Determination of Dividend Policy

Determinants of Dividend Policy in Indian Companies: A Panel Data Analysis
Determinants of Dividend Policy in Indian Companies: A

Panel Data Analysis
Introduction
Dividend decision is one of the most complex decisions in the corporate finance.
Dividend is the part of the profit to be paid to the shareholders. The amount of the
dividend which is to be paid or to be retained back in the company is decided by the
board of directors of the company. Earlier the dividend payment is realized as fulfilling
the shareholders expectation. As per signaling theory dividend was also used as
indicator for the company’s performance. Miller Lintner (1956) and Gordon (1959)
described dividend relevance as the increase in dividend increases the value of the firm
where as Modigliani (1961) described the irrelevance theory of the dividend as there is
no impact on the value of the firm with increase in dividend.It was believed that any
reduction in the dividend may result in reduction of the share price in the market. As
per the literature many theoretical models and explanations have been developed by
the researchers which define the various factors influencing the dividend decision.
Though many research have been done to identify the variables affecting and should be
concern before making dividend decision still the topic remains controversial.
Black
Available on SSRN-Elsevier
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AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

(1976) defines the dividend policy as “The harder we look at the dividend picture the
more it seems like a puzzle, with pieces that just do not fit together”. Many dividend
theories have been developed tojustify how the dividend decision has been taken and
whether it affects the value of the firm. After many researches, the answer is not similar
to the question that what are the determinants of dividend policy? Basically, the
research is on the various model, explanation and theories given by the researchers.
The result of the studies varied from country to country and from different time
periods. There were no fixed factors defined which can be used as perfect model. Being
the dividend decision is important and is been taken consistently by the manager.
Some companies pay dividend and some do not pay, explaining how much dividend to
pay and how much to retain it still a controversial and there is no fixed guide line for
making dividend decision. In this study we will identify the factors effecting
automobiles industry and pharmaceuticals industry as these industries grown huge in
last ten-year period. There will be comparison between the factors studied in both the
industry. As both the industries are growing rapidly and there is no research or very
few researches on both the sector the automobile sector and the pharmaceutical sector
in India. This study contributes to the existing literature by studying the dividend
policy of Automobiles company and Pharmaceuticals companies listed on NSE for the
period between 2007 and 2016. The variables were identified which make positive and
negative impact on dividend decision and will investigate the significance on dividend
policy.
Review of Literature
Dividend is considered as an important source of information for the investors.
Signaling theory says that the dividend is used as signal to announce the prospects of
the company.Managers know about the performance of the company as they analyze
the strategies and investment opportunities. Bhattacharya (1979) describes that
increase in dividend signals rise in expected cash flow and future performance of the
company and vice versa.
Aivazian et.al (2003) studies the dividend policy of emerging markets and also
compared the policy with the dividend policy of US firms. The result of the study
concluded that ROE and market to book value affect the dividend decision of US firms
positively. Debt ratio and Tangibility affects the dividend decision of the firms
negatively. The reaction of variables is similar in both market but the firms in emerging
market were more sensitive as compare to the US market. The Pooled cross analysis
concluded that emerging market firms pay higher amount of dividend as compare to
the US market firms.
Amidu& Abor (2006) examined the dividend payout ratios of 20 companies of listed on
Ghana Stock Exchange for period of six-year from 1998 to 2003. Ordinary Least
Squares model was used to test the regression equation. The results concluded the
positive relationships between dividend payout ratios and profitability, tax and cash
flowand market-to-book value and growth in sales had significant negative relation
with dividend payout. The institutional holding and risk (beta) had insignificant
negative correlation with dividend payout.
Al-Kuwari, D. (2009) analyzed dividend payout decisions of 191 non financialfirms
listed on the Gulf Cooperation Council (GCC) stock market for 5 period between
1999

