The Dividend Strategy of Indian Companies: An Empirical Assessment

 

1. Introduction

 

Dividend payout policy has been the  primary  puzzling  factor  in  the  economics  of  corporate  finance  since  the  work  of Black (1976). The dividend literature has primarily relied on two lines of hypothesis: signaling and agency cost. The cash flow hypothesis asserts that insiders have more information  about  firms'  future  cash  flow  than  outsiders  do,  and  they  have  incentive to signal that information to outsiders.

 

Institutional Details

 

Large   shareholders,   like   other   emerging   market   economies,   characterize Indian   corporate   firms'   ownership   structure.   Majority   control   gives   the   largest shareholder  incentive  and  control  over  key  decisions,  like  dividend  payout.  The dominance  of  large  shareholders  may  affect  the  dividend  payout  in  several  ways. There have been changes in the taxation policy for dividend during the sample period, which gives us an opportunity to test the tax-preference theory and its implications for the dividend payout in case of an emerging market economy, India. India operates a classical  company  tax  system  in  which  companies  are  taxed  separately  from  the investors  receiving  the  profits  in  form  of  dividends. 

 

Data and Variable Construction

Data

 The  firm  level  panel  data  for  our  study  is  primarily  obtained  from  the corporate  database  (PROWESS)  maintained  by  Center  for  Monitoring  the  Indian Economy  (CMIE).  The  data  used  in  the  analysis  consists  of  all  manufacturing  firms listed on the Bombay Stock Exchange (BSE), for which we could get their historical share  holding  pattern  along  with  the  dividend  payout  ratio  and  other  explanatory variables used in the study. We confine our analysis to BSE listed firms only because all the listed firms are required to follow the norms set by SEBI for announcing the financial accounts. The BSE also has the second largest number of domestic quoted companies  on  any  stock  exchange  in  the  world  after  NYSE,  and  more  quoted companies  than  either  the  London  or  the  Tokyo  stock  exchange. 

Empirical Analysis

 

This   section   is   divided   in   two   sub-sections:   sub-section   1   presents   the empirical model. The descriptive statistics and regression results are presented in sub- section 2. Sub-section 3 analyses the endogeneity of ownership and in sub-section 4, we present results of some sensitivity analysis.

 

Conclusion

 

Our  paper  offers  an  empirical  examination  of  the  agency  theory  explanation for  the  distribution  of  dividends  policy  in  India,  especially,  analyzing  the  relationship between the ownership structure, corporate governance, and dividend payout using a large panel of Indian corporate firms over 1994-2000. To the best of our knowledge, it is the first attempt to use the well-established dividend payout models to examine the impact of ownership structures on dividend payout policies in context of an emerging market economy, India.

References

•  Bhat, Ramesh, and I. M. Pandey, 1994, Dividend decision: A Study of Managers' Perceptions, Decision 21, 67–86.

•  Bhattacharya, Sudipto, 1979, Imperfect information, dividend policy, and "the bird in the hand" fallacy, Bell Journal of Economics 10, 259–270.

•  Black, Fisher, 1976, The dividend puzzle, Journal of Portfolio Management 2, 72–77. Brennan,  Michael  J.,  and  Anjan  V.  Thakor,  1990.

• Demsetz,  Harold  and  Belen  Villalonga,  2001,  Ownership  Structure  and  Corporate Performance, Journal of Corporate Finance 7(3): 209-33.

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