The impact of

business on
payment ratio
Impact of Business (systematic risk) on
dividend payout
To analyze the relationship between beta and payout ratio, and use the market
model and calculate the beta for 62 non-financial companies. Basically the
sample of the study is 76 non-financial companies but due to the unavailability
of the data study has analyzed 62 companies Beta calculate for five years for
each company then the study also calculate the payout ratio of five years
through OLS. Study also analyze the coefficient of the result which concluded
that beta has positive and significant relationship with payout ratio

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 The impact of business on payment ratio
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Table of contents
1. Chapter 1 Introduction…………………………………..…………………………1
i. Research statement
ii. Scope of research
iii. Purpose of the research

2. Chapter 2 Literature review

3. Chapter 3 Methodology

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List of abbreviation
FMCG Fast moving consumer goods

IT Information Technology

OLS Ordinary least square method

KSE Karachi stock exchange

US united States

NYSE Newyork stock exchange

NASDAQ National automated security dealer association and quotation syste

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CHAPTER 1

Introdution

Introduction:
All managers try to control risk because it is a factor that effect the ability
of the firm to increase or decrease return on investment or affect profit and
loss of the firm .

All the firms give dividends to their shareholders. Some give fix dividends
and other bring some variation which affect the operating activities of the
firm

There are two types of risks, Systematic (beta) and unsystematic risk. Here
the study is concern with systematic risk which is not diversified and how it
affects the dividend payout ratio

One of the biggest problem for businesses today is dividend payout ratio ,a
lot of researchers have done their study to determine payout ratio . Other
factor also effect payout ratio such as Profitability, cash flow, corporate tax
sales growth and market to book wale ratio

Dividend payout is positively related to profit and cash flow and it is

inversely related to corporate tax sales growth and market to book value
ratio (Anil and Sujata kapoor,2008)

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Another study shows that if the company earning growth is high then the
company tend to pay high dividend to their shareholders (Ping Zhou and Roland
2006),

The study also shows that nobody knows that how much dividend should be
payed, the managers cannot avoid any uncertainties regarding future
developments or any future failure in dividends. They will look into every aspect
to avoid such situations (Linter 1956)

Studies show that when the determinants of dividends are changed then there is
a change in the payout ratio .literature show that determinants have a great
impact on payout ratio either positive or negative when changed

The managers think how these changes can be controlled through adopting
different procedures and methodologies, but here study only examine the impact
of systematic risk (beta) on dividend payout ratio.

Further this study will use Anils and sujata kapoors model and some
interpretation and calculations will be done by pooled and 5 years period had
been taken from2005 to 2009.

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1.2 Research statement

“To determine the impact of business risk (beta) on payout ratio at KSE 100 index”

1.3 Scope of research

This study will be conducted on KSE 100 index and will be applicable to all the
sectors of Pakistan, Here the study will focus on non-financial listed on KSE 100
index

1.4 Purpose of the research

The study will show how payout ratio of dividends is affected by business risk.
This will find an easy way to for organizations on basis of business risk that how
much dividends should be paid to the shareholders

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Chapter 2
Literature Review
2.1 Literature review
Miller and Modigliani(1961) said that the value of the firm depends on the
earning they make, if the income is good then there is no problem how to split it
between dividends and retain earnings

Myers (2004) in there study of 483 firs empirically examined from miltex investor
database to analyze the impact of selected financial variables on dividend
decisions using OLS regression .they took price to earning ratio, profit margin,
debt to equity ratio, current ratio, float, insider ownership, institutional
ownership and growth rate for earning per share and sale growth as independent
variables and payout ratio as dependent variables. They found that if the price to
earning ratio is high then risk will be lower and dividend payout ratio will be
higher.

Anil and kapoor (2008) conducted a study in India on Indian information

technology sector and said that the existing variables do not explain the payout
ratio of it sector. Only cash flow liquidity and beta is are proper variables for
payout ratio. They found that if the cash flow and current liquidity of the firm is
high then firs will be able to pay their dividends

Green et al. (1993) his study explained the relationship between investment,
dividend payout ratio and financial decisions. The study found that the companies
are ready for upcoming problems but cannot payout their dividends due to
involvement in investment and financial activities

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Zhou and Ruland (2006) examined the companies listed in NYSE.NASDAQ

and Amex that paid dividends. Their study showed that if the risk is low
then future earning growth is expected to be high and payout ratio will also
be high

Gill et al. (2010) the study was done on American manufacturing

companies. Study states that the dividend payout ratio is the function of
profit margin, tax and market to book ratio.

