Corporate Dividend Behaviour: Is there a Pattern?

Corporate Dividend Behaviour: Is there a Pattern?
In the era of Rational
Expectations Hypothesis
holding true with almost every investing community,
do firms make the payout policies to achieve their managerial objectives or to
please the investors’ ‘bird-in-hand’
myopia? Is the Graham and Dodd’s
theory of firm value depending more on dividend payout ratio than the retention
ratio, is indeed true? Does Miller and
’s ‘theorem of dividend
as contrasted to John
’s ‘dependent corporate
dividend behaviour model
’ holds its argument in the current corporate
finance practices?
John Lintner is the first to propose a quantitative
model of dividend payout policy in the 1950s. He studied 16 manufacturing firms
of America to arrive at his proposal. In Lintner’s words – “savings (retained earnings) in a given
period generally are largely a by-product of dividend action taken in terms of
pretty well established practices and policies
”. By this he means that
corporate decision-makers do find dividend payout to be a relevant determinant
of the value of the firm and such firms tend to distribute earnings to owners
in a target payout ratio, predetermined along with a conservative adjustment
towards the sustainability of increased earnings of current year as compared to
the previous. Lintner found a positive constant, reflecting firms’ preference
to increase dividends with the increase in earnings. Since then, the model has
been supported as well as contested by researchers across. Many found that
initial slope for adjustment in Lintner’s basic model, (which was roughly 0.33)
and positive intercepts were no more the same. The slope for adjustment has
reduced and constant was moving towards negative. The supporters of
applicability of Lintner’s model claim that this was because of investors and
corporates preferring non-cash dividends, which when considered in the total
payout, do prove Lintner’s argument. These pro and against arguments continue
to throw light on understanding corporate dividend behaviour leading to
different purposes being met for different stakeholders. Decision-makers are
better equipped to support their dividend decisions in their annual reports.
Corporate governance is kept intact. Investors are able to find the right
valuation of the firm’s stocks. For instance, the dividend growth model uses
future dividends to be the determinant of value of equity or the free cash flow
model uses the growth rate of firm’s earnings based on the ploughback ratio,
which is the residual after dividend payout ratio. Given the increasingly
complex ownership structures and increasingly demanding nature of investors,
dividend payouts are viewed from varied perspectives. For some, it’s bird-in-hand and for some reduced stake. 

Statistical Modelling &

It is in these contexts that we attempt to examine
whether Lintner’s proposal works even now and if so, what is driving the target
payout ratio. We take the case of Indian firms for the study and bring forth
the dimension of dividend decisions of firms operating in the emerging and
growing economies with wider fluctuations in their earnings.  The objective of this study is to examine
the dividend behaviour of Indian firms
. By dividend behaviour we mean,
the pattern of determining the dividend payout in a given year. In other words,
what are the factors that influence the dividend decisions of Indian firms? The
study also aims to analyse whether such behaviour is in line with Lintner’s
theoretical model of corporate divided behaviour with dependency and relevance.
We tested the below
hypothesis, which is partially based on Lintner’s model:
Dividend decisions of Indian firms are significantly independent of lagged
H1: Dividend decisions
of Indian firms are not significantly independent of lagged dividends 
A basic regression model as below was developed for a
better understanding:
The sample firms selected using Judgmental Sampling method for the study were LIX 15 and LIX
15 Midcap
constituent firms, both aimed to represent the 30 firms that
are highly liquid and represent diverse industries. Multiple Regression Analysis is
carried out to test the above model, considering lag dividend as the
independent variable influencing the current year dividend. The analysis is
carried out using SPSS software package. Only the most important outputs of the
linear regression analysis are considered for interpretations and presented in
the below table:
*statistically not significant
The R value
in all the years is signifying strong positive correlation. This indicates that
current year dividend declaration and that of the previous year are highly
associated to each other. The value of R2
is considerably high in all the years except in 2009-10, when it is 0.415, thus
signifying Dt-1 can be a
good predictor of Dt.  ANOVA
significance value is
below the alpha value of 0.05 (confidence level of 95%) in all the
years, suggesting that the model is worth considering as a predictor tool and the
relationship between Dt
and Dt-1 is not
random and there exists a systematic relationship. The a value or the intercept values varying from year
to year and except 2009-10 in all other years it is not statistically
significant. As the relationship is explained more by the slope of the curve,
we may ignore the a value. The b values are positive in all the years signifying
the positive relationship between Dt
and Dt-1. The t-tests (at 95% confidence level) in all
the years’ data suggest that the b values are statistically significant, hence, we
the null hypothesis
– “Dividend decisions of Indian firms are significantly
independent of lagged dividends”.
It is highly likely that the current
year dividend decisions of Indian firms are dependent on the lagged dividends
or the level of dividends paid in the previous year. One can use the above
suggested model to forecast the dividend payouts of any given Indian firm in
the next year. The Durbin-Watson coefficient is spread around the value
of 2, even though not very close to 2 indicate that there might be
autocorrelation among the error terms and the model may not be completely free
from flaws. One may have to use it with caution and might have to better the
model with more observations.


This cross-sectional research attempted to examine
whether Indian firms follow a stable dividend payout pattern and attempt to
maintain the same. Other determinants, like the market condition, firm’s
earning, proposed capital expenditure and so on have little or no influence on
the decision-makers while deciding on the dividends. The study also restricted
its scope to measure the effect of previous year dividend on the current year
dividend, and other factors suggested by Lintner and Britain like the earnings,
cash earnings, capex and depreciation are not tested for and assumed to be
reflected by the error term.
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