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and 2003. The result revealed that company size, government ownership and
profitability had positive relation with dividend decision whereas good investment
opportunities had negative relation with dividend decisions.
Uwuigbe (2013) examined dividend policy of the 50 firms listed on Nigerian stock
Exchange for the period between 2006 and 2011. The annual report was used for
analyzing and collecting the data. Regression was applied on the data collected and
revealed that firm size, financial performance of firms and board independence put the
significant positive impact on the dividend payout decisions of firms listed on the
Nigerian stock exchange market. And found significant negative relationship between
financial leverage and dividend payout of the firm.
Maldajian&Khoury (2014) explored the dividend policy Lebanese listed banks. Seven
years unbalanced panel dataset of listed banks for the period between 2005 and 2011
were used for the study. The tools like OLS and the dynamic panel regressions were
applied on the data collected for the study. The result shows that the dividend payout
policies were positively influenced by the risk, firm size and previous year’s dividends
of the firms whereas at the same time opportunity growth and profitability influenced
the dividend decision of the firms negatively. The findings concluded that the Lebanese
listed banks prefer to retain the earnings for growth rather than to pay as dividend. The
listed banks just pay dividend to the shareholders to avoid the agency conflicts.
Wasike& Ambrose (2015)investigated the factors influencing the dividend policy of the
60 listed companies at the Nairobi Securities Exchange, Kenya for the period between
2004 and 2014. Panel regressions technique was applied on the data collected to
identify the variables. The result found that profitability and cash flow had significant
positive impact on the dividend decision of the listed firms whereas Tax had an
insignificant positive impact on the dividend decision of the firms. The results
also found that sales growth and market-to-book value had significant negative impact
of on dividend policy of the firms, risk and institutional holding had insignificant
negative impact on dividend decision of the listed firms.
Soondur et al (2016) analyzed the determinants of dividend policy of 30 companies
listed on the Stock Exchange of Mauritius for the period between 2009 and 2013. The
fixed and the random effect model were analyzedon the data collected and concluded
that there was significant negative relationship between retained earnings and net
income and dividend policy of the listed Mauritian firms, whereas there was highly
positive correlation between EPS and dividend policy of the SEM market.
Labhane&Mahakud (2016) examined the dividend payment of Indian listed
companies. Static panel data models 781 companies listed on NSE for the period
between 1995 and 2003 were used for the study. The study classified in two generation
that is first generation from 1994 to 2003 and second generation from 2004 to 2013.
Fixed effect model analysis concluded the significant positive relationship between
profitability, liquidity, size of the firm and dividend payout ratio of the firms, whereas
the firms with high investment opportunity, financial leverage and business risk had
lower dividend payout or significant negative relationship with dividend payout ratio.
Panel data analysis found that investment opportunity, financial leverage, size of the
company, business risk, firm life cycle, profitability, tax and liquidity are the major
determinants of the dividend policy for Indian companies.
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Determinants of Dividend Policy
Dividend is the amount of the profit to be distributed among shareholders. The

decision is taken by the board of directors keeping in mind the future financial needs of
the company. Dividend decision is the decision where the board of directors decides
the amount to be distributed among the shareholders and the amount to be retained.
Not only future financial needs affect the dividend decision there are many others
factors which influence the dividend decision of the company. As per the literature the
variables which influence the dividend decision of the company like profitability, size,
leverage, retained profit, investment opportunities, dividend distribution tax, liquidity
and sales growth. The description and measurement of the variables is defined below.
Dividend payout ratio is used as a measurement of dividend policy.
Profitability
Lintner (1956) described the profitability as the primary indicator which defines the
capability of the firm to pay dividend or not. The profitable company’s can only pay
dividend. As per the literature the result of impact of profitability on dividend payout is
mixed. Al-Kuwari (2009) concluded that the dividend decision is positively affected by
the profitability of the company. The profitable firms are likely to pay dividend as
compared to the nonprofit making firms. Aivazian et.al (2003), Najjar and Hussainey
(2009) and Wasike& Ambrose (2015) concluded that with increase in the profit of the
company increases the dividend paid to the shareholders. As per pecking order theory
the firms are more depend on the internal funds or retained earnings which result in
reduction in dividend payments by the profitable firms. Myers & Bacon (2004); Kania&
Bacon (2005); Amidu& Abor (2006)and Labhane&Mahakud (2016) concluded that
profitability had significant negative association with the dividend payout and
described that the firms prefer to retain profit rather than paying it to the shareholders.
Return on equity is measured as the ratio between net income and total equity.
H01 – There is no impact of profitability on the dividend policy of the
company.
H11 – There is impact of profitability on the dividend policy of the company.
Liquidity/ Cash Flow
Brittain (1964), Amidu& Abhor (2006), Musa (2009), Kapoor (2010) and
Gangil&Nathani (2018) found that the free cash flow affects the dividend decision of
the company. The free cash flow is the amount available and used for the payment of
the dividend. Brittain (1964) concluded that cash flow had positive impact on dividend
payout ratio of the company. Musa (2009), Wasike& Ambrose (2015) and
Labhane&Mahakud (2016) found the significant positive relationship between the cash
flow of the company and dividend payments. Ahmed &Javid (2009) described that
poor liquidity means shortage of funds which result in less dividend payments. Sur
&Majumdar (2012) and Kanwal& Kapoor (2008) found that cash flow had significant
impact on the dividend payout of the firm. Cash flow is measured as by adding
depreciation to the profit after tax.
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H02 – There is no impact of liquidity/cash flow on the dividend policy of

