MS Fall 2011 Section 02varied factors. To see the leverage and profitability impact we attempted use the secondary dataof companies listed on the Islamabad stock exchange.
Leverage, Debt ratio, profitability, dividend policy (Payout), ISE (Pakistan)
Dividend policy is the issue of interest in financial literature since many years. Lot of work hasbeen done on this by many experts.
Among early theories of dividend Miller and Modigliani(1956-1961) presented the roots of irrelevance of dividend policy that in perfect capital marketdividend payout has to do nothing with value of firms and its shares value. They supported theirargument by the fact that firm value is solely determined by the earning power of its assets andrisk associated. They argued that dividend paid by firm should be viewed as residual left overafter all acceptable investment opportunities have been under taken. Later on Lintner (1961) andGorden (1962) came up with the view of relevance of dividend policy. They argue that the firm
value is strongly affected by the dividend payout tendency. Their
theory was based on “Bird inHand” argument.
They said that
one bird is of more worth then two in bush
. That currentdividend
payout decreases shareholder’s uncertainty
and put high value on stock prices.Corporate dividend policy is subject to influence by many factors which managers keep in mindwhile labeling the dividend policy. Leverage is most dominant factor among all. Talat Afza andHammad Hassan Mirza(2010) concluded that The companies in which high proportion of sharesare held by managers and individual are more reluctant to pay high dividends as compared withthe companies in which managerial and individual ownership is low. However, high operating
cash flows increase companies’ potential to pay high dividends.
Large and highly leveragedfirms are more reluctant to pay high dividend as compared to small and low leveraged firms,while profitability increases
the companies’ dividend payouts.
S. Franklin John and K. Muthusamy (2010) inferred that Earnings per share and price earningsratio are negatively related to dividend payout. They find that the leverage is negatively relatedwith the corporate dividend payout.
Xi Wang, David Manry and Scott Wandler infer from theirresearch study that dividend payouts and dividend likelihood are both increasing in the largest
shareholder’s percentage ow
nership, although both are increasing at a lower rate when economic