American Journal of Scientific Research

ISSN 1450-223X Issue 49 (2012), pp. 21-26

© EuroJournals Publishing, Inc. 2012

http://www.eurojournals.com/ajsr.htm

Determinants of Dividend Payout in Pakistan

Zia Abassi

Assistant Professor, Iqra University

Abid Town, Block-2 Gulshan-e-Iqbal, Karachi, Pakistan

Tel: +92214800670-4 ; Fax: +92214987806

Muhammad Muzammil

Business Graduate, Iqra University

Abid Town, Block-2 Gulshan-e-Iqbal, Karachi, Pakistan

Tel: +92214800670-4; Fax: +92214987806

Fahim Qazi

Assistant Professor, Iqra University

Abid Town, Block-2 Gulshan-e-Iqbal, Karachi, Pakistan

Tel: +92214800670-4 ; Fax: +92214987806

Abstract

The Dividend policy explains the strategy in the organizations about the payments

amount which they announce to investors as profit on shares, the procedures of dividend is

method as well as arrangement which organizations build up plus affect on organize to pay

dividend payouts to investors. Dividend payout is the base for attracting new the investors,

the number of investors unaware about firm performance for making investment and to

earn good dividends. This research base to find the impact of expenses, gross sales, cost of

sales, taxes, net profit before tax, earning per share on dividend payout of all registered

firms in KSE, Pakistan. Quantitative and numeric data base on cross sectional data used in

this study. The six years (2004-2009) secondary yearly figures are compiled from 427 firms

which are registered in Karachi Stock Exchange, from the annual reports extracted derived

trustworthy supply i.e. SBP and KSE official sites. After collection the average of the six

years data has been taken to make it cross-sectional data. Multiple Regression technique is

used in E-View Statistical software with the 90% level of significance. The study found

that the value of net profit, tax, earning per share and gross sales are significant and

positively related to the dividend payout. The value of cost of sales is significant and

expenses are insignificant but both values are negatively related to the dividend.

Keywords: Dividend, Karachi Stock Exchange

1. Introduction The Dividend policy explains the strategy in the organizations about the payments amount which they

announce to investors as profit on shares, the procedures of dividend is method as well as arrangement

which organizations build up plus affect on organize to pay dividend payouts to investors. The making

of correct dividend payout plan is advantageous mutually for the company as well as for investors. To

Determinants of Dividend Payout in Pakistan 22

insure strategy about the payout of dividend its same and exact in support of every one, the

organization need in the direction to make sure that which policy they want to implement it is

practicable policy or not, after selection of that particular policy they need to implement that policy in

different scenarios to insure the weaknesses of overall plan and its effect on organization and for its

investors.

Number of organizations practice to clearly explain the necessities for dividend guiding

principle, it is beneficial for the both company and the investors because both have clear picture of

working procedure and its output, due to which strong trust and relations become more strong. It is

simple to announce the shares incomes make from an era in transparency due to which the organization

is facilitate to finish off the volume payout dividends. If the dividend policy is well define to the

investors so it is easy to motivate the investors due to transparency in the define policy and the real

dividend payout as per policy.

It is necessary to make sure that these policies and feelings of those policies should be positive

from its shareholders along with business markets for related organization which going to present their

policies. The organizations policies are mirror of the organization with respect to their current and

future of profits and progress. These policies can easily attract number of invertors towards the

organization and to keep them in company account.

There is number of others factors which effecting on dividend policy of the firms which

includes taxes is a term which imposes a different charges and other taxes types. To get payout from

the business functions, which become liability and if fail to in paying it so it punishable according to

law, At other hand company internal and financial performance.

Dividend payout is the base for attracting new the investors, most of the investors don’t know

about the firm performance to make investment and to earn good dividends (Ahmed, H. & Javid, A.,

2009). Therefore its need to be work on important of dividend payouts because there are number of

researchers do research on dividend payout or policy (Gill, A. et. al., 2010, D’Souza, J., 1999, Kanwer,

A., 2003, Nazir, M. S., et. al., 2010, Yiadom, E. M. & Agyei, S. K., 2011). With the single variables

and other multiple difference variables, in different interval of time, in different sectors of the industry,

and at different world places. This research base to find the impact of expenses, gross sales, cost of

sales, taxes, net profit before tax, earning per share on dividend payout of all registered firms in KSE,

Pakistan.

In the second part of this study we will review the related literatures which are essential for this

research, in the third part we will understand the modeling frame work of this research, where as in the

fourth part of this research we will do empirical and result analysis of for this research and at the end of

this research in fifth part we find conclude its recommendations according to the research.