the company.
H12 – There is impact of liquidity/cash flow on the dividend policy of the
company.
Size
As per the literature the dividend payout is influenced by the size of the firm. It is
believed that big size firms pay largenumber of dividends where as small size of firms
pay small amount of dividend. Fama& French (2000) described that small size of firms
mainly depends on retained earnings to finance the new project as small size of firms
cannot easily access to the capital market to raise capital. Aivazian (2003), Al-Kuwari
(2009), Al-Shubiri (2011); Uwuigbe (2013), Maldajian&Khoury (2014) and
Labhane&Mahakud (2016) found significant positive relationship dividend payout
ratio of the firms. The size of the firm is measured as natural log of the Market
capitalization of the company.
H03 – There is no impact of size on the dividend policy of the
company. H13 – There is impact of size on the dividend policy of the
company.
Leverage (Debt equity ratio)
It is defined as the ratio of short- term and long-term borrowings to shareholders
equity. Uwuigbe (2013) described that if capital structure is comprising of debt than it
affects the dividend payout negatively and vice versa. Most of the studies found that
the indebted firms prefer to pay fewer dividends. Aivazian et.al (2003), Mahakund
(2005), Al-Kuwari (2009),Gupta &Banga (2010) and Labhane&Mahakud (2016) found
strong negative impact of leverage on the dividend policy of the firm. Leverage is
measured as the ratio of short term and long-term liabilities to shareholders funds.
H04 – There is no impact of Leverage (Debt equity ratio) on the dividend
policy of the company.
H14 – There is impact of Leverage (Debt equity ratio) on the dividend
Investment Opportunities
The investment opportunities influence the dividend payment of the company. The
company having high investment opportunities requires cash or funds to finance the
project and it will affect the dividend decision of the company. It is measured as the
ratio of the company equity to total asset of the firm. Aivazian et al. (2003) and Al-
Shubiri (2011) found the positive impact of investment opportunities on dividend
payment.Maldajian&Khoury (2014) and Labhane&Mahakud (2016) found the
significant negative impact of investment opportunities on dividend payment. It is
measured as company’s equity to total asset of the company.
H05 – There is no impact of Investment Opportunities on the dividend
H15 – There is impact of Investment Opportunities on the dividend policy
of the company.
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Retained Earnings
The profit which is not paid to the shareholders in form of dividend and retained back
is retained earnings. When the company wants money for investment and does not
wants to borrow than retained earnings id used for financing the project. It is measured
as percentage of profit retained by the company.Soodur et al (2016) found negative
relationship between retained earnings and dividend payout ratio.
Gangil&Nathani(2018) found significant negative relationship between retained
earnings and dividend payout ratio. It is measured as retention ratio of the company
H06 – There is no impact of Retained Earnings on the dividend policy of
the company.
H16 – There is impact of Retained Earnings on the dividend policy of the
company.
Dividend Distribution Tax
According to tax preference theory investors prefer that company should retain profit
instead of distributing to the shareholders because the tax rate on dividend higher as
compared to the capital gains. Narasimhan& Asha (1997) compared the impact of
dividend distribution tax with 10% tax rate against the 20% tax rate on the capital
gains passed in union budget 1997-1998. The result conclude that investors are
demanding dividend in place of capital gains because tax rate on capital gains is higher
than dividend distribution tax. Damodaran (2010) and Kamat&Kamat (2013) describes
that the higher tax rate on dividend increases the tax payment of the firm and reduces
the profit after tax which in turn reduces residual profit of the firm. It is measured as
ratio of dividend distribution tax to profit after tax of the firm.
H07 – There is no impact of Dividend Distribution Tax on the dividend
H17 – There is impact of Dividend Distribution Tax on the dividend policy
of the company.
Sales Growth
Rise in sales from one year to another indicate growth in sales. This growth indicates
that more amount of investment is required to meet future needs. The investment can
be arranged by not paying earnings in form of dividend to the shareholders. The
earnings can be utilized to finance the project and to maintain sales growth in long run.
Marfo-Yiadom&Agyei (2011),Wasike& Ambrose (2015) and Gangil&Nathani (2018)
found the negative relationship between sales growth and dividend payout. It is
measured as percentage change in the sales of the company to the previous year.
H08 – There is no impact of Sales Growth on the dividend policy of the
company.
H18 – There is impact of Sales Growth on the dividend policy of the
company.
Objectives of the study
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 To find out the factor affecting the dividend policy in automobiles sector.
 To find out the factor affecting the dividend policy in Pharmaceuticals sector.
Research Methodology
The various variables are identified which are expected to influence the dividend
decision of the company. For the study the sample of automobiles companies and
pharmaceuticals companies listed on NSE sectorial indices are identified. The Auto
index is a 16 companies Index from the automobile sector and it trade on the National
Stock Exchange. The Pharma index is a 10 companies Index from the pharmaceuticals
sector and it trade on the National Stock Exchange.The secondary data of 9 automobile
companies and 10 pharmaceuticals companies has been collected for the period
between 2007 and 2016 from the financial statements of the companies and website
like money control.com, yahoofinace.com. Thecompany of which the data is not
available has been excluded from the study. The data for the variable is standardized
on same scale. The data collected and compiled as per the requirement of the study.
Model Specification
Most of the studies have used logit and probit model is used to analyze the
determinants of dividend policy. In our study the data is not in binary form so logit and
probit model has not used. In the study data comprises of both dimension different
firms and time period. Panel data is used when the data comprises of both time series
and cross sectional. The multiple panel regression is analyzing on the panel data to find
out the determinants of dividend policy. Unit root test, Fixed Effect and Random
Effect, Hausman test are analyzed on the panel data using a statistical software called
Eviews.
The model for the study:
DPRit= β0 + β1CFit+ β2DEit+ β3DDTit+ β4IOit+ β5SIZEit+
β6ROEit
+ β7RPit+ β8SGit+
eit
where Yit= DPR for firm iin period t , CFitis cash flow used to define the liquidity of the
firm, it measured by adding depreciation to the profit after tax of the firm iin period t ,
DEitis used to measure the leverage of the firm it is measured as debt-to-capital ratio
for firm iin period t, IO is investment opportunity variable measured as ratio of
company’s equity to total assets of the firm iin period t, SIZEit is size variable
measured as natural log of market capitalization for firm i in period t, ROEit is
profitability variable measured as return on equityfor firm i in period t, DDTit is
dividend distribution tax divided by net profit after tax for firm i in period t, RPitis
retained profit variable measured as percentage of profit retained by the firm i in
period t, SGitis sales growthvariable measured as annual sales growth of the firm i in
period t,β0 is a constant, βs are the slope coefficients, eit is the error term for firm i in
period t.
Data Analysis of Auto mobile sector