Kalay (1981) the study showed the cross sectional test that risk is
independent of the payout ratio

Rozeff (1982) his study showed that investment policy influences dividend
policy

Hoberg and Prabhala (2009), the study explained the disappearing of

dividends due to risk and resulted that risk is a main factor which lead to
the disappearance of dividends

Baker and Powell in the year 2000 , carried out a survey which concluded
that dividend payout ratio can be impacted by future risks and that these
determinants are industry specific.

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In the year 1991, Pruitt and Gitmann studied to give out the annual
variation in the earning and also set the firms dividend policy. Their study
also concludes that firms with stable earnings can predict their future
income and are able to pay a higher percentage of its earnings than the
firms with variation in their earnings

Rozeff in 1982 examined 1000 samples from 64 industries which showed

that higher growth rates are associated with lower dividend payout. It also
states that higher inside ownership can lower the dividend payout.

Sujata kapoor in 2009's review was directed on indian firms and spotlights
on indian data technology.FMCG and administration division
respectively.His study uncover that organizations in FMCG area have high
liquidity position.so if the organizations obligation extent increment then it
doesn't put any weight n these organizations to pay profit that is the reason
the efficient hazard is emphatically identified with profit payout proportion
yet if there should arise an occurrence of IT segment firms have low or zero
obligation subsequently these elements of money related and efficient
hazard has no effect on profit payout proportion and in administration area
the systamatic chance and winning fluctuation have negative connection if
the changeability in winning danger is lower than the extent of dividend
payout apportion will be high in administration sector.Amihud in 2002
inspected the stocks and in finished up every stock in the portfolio has
distinctive beta's because of which return of stock can be influenced.

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Pastor and Samavgh in 2001 examined the relationship between stock's

returns and liquidity beta's and concluded that the stocks that are more
sensitive to liquidity have higher expected return and smaller stocks have
less liquidity therefore have high sensitiveness to aggregate liquidity.
William beaver (1970) studied a sample of 307 firms and found out how risk
is associated with the earnings of a firm and how much a firm can be
affected by dividend payout, growth, leverage, liquidity, asset and size etc.
His study concluded that ceteris paribus firms are more risk with low
dividend payout and if the firm's variability is high its dividend will be low
because of uncertainty of earning.

Cheng and Boasson in 2002 analyzed the sample of 31 emerging market

stocks and concluded that the beta of these markets can be shifted over
the period of time.Taufiq Chaudhry in 2001 examined three Asian markets
Hong Kong ,Malaysia and Singapore and found that the variability can affect
the stocks. Rahul versa in 2011 studied different countries with a market
model and concluded if the market is doing good then the relationship
between beta and return is positive and vice versa. Lloyd (1985) his
reasearch has used beta values and concluded that beta is the indicator of
its market risk further more the study found that if the systematic risk is
high then the divident payout ratio of that firm will be low.

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Chapter 3

So in chapter three mainly two variables are used throughout the chapter,
risk and payout ratio. Business risk is independent variable whilst payout
ratio is dependent variable. Many researchers have revealed how the
business risk affect the payout ratio higher the payout ratio the higher will
be the business risk. The data in this chapter is collected from secondary
sources. Population is KSE 100 index and the sample consisting of all the
non financial companies listed on the KSE 100 index. All the prices of non-
financial are collected from the official website of KSE 100 index and the
formula that's used for returns is

P1-Po/Po

After the calculation of returns beta will be calculated through linear

regression. Companies with B>1 are high risk company and B<1 are low risk
company.

3.2: This study will examine the changing behavior of payout ratio and how
the payout ratio is affected by business risk. The business risk has a
negative effect

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Chapter 4
The table shows the OLS regression model for the dependent and independent variable of the f value for
the regression model is 5.263 which is statistically significant and which insinuates that the pool OLS model
is correctly predicting the relationship between dependent and independent variable. The r square value
for the regression model is .01 which suggest that the dependent variable of the table shows 1%
varuation.The intercept coeffient value for the regression model is 3.08 which shows that the constant
coeffient is significant at 5

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Conclusion

Most of the researchers have shown that systematic risk has impact on the payout ratio some of
them have shown the negative relationship of and some of them have shown the positive
relationship. The study of Rahul verma and tufa Chaudhary has shown that the systematic risk
has a positive relationship with stocks returns and their study also concluded a positive
relationship between systematic risk and payout ratio. And some the researchers showed the
negative relationship between the aforementioned two variables

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