The paper is co-authored by Naimat Ullah Khan with B.M. Burton and D.M. Power. 23 company

executives from diverse industries with a wide range of educational backgrounds and

experiences, who were supposed to be adequately knowledgeable about the dividend policies

of their respective companies, have been sampled for the study. The methodology used was

semi-structured interview.

The paper examines the Pakistani executives from different industries about the dividend

policies of their firms, their determinants and important factors which are considered at the

time of formulating dividend policy and cash payouts. It attempts to look into the peculiarities

associated with Pakistani market which differentiate it from other markets.

Dividend policy is one of the most heavily researched areas of the corporate finance. Many

researchers have placed it in the top 10 ‘most perplexing’ issues in the ambit of corporate

finance owing to its intriguing nature. Extensive studies have been carried out in attempt to find

out why companies pay cash dividends which are taxed heavily than capital gains. The most

notable among them is Linter’s(1956) work.

The responses of the participants have converged on some major determinants of dividend

policy which are enumerated below:

All the participants unanimously asserted that dividend policy/decisions was of

significant importance to their firms which defies the Irrelevance theory of Miller and

Modigliani (1961).

All the interviewees opined that earnings of current year were the main determinant of

dividends. Some supported the importance of last year’s dividend, though less

emphatically and mainly for comparison purposes.

Liquidity of the firm also chips in determination of dividends. Opinions were, however,

on the mode of dividend (cash payouts or bonus shares) in case of liquidity issues.

Responses about tax regime were ambivalent; some asserted its importance while

others showed indifference.

Participants pointed out that role of third parties primarily lending institutions have to

be factored in while deciding about dividends.

Refuting the propositions of Irrelevance theory of MM that dividends stand separated

from the firm’s investment decisions, majority of the interviewees supported their

interdependency because the firm has to consider future expansion. Views, however,

differed in cases where investments were financed from sources other than residual

cash.

Responses of the participants showed that Pakistani firms do not have any particular or

fixed payout ratio, rather it is revised and decided each year with the fluctuations in the

earnings corresponding year.

Apart from these major factors participants pointed out other factors like political

stability and institutional regulations of regulators like SBP and SECP might influence

firm’s dividend policy.

The fact is evident from the views of participants that current year’s earnings play decisive

role in determination of cash payouts. The findings suggest that dividends have certain

peculiar aspects in Pakistan, thus the generalization of findings of one market in another

may not prove plausible.