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Unit Root test
Variables Levin, Lin & Chu ADF Fisher ADF PP

Statistics Prob Obs Statistics Prob Obs Statistics Prob Obs
DPR -13.15 0.00 81 -3.004 .0013 81 -3.055 .0011 81
CF -1.70 0.045 81 -4.520 0.00 72 -5.31 0.00 72 (1st)
1st
DE -9.62 0.00 72 -5.03 0.00 72 -1.61 0.52 81
1st
DDT -6.61 0.00 81 -5.84 0.00 72 -7.11 0.00 72
IO -8.39 0.00 72 -4.68 0.00 72 -5.50 0.00 72
MC -10.62 0.00 72 -5.36 0.00 72 -6.41 0.00 72
ROE -2.55 0.005 81 -1.600 0.051 81 -2.11 0.017 81
RP -8.77 0.00 81 -2.66 0.003 81 -274 0.003 81
SG -4.13 0.00 81 -2.06 0.019 81 -1.95 0.025 81
Null Hypothesis:
Ho : Unit Root (ASSUMES common unit root process)
The Stationary of the series is tested using Levin,Lin& Chu, ADF (Augmented Dickey
Fuller) Fisher and PP test techniques. The results concluded that the series are non
stationary at level and 1st difference by using all three techniques. As the P value is less
than 0.05, the null hypothesis i.e. series assumes unit root is rejected. It means that the
series do not have unit root.
Descriptive Statistics
All the descriptions apply to the sample of automobile sector which cover around 9
companies listed on the National Stock Exchange of India are included in the model.
Since we have panel data that contains both cross- sections and time series, the
statistics are taking into account the for the period between 2007 and 2016.
DPR CF DDT DE IO SIZE ROE RP SG
Mean 34.74367 0.102524 5.126000 0.427444 2.6881844.197587 22.8488959.64478 0.175325
Median 28.28500 0.100181 3.595000 0.295000 2.0457704.26224521.05500 66.680000.171494
Maximum212.7300 0.20566926.06000 1.610000 18.27334 5.144947 73.35000 100.00001.101747

- - -
Minimum 0.000000 0.0000000.000000 0.1878982.819590 -112.9300
0.051781 28.10000 0.693055
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Std.Dev 34.05643 0.043759 5.051409 0.418635 2.632537 0.55470615.58676 34.55076 0.244778
The mean, median, maximum, minimum and standard deviation of the selected
variables have been calculated and after seeing the outcome we can conclude that mean
and median of many variables like CF, DE, IO, SIZE, ROE and SG are very close that
means that the series have good spread and do not have extreme outliers.The mean
value of the dependent variable DPR (Dividend Payout Ratio) is 34.74 explains that the
average dividend payout ratio is 34.74% of the sample firms. The maximum and
minimum is 212.73 and 000 with a variation of 34.05. The average ROE is 22.84
explains the 22.84% return on equity, the average cash flow is .10 while dividend
distribution tax is 5.12. The average investment opportunities is 4.19, the average sales
growth is .17 while average size is 4.19 and retained earnings is 59.64.
Regression Result
To investigate the impact of the chosen independent variables on dividend payout ratio
the panel regression is applied. Hausman test is applied to check which model is
accurate and reliable.
Regression Result
Explantory Fixed Effect Model Random EffectModel
Variables Coef t-stats Prob Coef T stats Prob
CF 122.08 2.510*** 0.0143 47.383 30.718 0.126
DE -3.9811 -0.984 0.3281 -8.293 -3.003 0.0035
DDT 4.8313 11.063*** 0.000 4.398 0.3987 0.000
ROE -0.0995 -0.710 .4794 -0.128 -1.588 0.1160
IO -1.1842 -1.8213* 0.0726 -0.6765 -1.423 0.1585
MC -3.23468 -0.8517 0.3971 -6.281 -3.639 0.0005
RP -0.359 -4.7279*** 0.000 -0.410 -6.704 0.000
SG 3.2735 0.6557 0.5141 8.8813 2.0270 0.0459
R- .9559 R- .9320
squared squared
F-statstic 98.93 F-statstic 153.60
Prob(F- 0.000 Prob(F- 0.000
statstic) statstic)
Hausman Chi- 29.404 Prob 0.0003
Test Sq.Stats
*** significance at 1%
** significance at 5%
*significance at 10%
As per the Hausman test fixed effect model is accurate and reliable as the P value is
0.0003 which is less than 0.005. Above the outcomes from the panel regression F value
98.93 with P value 0.000 says that the model is fit. The R squared value is .9559
implies that 95.59% variation in the dependent variable dividend payout ratio is
explained by at least one independent variable. Seeing the separate effect of
independent variable, DPR is significant positively affected by cash flow, Dividend
distribution tax and insignificant positively by sales growth, where as it sis significant
negatively affected by investment
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opportunities and retained earnings, insignificant negatively affected by the market