2. Literature Review 2.1. Theoretical Background

According to the theory of accounting, the gross sales is the first sales which include return sales and

sales discount it is treat as income, where as the cost of sales is the manufacturing and inventory

holding cost during the business cycle it nature is to less from income, where as expenses out flow of

money or cash which used for business support expenditures it nature is to less from income, the tax is

financial charge which impose on business and on individuals on their income and business

transactions its nature is to less from income, the net profit before tax is the profit from which taxes

need to be less to make it net profit, where as earning per share is that in which company distribute its

profit on outstanding or common stock shares, where as the dividends are the payouts from the firms to

its shareholder, which is the part of profit for shareholder, I could be inform of cash or shares.

(Accounting; The Basis for business decisions by Walter B. Meigs and Robert F. Meigs, Seventh

Edition, International Edition).

23 Zia Abassi, Muhammad Muzammil and Fahim Qazi

2.2. Empirical Background

D’Souza, J., (1999) examined the effects of agency cost, market risk, and investment opportunities on

an international firms dividend policy. He used assets and previous sales growth and market to book

value of stock with its investment chances use as the substitute for the agency cost, investment

chances, market threat accordingly. He used the three hundred forty nine companies as a sample

worldwide for find the relationship among dividend payout, agency costs, investment chances, market

threat. He used past three years’ sales growth and market to book value of stock, as an alternative for

the firm’s investment chances in the near future. The dividend payout variable used in his study, with 3

years straight average taken from 1995 to 1997, while the institutional holdings, beta value, growth,

and market and book values all pertain to the year 1997. He obtained dividend payout, beta and growth

data from Data Stream, while institutional ownership is obtained from World Scope Disclosure.

Multiple regression analyses are used for explaining association among the dividend payout,

agency costs, investment chances, market threat payout ratio, where as dividend is dependent variable

while beta, past three years’ sales growth, percent age of assets, with market-to- book value are

independent variables. Outcome of this research maintain the previous research outcome because it

show agency cost and market threat is negatively effect on dividend payments, but it not maintain the

outcome about negative impact of investment chance on dividend, according to this research

investment chances has significant impact on dividend payout policy with respect to international point

of view.

Kanwer, A., (2003) according to his research the researcher find the relation for the dividend

policy, for companies which are registered with KSE Pakistan, the researcher has find the what factor

become a reason to impact on Dividend policy payouts. The researcher has used investment

opportunities firm size, surplus, , quality of firms, on dividend payout, the researcher used Heckman

procedure to over comes on this research limitation, as per the result of this research out of the above

factors quality of firms and investment opportunity has significant effect on dividend policy or payout

decisions.

Amidu, M. and Abor, J., (2006 explain the determinants of dividend payouts of registered firms

in Ghana, in this research they have used financial data from firm which are registered with Ghana SE

for the period of six year, the OLS model is used to analyze the equation of regression in their research.

They used Institutional holding Growth in sales; agency cost and market to book values are utilized as

the alternative of investment chance. According to this research result there is optimistic association

among the dividend payments, cash flow, taxes and profitability, at other hand the outcome show that

pessimistic association among dividend payments, assets, risk, sales growth and market book value.

The important variables in outcome are cash flow, sale growth, profitability, and market-to-book value.

The main value of their study is the identification of the factors that influence the dividend payout

policy decisions of listed firms in Ghana.

Anil, K., and Kapoor, S., (2008) work on the determinants of the Dividend payment Ratio in

the information technology sector of India. They define that profits of the firms are always matter and

displayer of the good dividends, according to this research there is number of other factors which are

involve into display the dividend decision possibility like corporate taxes, growth of sales, market to

book value ratio and cash flow. With respect to this research it shows that the dividend payment ratio is

optimistically associated with cash flow, profits but it is negatively associated with growth of sales,

corporate taxes, and market to book value ratio.

In this research the researcher used Indian sector from information technology to find the

determinants of dividend payments, to study it empirically, by using correlation and regression

methods to explore the association among the major factors.

In this research they explore that if they reroll the earnings in the business so that sector can

give better return to its investors, most of the firms working on that pattern and give good results to

their investors with goo earnings. They also inform that the variables which are in literatures are not

Determinants of Dividend Payout in Pakistan 24

enough to explain the pattern of dividend payments of this sector. They also indicate that IT firm of

India has goods capability to give good dividends.

Ahmed, H. & Javid, A., (2009) in his research they have explain dynamic and determinants of

dividend policy in Pakistan, by using KSE non financial firms, the sample size used is three hundred

twenty companies during 2001 to 2006 six years. With respect to this research firms are base on

previous payouts and become more sensitive for current payouts, for finding this relation they have

applied regression analysis, with profits of firms, leverage, net earnings, concentration, market

liquidity and free cash flow on dividend payouts, concentration and liquidity of market has optimistic

effect on dividend, whereas leverage has negative impact on dividend payouts at other hand market

capitalization and firm size has negative impact on dividend, which show that firms are interested in to

reinvest in their assets instead of pay dividends.

