Dividend Policy of Indian Corporate and business Firms: A great Analysis of Trends and Determinants Doctor Y. Subba Reddy1 The present study looks at the gross behavior of Indian corporate firms over the period 1990 вЂ“ 2001 and efforts to explain the observed behavior with the help of trade-off theory, and signaling speculation. Analysis of dividend styles for a significant sample of stocks traded on the NSE and BSE indicate that the percentage of companies paying dividends provides declined via 60. 5 percent in 1990 to 32. 1 percent in 2001 which only a few businesses have consistently paid precisely the same levels of returns. Further, dividend-paying companies are even more profitable, large in size and growth does not seem to prevent Indian organizations from paying out higher payouts. Analysis of influence of changes in tax regime about dividend patterns shows that the tradeoff or perhaps tax-preference theory does not appear to hold the case in the Of india context. Check of signaling hypothesis reinforces the earlier conclusions that gross omissions have got information content material about future earnings. However , analysis of other non-extreme dividend situations such as dividend reductions and non-reductions shows that current failures are an important determinant of dividend savings for companies with founded track record and that the incidence of dividend lowering is much more severe in the case of Indian firms when compared with that of businesses traded within the NYSE. Additional, dividend alterations appear to signal contemporaneous and lagged income performance as opposed to the future profits performance.
Asst. Professor, Institute for Financial Administration and Study (IFMR), Chennai. The sights expressed and the approach advised are in the authors and not necessarily of NSE.
1 ) Introduction
From the practitioners' standpoint, dividend policy1 of a firm has ramifications for buyers, managers and lenders and also other stakeholders. Pertaining to investors, returns вЂ“ whether declared today or built up and presented at a later date -- are not only a method of regular income2, but also an important input in value of a firm3. Similarly, managers' flexibility to invest in projects is likewise dependent on the amount of dividend they can offer to shareholders while more returns may suggest fewer money available for purchase. Lenders could also have interest in the amount of gross a firm states, as more the dividend paid fewer would be the sum available for providing and payoff of their promises. However , within a perfect universe as Modigliani and Burns (1961) have shown, investors could possibly be indifferent regarding the amount of gross as it does not have any influence within the value of your firm. Virtually any investor can create a вЂhome built dividend' in the event required or can invest the proceeds of a dividend payment in additional stocks and shares as and when a firm makes gross payment. In the same way, managers might be indifferent because funds can be available or could be increased with out any kind of flotation costs for all confident net present value assignments. But in reality, dividends may possibly matter, especially in the circumstance of gear tax treatment of dividends and capital gains. Very often returns are taxed at a higher rate compared to capital gains. It indicates that returns may possess negative consequences for investors4. Similarly, cost of raising money is not really insignificant and may even well bring about lower payment, particularly when great net present value tasks are available. Aside from flotation costs, information asymmetry between managers and outside buyers may also include implications intended for dividend coverage. According to Myers and Majluf (1984), in the existence of information asymmetry and flotation costs, expense decisions of managers will be subject to the pecking order of financing choices available. Managers favor retained earnings to debt and debt to fairness flotation to finance the available assignments. Information asymmetry between real estate agents (managers) and principals (outside shareholders) can also lead to organization cost (Jensen and Meckling, 1976). 1...