capitalization debt to equity and return on equity.
Cash Flow
There is positive relation between cash flow and dividend payout ratio. The coefficient
of cash flow is 122.08 and t-statistic is 2.510 with p value 0.0143 indicates that null
hypothesis that there is no impact of cash flow on dividend payout ratio is rejected at
1% level of significance and alternative hypothesis is accepted, meaning that change in
dividend payout ratio can be explained by cash flow of the firm. The result is similar to
the findings of Brittain (1964), Ahmed &Javid (2009) and Musa (2009). They found
significant positive relationship between cash flow and dividend payout ratio.The
automobiles firms have high cash flow and have capability to paydividend and meet
obligations and to avoid or reduce agency conflicts. Rozeff (1982), Easterbook (1984)
describe that the cash flow is used to pay dividend and to avoid agency conflicts.
Leverage
Negative relation is found between debt to equity ratio and dividend payout ratio. The
coefficient of debt to equity ratio -3.98 and t-statistic -0.710 with P value 0.3281. The
null hypothesis that there is no impact of debt equity ratio on dividend payout ratio
cannot be rejected at 10%level of significance. It implies that leverage (debt to equity
ratio) is not significant and could not explain the change in DPR of the firm. In
automobile sector the leverage of the firm may not influence the dividend decision but
in other studies it was found significant like Higgins (1972), Fama(1974), Al-Kuwari
(2009), Gupta &Banga (2010), Uwuigbe (2013) and Labhane&Mahakud (2016)and an
important variable for dividend decision.
There is positive relation between dividend distribution tax and dividend payout ratio.
The coefficient of dividend distribution tax is 4.8313 and t-statistic is 11.063 with p
value
0.000 indicates that null hypothesis that there is no impact of dividend distribution tax
on dividend payout ratio is rejected at 1% level of significance and alternative
hypothesis is accepted, meaning that change in dividend payout ratio can be explained
by dividend distribution tax of the firm. However the result is statistically significant
but the relation is not in consistent with the findings of Damodarn (2000) and
Kamat&Kamat (2013) that dividend distribution tax makes anegative impact on
dividend payout ratio of the firm. It can be concluded that automobiles firms pay high
dividend to the shareholders.
Return on equity
Negative relation is found between return on equity and dividend payout ratio. The
coefficient of return on equity is -0.09 and t-statistic -0.98 with P value 0.479. The null
hypothesis that there is no impact of return on equity on dividend payout ratio cannot
be rejected at 10%level of significance. It implies that return on equity (profitability) is
not significant and could not explain the change in DPR of the firm.The finding is not
consistent with the result found byFama& French (2001), Kania&Bacon (2005), Rozeff
(1982),Mirza &Azfa (2010) and Maldajian&Khoury (2014). The profitability is not
considered for paying dividend to the shareholders in Automobiles Company.
Investment opportunities

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Negative relation is found between investment opportunities and dividend payout