The firm dividend policy is normally varies from geographical region due to the differences in

different dealing with capital market.

Further it indicates unresolved issues for the dividend, there is a list of dividends as advance

corporate finance is one of the top most essential unresolved issues of this area or segment. their hand

theory, in which they conclude that in general most of the investors to keep cash in hand as compare to

capital gain as a future promise the aim is to lowering risk or minimizing risk. The result of that

research confirmed that the unconstructively association among the agency cost and market threats for

the dividend payments but it not show negative association between investment chance and dividends

payments, for international it negative association.

Ahmed, H. & Javid, A., (2009) in his study they explain determinants of dividend payout

policy; they have used three hundred twenty firms which are from non financial sectors of KSE. They

have used six years period data from 2001 to 2003 for research analysis, the outcome of this research

show that the KSE listed non financial sectors note their previous dividend outs and earnings per share

before announcing final dividends.

Non-financial firms having different adjustments and low payout ratio represents the

fluctuation in their dividend payouts. They have used regression analysis to find out results, in the

result show that the firms which are enjoying stable profit maintain smooth cash flow due to which

they pay good dividends, at same time association awareness and market worth has positive impact on

dividend payments but investment chances and leverage have negative impact on dividend payments.

Nazir, M. S., et. al., (2010) explain and further investigate the dividend policy to contribute in

the field of finance, they present their work on the role of corporate policy for dividend and volatility

in stock share prices with respect to Pakistan. They have use 73 firms from Karachi stock exchange,

Pakistan, for five year data, from 2003 to 2008 and they applied fixed effect with arbitrary effect

model. Outcome of that research show that dividend policy for payouts has a major effect on stock

worth instability in KSE, so they suggest that volatility can be reduce if firms announce positive

dividend payouts policy.

Yiadom, E. M. & Agyei, S. K., (2011) explain the concept of the dividend policy in banks of

Ghana, they use five year data from nineteen ninety nine to two thousand three, where they use random

and fixed different techniques. The outcome of this research shows that the Debt, profitability, vary in

dividend and its undertaking ability are significant variables which are definitely control dividend

policy in banks of Ghana, at the other hand they have found that the growth and the age impact on

dividend policy really negatively and it has significantly present its impact, whereas cash has a reverse

relationship with the dividend policy but not significantly, they confirm that the major factor in

determinant of dividend policy are leverage, profitability, vary in dividend, undertaking ability, age

and growth, and they have also support for the agency cost theory and profitability theory with limited

favor for life cycle theory, but n support endorse for the free cash flow theory.

25 Zia Abassi, Muhammad Muzammil and Fahim Qazi

3. Modeling Framework On the basis of the literature review for this research the regression analysis has used because the

previous researcher also use same analysis for that type of research, the researchers are Ahmed, H. &

Javid, A., (2009), Kanwer, A., (2003), Nazir, M. S., et. al., (2010) and Yiadom, E. M. & Agyei, S. K.,

(2011) so the model will examine the impact of expenses, gross sales, cost of sales, taxes, net profit

before tax, earning per share on dividend payout.

D = F (COS, NPBT, EXP, TAX, EPS, GS)

For empirical Estimation following equation has used.

1 1 2 2 3 3 4 4 5 5 6 6Y COS NPBT EXP TAX EPS GSα β β β β β β ε= − + + + + + + ∂

In the above equation ε is the error term, α is the term for constant, whereas β1 is coefficient of

cost of sales, β2 is coefficient of net profit before tax, β3 is coefficient of expenses, β4 is coefficient of

taxes, β5 is coefficient of earning per share and β6 is coefficient of gross sales. Whereas we have use

the log data value of cost of sales, taxes, expenses and gross sales, The six years (2004-2009)

secondary yearly figures are compiled from 427 firms which are registered in Karachi Stock Exchange,

from the annual reports.

4. Empirical Result and Analysis The analysis of data is way to use the raw form of data in to the meaning full information, after that

analysis the new form of output show the realistic picture which fives main information about the

respective area. As the data analyze in the different way with different approaches it show the true

values than on the basis of that values conclusion and result interpreted. So after this analysis the final

conclusion and decision makes, so it’s most important part of the thesis and research so here is the

Output of Regression Analysis.

Table 4.1: Output of Regression Analysis

Variable Coefficient t-Statistic Prob.

