How Capital Structure and Dividend Policy Impact Firm Performance

THE UNIVERSITY OF xxx
The Effects of Dividend Policy & Capital Structure on Firm

Performance: Based on Non-Financial UK Companies
being a Dissertation submitted in partial fulfilment of
the requirements for the Degree of
in the University of xxxx
by
Abstract
This dissertation aims to study the influence of Dividend Policy and Capital Structure on the
performance and profitability of 311 non-financial firms listed on the FTSE All Share index from the
period 2009 to 2013.
The econometric method used in the study was mainly descriptive statistics, correlation matrix and
multiple regression analysis to analyse the sample of 311 non-financial firms of the FTSE All share
index.
The study examines the effects of both the Dividend Policy and Capital Structure on the performance
of non-financial firms using a number of variables such as debt to equity ratio, dividend yield ratio,
dividend pay-out ratio, the market value capital (size and value) of the firm and the interest coverage
ratio.
There is reasonable consistency in the results of the analysis with the capital structure and dividend
policies results and related theories.
The dissertation consists of eight chapters. Chapter 1 is an introduction to the dissertation which
mentions how and why this topic was chosen and the reasons surrounding this subject today. Chapter
2 is the literature review and is in two parts, one covering Capital structure and the second covering
Dividend Policy. Chapter 3 is about the methodology including the hypothesis, the dependent and
independent variables along with the econometric methods used in the analysis. Chapter 4 discusses
the data; it’s source, selection and the sample size.
Chapter 5 comprises of the empirical research; including the descriptive statistics, correlation and
regression analysis.
Last but not least is the conclusion in which a summary of the findings is discussed, some
recommendations, limitations and possible directions for future research.
Acknowledgements
Table of Contents
1. Introduction………………………………………………………………………………...1
(i) Research background…………………………………………………………………….......1

(ii) Research problems & issues………………………………………………………………....3
(iii) Aims & objectives…………………………………………………………………………...6
(iv) Unique features of the work…………………………………………………………………8
2. Literature Review…………………………………………………………………………10
(i) Literature review – Capital Structure……………………………………………………….10

(ii) Literature review – Dividend Policy………………………………………………………..14
3. Methodology……………………………………………………………………………….20
(i) Hypothesis development……………………………………………………………………20

(ii) Definition of independent variable………………………………………………………….20
(iii) Definition of dependent variable……………………………………………………………25
(iv) Econometric method………………………………………………………………………...27
4. Data…………………………………………………………………………………………30
(i) Data source………………………………………………………………………………….30

(ii) Sample selection…………………………………………………………………………….30
(iii) Data filtering………………………………………………………………………………...31
5. Empirical Research………………………………………………………………………...32
(i) Descriptive statistics…………………………………………………………………………32

(ii) Correlation matrix…………………………………………………………………………....47
(iii) Regression analysis…………………………………………………………………………..48
6. Conclusion………………………………………………………………………………..…56
(i) Summary of findings………………………………………………………………………...56

(ii) Recommendations and implications…………………………………………………………57
(iii) Limitations…………………………………………………………………………………...59
(iv) Further/ future research………………………………………………………………………62
7. References…………………………………………………………………………………...65
Chapter 1. Introduction
a.) Research Background
‘Dividend policy’ and ‘Capital Structures’ of non-financial firms are two aspects of management that
have not only been extremely important in the past but also continue to gain increasing importance in
an ever changing and dynamic world.
I feel that there is not enough importance and attention given to the link between these two topics in
current day management decision making especially in the new globalized world which is more
financially interconnected due to various reasons, mainly technology and the growth of multinational
financial institutions i.e. large global investment banks, which has made access and availability to
financial services easier, quicker and more competitive.
The last two decades have seen the world evolve and modernize at all levels, and this includes
technology, communication, globalization of businesses, political and financial agreements and
treaties; all which have contributed to this more interconnected and globally linked world. This
evolution has changed the conventional dynamics and parameters with which previous financial
management decisions were made.
Financial deregulation in the 1980’s led to some complex and sophisticated financial products and
services; all of which facilitated in fuelling growth of the global financial system through increasing
liquidity and increasing the access to financial markets through advances in technology. This in turn
reduced the speed with which transactions can be carried out, reduced costs, and reduced valuable
time, not to mention the elimination of geographical hurdles for clients around the globe, especially
emerging markets. These factors allow firms to also switch to other financing options more easily and
within a shorter time period. If we speak of capital structure choices, firms can now change their
capital structure more quickly and more easily than ever before. This is why I will also touch upon the
concept of ‘financial flexibility’.
Therefore, in my opinion an objective and simple quantitative analysis is no longer enough to decide
on the correct ‘Dividend Policy’ and optimum ‘Capital Structure’ in order to maximise profits of the
firm. The need has also arisen to weigh in a number of other factors, somewhat qualitative in nature, to
come to a better decision, along with an element of subjectivity to the whole process. Importance also
needs to be to be stressed upon considering both these topics collectively rather than each one
independently to come to a better decision as both are financial management decisions and are made
by more less the same group of people who are involved with the day to day running of the firm as
well as the long term strategy of the firm.