ratio. The coefficient of investment opportunities is -1.184 and t-statistic -1.82 with P
value 0.0741. The null hypothesis that there is no impact of investment opportunities
on dividend payout ratio is rejected at 10%level of significance. It implies that an
investment opportunity is significant to explain the change in DPR of the firm.The
finding matches the result of Fama& French (2001), Aivazian et al. (2003),Malkawi
(2007), Al-Shubiri (2011) and Baah et al (2014). The profit is utilized for capturing new
investment opportunities rather than paying it to the shareholders.
Size
Negative relation is found between Market Capitalization (size) and dividend payout
ratio. The coefficient of Market Capitalization (size) is -3.23 and t-statistic -0.851 with
P value 0.3971. The null hypothesis that there is no impact of Market Capitalization
(size) on dividend payout ratio cannot be rejected at 10%level of significance. It implies
that Market Capitalization (size) is not significant and could not explain the change in
DPR of the firm.The finding is not consistent with the result found by Jensen et al.
(1992), Fama& French (2001), Manos and Green (2001), Al-Shubiri (2011) and
Uwuigbe (2013). The size of the firm is not considered as an important factor for
deciding dividend payments to the shareholders in Automobiles Company.
Retained earnings
Negative relation is found between retained profitand dividend payout ratio. The
coefficient of retained profit is -0.359 and t-statistic -4.72 with P value 0.000. The null
hypothesis that there is no impact of retained earnings on dividend payout ratio is
rejected at 1%level of significance. It implies that retained earnings is significant to
explain the change in DPR of the firm.The finding matches the result of Kapoor et al
(2010),soondur et al (2016) and Gangil&Nathani (2018). As the firm usesretained
earnings to finance the future needs of the firm instead to raise from outside.
Sales growth
Positive relation is found between sales growth and dividend payout ratio. The
coefficient of sales growth 3.52 and t-statistic 0.655 with P value 0.5141. The null
hypothesis that there is no impact of sales growth on dividend payout ratio cannot be
rejected at 10%level of significance. It implies that sale growth is not significant and
does not explain the change in DPR of the firm.The finding is not consistent with the
result found by Brittain (1964), Marfo-Yiadom&Agyei (2011). The change in sale does
not make impact on dividend decision of the automobiles firm.
Data Analysis of Pharmaceuticals
sector Unit Root test
Variables Levin, Lin & Chu ADF Fisher ADF PP

Statistics Prob Obs Statistics Prob Obs Statistics Prob Obs
DPR -3.486 0.0002 90 -5.65 0.000 80 -7.64 0.000 801
1
580

CF -4.241 0.000 90 -5.55 0.00 80 -7.68 0.00 80 1

1
DE -5.20 0.000 81 -2.61 0.004 81 -3.290 0.005 81
DDT -1.60 0.05 87 -5.30 0.00 76 -5.58 0.00 76 1
1
IO -2.477 0.006 90 -5.15 0.00 80 -7.05 0.00 80 1
1
MC -10.17 0.00 80 1 -5.18 0.00 80 -7.28 0.00 80 1
1
ROE -5.61 0.00 90 -2.731 0.003 90 -2.96 0.001 90
RP -4.196 0.000 88 -5.48 0.000 78 -7.692 0.00 78
1
SG -14.20 0.00 90 -5.96 0.00 90 -6.711 0.00 90
Null Hypothesis:
Ho : Unit Root (ASSUMES common unit root process)
The Stationary of the series is tested using Levin,Lin& Chu, ADF (Augmented Dickey
Fuller) Fisher and PP test techniques. The results concluded that the series are non
stationary at level and 1st difference by using all three techniques. As the P value is less
than 0.05, the null hypothesis i.e. series assumes unit root is rejected. It means that the
series do not have unit root.
Descriptive Statistics
All the descriptions apply to the sample of pharmaceuticals sector which cover around
10 companies listed on the National Stock Exchange of India and are same included in
the model. Since we have panel data that contains both cross- sections and time series,
the statistics are taking into account the for the period between 2007 and 2016.
DPR CF DDT DE IO SIZE ROE RP SG
Mean 26.9167 0.360 4.752 0.3950 2.891 4.159 21.97710 69.164 0.190
Median 20.33 0.194 3.185 0.2900 2.790 4.184 24.020 76.41 0.173
Maximum 231.0200 15.660 37.480 2.013 8.0224 5.295 53.120 148.97 1.759
Minimum -48.97 -0.910 0.000 0.000 0.218 2.956 -48.62 -0.240 -0.695
Std.Dev 33.750 1.554 5.8326 0.417 1.609 0.444 13.095 29.19 0.2632
The mean, median, maximum, minimum and standard deviation of the selected
581

