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