C -4.027731 -5.570122 0.0000

LOG(CS) -2.732713 -3.13513 0.0019

NP 4.65E-05 1.704789 0.0895

LOG(EXPN) -1.090078 -0.827793 0.4086

LOG(TAX) 0.34802 3.634991 0.0003

EPS 0.021156 3.427053 0.0007

LOG(GS) 4.462827 4.498723 0.0000

R-squared 0.754711

F-statistic 122.0475

Prob(F-statistic) 0.000000

Table 4.1 shows the value of R-square is 0.755 that represents the independent variable i.e.

dividend payout can predict 75.5%. The value of net profit, tax, earning per share and gross sales are

significant and positively related to the dividend payout. The value of cost of sales is significant and

expenses are insignificant but both values are negatively related to the dividend.

5. Conclusion and Recommendations The Dividend policy explains the strategy in the organizations about the payments amount which they

announce to investors as profit on shares, the procedures of dividend is method as well as arrangement

which organizations build up plus affect on organize to pay dividend payouts to investors. The making

of correct dividend payout plan is advantageous mutually for the company as well as for investors. To

facilitate strategy of dividend payout accurately for every organization, the organization need that

Determinants of Dividend Payout in Pakistan 26

which policy they want to implement it is practicable policy or not, after selection of that particular

policy they need to implement that policy in different scenarios to insure the weaknesses of overall

plan and its effect on organization and for its investors.

Dividend payout is the base for attracting new the investors, number of investors doesn’t know

about firm performance for make investment and to earn good dividends. This research base to find the

impact of expenses, gross sales, cost of sales, taxes, net profit before tax, earning per share on dividend

payout of all registered firms in KSE, Pakistan.

Quantitative and numeric data base on cross sectional data used in this study. The six years

(2004-2009) secondary yearly figures are compiled from 427 firms which are registered in Karachi

Stock Exchange, from the annual reports extracted derived trustworthy supply i.e. SBP and KSE

official sites. After collection the average of the six years data has been taken to make it cross-sectional

data. Multiple Regression technique is used in E-View Statistical software with the 90% level of

significance. After collection the average of the six years data has been taken to make it cross-sectional

data. Dividend Payout is used as a Dependent Variable while Independent Variables are Expenses,

Gross Sales, Cost of Sales, Taxes, Net Profit Before Tax, and Earning Per Share. Multiple Regression

technique is used in E-View Statistical software with the 90% level of significance.

The value of R-square is 0.755 that represents the independent variable i.e. dividend payout can

predict 75.5%. The value of net profit, tax, earning per share and gross sales are significant and

positively related to the dividend payout. The value of cost of sales is significant and expenses are

insignificant but both values are negatively related to the dividend.

After this research there is a need for more research in this area to explorer the more factors

which are still hide, the finding of remaining factor play important role for this area.

References [1] Ahmed, H. & Javid, A., (2009). “Dynamics and Determinants of Dividend Policy in Pakistan

(Evidence from Karachi Stock Exchange Non-Financial Listed Firms)”, International Research

Journal of Finance and Economics, ISSN 1450-2887 Issue 25 (2009) © EuroJournals

Publishing, Inc. 2009

[2] Ahmed, H. & Javid, A., (2009), “The Determinants of Dividend Policy in Pakistan”,

International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 29 (2009), ©

EuroJournals Publishing, Inc. 2009

[3] Amidu, M. and Abor, J., (2006), “Determinants of dividend payout ratios in Ghana”, The

Journal of Risk Finance, Vol. 7 No. 2, pp. 136-145, Emerald Group Publishing Limited.

[4] Anil, K., and Kapoor, S., (2008), “Determinants of Dividend Payout Ratios-A Study of Indian

Information Technology Sector”, International Research Journal of Finance and Economics,

EuroJournals Publishing, Inc.

[5] D’Souza, J.,(1999), “Agency Cost, Market Risk, Investment Opportunities and Dividend Policy

- An International Perspective”, Managerial Finance, Volume 25 Number 6 1999 35

[6] Gill, A., Biger, N., & Tibrewala, R., (2010), “Determinants of Dividend Payour Ratios:

Evidence from United States”, The Open Business Journal

[7] Kanwer, A., (2003) “The Determinants Of Corporate Dividend Policies In Pakistan: An

Empirical Analysis”, Foundation for Business and Economic Research

[8] Nazir, M. S., Nawaz, M. M., Anwar, W., & Ahmed, F., (2010). “Determinants of Stock Price

Volatility in Karachi Stock Exchange: The Mediating Role of Corporate Dividend Policy”,

International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 55 (2010),

© EuroJournals Publishing, Inc. 2010

[9] Yiadom, E. M. & Agyei, S. K., (2011). “Determinants of Dividend Policy of Banks in Ghana”,

International Research Journal of Finance and Economic, ISSN 1450-2887 Issue 61 (2011), ©

EuroJournals Publishing, Inc. 2011