variables have been calculated and after seeing the outcome we can conclude that mean
and median of many variables like CF, DE, IO, SIZE and SG are very close that means
that the series have good spread and do not have extreme outliers. The mean value
of the dependent variable DPR (Dividend Payout Ratio) is 26.91 explains that the
average dividend payout ratio is 26.91% of the sample firms. The maximum and
minimum is 231.02and 000 with a variation of 33.75. The average ROE is 21.97
explains the 21.97% return on equity, the average cash flow is 0.36 while dividend
distribution tax is 4.752. The average investment opportunities is 4.752, the average
sales growth is 0.19 while average size is 4.159 and retained earnings is 59.64.
Regression results
Explantory Fixed Effect Model Random EffectModel
Variables Coef t-stats Prob Coef T stats Prob
CF 0.385 0.695 0.488 0.0135 0.026 0.979
DE -5.614 -2.264** 0.0263 -4.341 -2.216 0.0292
DDT 5.340 24.22 .5098 5.181 25.21 0.000
ROE 0.224 2.83*** 0.0059 0.1496 2.2572 0.0265
IO 0.560 0.695 0.488 -0.440 -0.729 0.4674
MC -7.042 -2.51*** 0.0138 -4.255 -1.74311 0.0848
RP -0.133 -2.734*** 0.0077 -0.107 -2.240 0.0181
SG -9.005 -3.100*** 0.0027 -9.13 -3.22 0.0018
R- 0.971 R- 0.963
squared squared
F-statstic 157.96 F-statstic 292.77
Prob(F- 0.000 Prob(F- 0.000
statstic) statstic)
Hausman Chi- 20.755 Prob 0.0078
Test Sq.Stats
*** significance at 1%
** significance at 5%
*significance at 10%
As per the Hausman test fixed effect model is accurate and reliable as the P value is
0.0078 which is less than 0.005. Above the outcomes from the panel regression F value
157.96 with P value 0.000 says that the model is fit. The R squared value is .971 implies
that 97.1% variation in the dependent variable dividend payout ratio is explained by at
least one independent variable. Seeing the separate effect of independent variable, DPR
is significant positively affected by Return on Equity and insignificant positively
affected by cash flow, dividend distribution tax and investment opportunities, where as
it is significant negatively affected by debt equity ratio (leverage of the firm), retained
earnings,market capitalization (Size of the firms)and sales growth of the firms.
Cash Flow
There is positive relation between cash flow and dividend payout ratio. The coefficient
of cash flow is .385and t-statistic is .695 with p value 0.488 indicates that null
hypothesis that there is no impact of cash flow on dividend payout ratio is not rejected
at 10% level of significance.The acceptance of the null hypothesis implies that
change in dividend
582

payout ratio cannot be explained by cash flow of the firm. In pharmaceuticals sector
cash flow is not an significant variable for deciding dividend policy but in other studies
its is significant as dividend reduces agency conflicts described by Brittain (1964),
Rozeff (1982), Easterbook (1984) and Musa (2009). The findings suggest that the
divined payout is not decided by considering the cash flow of the pharmaceuticals firm.
Leverage
Negative relation is found between debt to equity ratio and dividend payout ratio. The
coefficient of debt to equity ratio -5.614 and t-statistic -0.264 with P value 0.0264. The
null hypothesis that there is no impact of debt equity ratio on dividend payout ratio is
rejected at 5%level of significance. It implies that leverage (debt to equity ratio) is
significant to explain the change in DPR of the firm.The finding is consistent with the
result found by Higgins (1972), Fama(1974), Al-Malkawi (2008) and Uwuigbe
(2013)Labhane&Mukund (2016). The findings says that the high leveraged firms pay
less amount of dividend to the shareholders as compare to the low leveraged firms as
the fixed interest liability is high in the high leveraged firms.
There is positive relation between dividend distribution tax and dividend payout ratio.
The coefficient of dividend distribution tax is 5.340 and t-statistic is 24.22 with p value
0.5098 indicates that null hypothesis that there is no impact of dividend distribution
tax on dividend payout ratio is not rejected at 10% level of significance. The result
implies that change in dividend payout ratio cannot be explained by dividend
distribution tax of the firm. However the finding is not in consistent with the findings
of Damodarn (2000) and Kamat&Kamat (2013). The pharmaceuticals firms does not
consider tax rate before declaring dividend payout ratio of the firm.
Return on equity
Positive relation is found between return on equity and dividend payout ratio. The
coefficient of return on equity is 0.224 and t-statistic 2.83 with P value 0.0059. The
null hypothesis that there is no impact of return on equity on dividend payout ratio is
rejected at 1%level of significance. It implies that return on equity (profitability) is
significant to explain the change in DPR of the firm.The finding is consistent with the
result found by Fama& French (2001), Kania& Bacon (2005), Rozeff (1982), Mirza
&Azfa (2010), Maldajian&Khoury (2014) and Wasike& Ambrose (2015). The firm with
high profitability pay high amount of dividend to the shareholders in
pharmaceuticalsCompany.
Investment opportunities
Positive relation is found between investment opportunities and dividend payout ratio.
The coefficient of investment opportunities is 0.560 and t-statistic .695 with P
value
0.488. The null hypothesis that there is no impact of investment opportunities on
dividend payout ratio is not rejected at 10%level of significance. It implies that an
investment opportunity isnot significant to explain the change in DPR of the firm.The
finding findings is not consistent with the result found by Fama& French (2001),
Aivazian et al. (2003), Malkawi (2007), Al-Shubiri (2011) and Baah et al (2014). The
investment opportunity isnot an important factor to consider before deciding dividend.
583

