what had been shown in other advanced economies and the reason for those results
are the consistencies of the variables taken in the study. It is suggested for the future research that
it is to be examined that the impact of other firm-specific factors incorporating the corporate
governance aspects on the dividend policy of different emerging markets.