Size
Negative relation is found between Market Capitalization (size) and dividend payout
ratio. The coefficient of Market Capitalization (size) is -7.042 and t-statistic -2.51 with
P value 0.138. The null hypothesis that there is no impact of Market Capitalization
(size) on dividend payout ratio is rejected at 1% level of significance. It implies that
Market Capitalization (size) is significant and to explain the change in DPR of the
firm.However the result is statistically significant but the relation is not in consistent
with the result found Jensen et al. (1992), Fama& French (2001), Manos and Green
(2001), Al-Shubiri (2011) and Uwuigbe (2013). The result conclude that large size of
the firm may have large number of expenses to meet so pay less amount of dividend to
the shareholders in pharmaceuticals Company.
Retained profit
Negative relation is found between retained profitand dividend payout ratio. The
coefficient of retained profit is -0.133 and t-statistic -2.734 with P value 0.0077. The
null hypothesis that there is no impact of retained earnings on dividend payout ratio is
rejected at 1%level of significance. It implies that retained earnings is significant to
explain the change in DPR of the firm.The finding matches the result of Kapoor et al
(2010), soondur et al (2016) and Gangil&Nathani (2018). As the firm uses profit to
finance the future needs of the firm instead to raise from outside.
Sales growth
Positive relation is found between sales growth and dividend payout ratio. The
coefficient of sales growth -9.005 and t-statistic -3.100 with P value 0.0027. The null
hypothesis that there is no impact of sales growth on dividend payout ratio is rejected
at 1 %level of significance. It implies that sale growth is significant to explain the
change in DPR of the firm.The finding is consistent with the result found by Brittain
(1964), Marfo-Yiadom&Agyei (2011), Wasike& Ambrose (2015) and Gangil&Nathani
(2018) that there is significant negative relationship between sales growth and divined
payout ratio of the company. The sales growth of the firms require more funds to
finance the smooth production of the product so retain the profit and pay lower
amount of decision to the shareholders in pharmaceuticals firm.
Conclusion
This study examines the determinants of dividend policies of the firms listed on National
Stock Exchange under the Auto indices and Pharma indices. Total 9 Automobiles firms and
10 Pharmaceuticals firms listed on exchange of India is used for the study. The analyses are
done on the data collected from the financial statements of listed firms and various
financial website. The study comprises of 10 years for 10 the period between 2007 and
2016. Unit root test, Fixed Effect and Random Effect, Hausman test is applied on the
data. In both the sector the fixed effect model is considered as appropriate after seeing the
P value. The results conclude that in automobiles sector DPR is significant positively
affected by cash flow, Dividend distribution tax and significant negatively affected by
investment opportunities and retained earnings. There is insignificant positive relation
between DPR and sales growth, insignificant negatively relation with market
capitalization, debt to equity ratio and return on equity of the automobiles listed firms.
In pharmaceuticals sector DPR is significant positively affected by Return on Equity
and significant
584

negatively affected by debt equity ratio (leverage of the firm), retained earnings, market
capitalization (Size of the firms) and sales growth of the firms. There is insignificant
positive relation of DPR with cash flow, dividend distribution tax and investment
opportunities.
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Determinants of Dividend Policy in Indian Companies: A Panel Data Analysis

Determinants of Dividend Policy in Indian Companies: A

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

Determinants of Dividend Policy

Dividend is the amount of the profit to be distributed among shareholders. The

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

H02 – There is no impact of liquidity/cash flow on the dividend policy of

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

Data Analysis of Auto mobile sector

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

Unit Root test

Variables Levin, Lin & Chu ADF Fisher ADF PP

DPR CF DDT DE IO SIZE ROE RP SG

Mean 34.74367 0.102524 5.126000 0.427444 2.6881844.197587 22.8488959.64478 0.175325

Median 28.28500 0.100181 3.595000 0.295000 2.0457704.26224521.05500 66.680000.171494

Maximum212.7300 0.20566926.06000 1.610000 18.27334 5.144947 73.35000 100.00001.101747

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

Std.Dev 34.05643 0.043759 5.051409 0.418635 2.632537 0.55470615.58676 34.55076 0.244778

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

opportunities and retained earnings, insignificant negatively affected by the market

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

Negative relation is found between investment opportunities and dividend payout

Variables Levin, Lin & Chu ADF Fisher ADF PP

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

CF -4.241 0.000 90 -5.55 0.00 80 -7.68 0.00 80 1

DPR CF DDT DE IO SIZE ROE RP SG

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

Al-Kuwari, D. (2009). Determinants of the dividend policy of companies listed on emerging

Easterbrook, F. H. (1984). Two agency-cost explanations of dividends. The American economic

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

Easterbrook, F. H. (1984). Two agency-cost explanations of dividends. The American economic

Gupta, A., &Banga, C. (2010). The determinants of corporate dividend policy.Decision

Higgins, R. C. (1972). The corporate dividend-saving decision.Journal of Financial and

Labhane, N. B., &Mahakud, J. (2016). Determinants of dividend policy of Indian companies:

Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings,

Marfo-Yiadom, E., &Agyei, S. K. (2011). Determinants of dividend policy of banks in

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

Nizar Al-Malkawi, H. A. (2007). Determinants of corporate dividend policy in Jordan: an

SubhashKamat, M., &Kamat, M. M. (2013). Economic reforms, determinants and stability of

Uwuigbe, O. R. (2013). Determinants of Dividend Policy: A study of selected listed Firms in

Wasike, T. W., & AMBROSE, D. J. (2015). Determinants of dividend policy in

AVINASH DEGREE COLLEGE- TOPIC ANALYSIS

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