b.) Research problems or issues
Q1. What is the relation between firm's capital structure and Profitability?
This relationship is one of the important bases for the dissertation. Depending on the different amount
of leverage various non-financial firms of the FTSE All share index have taken on, the effects on these
firms’ profitability and performance is something that needs to be observed and identified. Any change
or movement in profitability of the firms from the sample will allow us to identify whether how
different levels of debt have affected profitability and what other factors may have a possible
relationship that may be interfering with the regression equation.
How the level of debt affects the level of profitability of the firms in the sample will be interesting to
see; if higher debt is something that firms are taking on when they have the ability to turn that in to
higher earnings or if it has only be taken on as a means necessity and due to lower earnings in the first
place, to sustain operations and continue to remain in business.
Q2. What is the relation between dividend pay-out and Profitability?
This is the second and equally important relationship under study in this dissertation as we have to
determine whether the different dividend policies have any impact on the profitability and performance
of the non-financial firms of the FTSE All share index. With this question we will also be trying to
identify any factors that may possibly also come in to play while observing changes or variations in
dividend policy.
Whether high dividends are a sign of higher profitability or whether lower dividends are a sign of
higher future profitability; that is something we will try to gauge from the analysis and subsequent
results. Do higher dividends effect the firms’ profits or is it actually the other way around; that firms
who pay high or regular dividends are actually better performing and posting higher profits.
Q3. What is the relation between firms capital structure and dividend pay-out?
Although the dissertation is based on how capital structure and dividend policy both effect the
profitability of non-financial firms separately, the relationship between capital structure and dividend
policy itself is something crucial to this whole study, and that is primarily the reason why it was
decided to study the effects of both of them on profitability simultaneously rather than how in so many
cases both are looked at separately. The results for this research question and problem will be most
interesting and fascinating to observe.
The fact that both aspects are being analysed together is the reason to look into how the different
decisions regarding both can and may affect the other and whether higher levels of debt encourage a
more conservative dividend policy and lower levels of debt encourage a more aggressive dividend
policy where the board are easily willing to allocate a larger proportion of their earnings towards
dividends to shareholders.
Similarly it is worth observing whether the dividend policy has anything to do with the decision on
how much debt the firm has taken on and the effect of that on profitability. We will try and see
whether firms have taken on high levels of debt while also maintaining an aggressive dividend policy
and if that is the case then how is it affecting the performance of the firm.
Q4. What is the relation between factors not related directly to capital structure and/or dividend
pay-out and Profitability?
This research problem and question is also fascinating because although it is traditionally thought that
an objective and financial analysis is sufficient to analyse and predict the factors that relate to firms
profitability, we have to factor in and assess the various non-financial elements that also come in to
play whilst observing the changes in performance and profitability. Simply looking at variations in
financial statement analysis and ratios will not give us a true picture of the complex and much dynamic
environment firms exist and operate in today. Today’s corporate world is much more vibrant and
advanced than what existed even as recent as two to three decades ago. Many factors can be attributed
to this, from modernisation of communication infrastructure to advancement in financial products and
services and to general globalization where geographical boundaries have become less of a hurdle to
do business than ever before. The pace at which transactions are executed because of these factors has
increased immensely, due to which the whole financial management culture and decision making
process has evolved. These factors may include aspects such as changes in geo political situation,
political and economics treaties such a WTO, the European Union and the single European currency
which is quite recent development relative to research carried out since Modigliani and Miller on
finance.
That is why there are many such factors that fall under this category, and incorporating all of them is
nearly impossible in any analysis as it is not easy to measure and quantify them. Even if they are,
accuracy in doing so is very difficult.

c.)Aims & Objectives
There are many theories in the corporate finance literature addressing the dividend and capital
structure issue. The purpose of study is to understand the factors influencing the firm’s performance
with regards to its dividend policy and capital structure. The specific objectives of this study are:
1. To analyse the financials of the company in order to understand the factors such as
Return on Assets, Return on Equity, Earnings per share, Dividend yield, interest
coverage ratio, Market value capital, Debt to Equity, dividend pay-out ratio and how they
affect the firms’ performance.
The firms’ financial data is a direct and objective reflection of the firms’ performance and
helps us compare and analyse the information with uniformity and ease. It gives us a detailed
snapshot of the workings of a firm and is used as a primary source of data when any kind of
study or research is attempted or carried out.
2. To understand the significance of a company's profitability in terms of Earnings per
share, Return on Assets, Return on Equity.
Certain financial data and ratios provide us with statistics and figures that more specifically
focus on certain aspects of performance of the firm. These specific ratios then help us to gauge
and measure variations with which we are able base our research on.
Earnings per share, Return on assets and Return on equity are similar ratios that enable us to
measure profitability of the firms but in terms of different aspects. Earnings per share is also a
profitability ratio more specific to the outstanding shares a firm has and therefore gives us a
glimpse of profitability with regards to the dividend policy. On the other hand Return on assets
gives us profitability with regards to the total value of assets employed by the firm and return
on equity gives us profitability in terms of shareholder equity.

Hence these three ratios are used as the dependant variables in the analysis and they will
provide us with a performance measure for each of their own domains.
3. To measure each factor individually on how it affects the dividend decision and also the
capital structure. And whether both capital structure and dividend policy have any effect
on each other with respect to firms’ profitability and performance.
Different variables represent different aspects of the firm. Some variables represent the
financial footing of the firm where as others do not represent any direct financial aspect but still
give a lot of information regarding the firm. They help us to understand any pattern or
behavioural link that may exist amongst the different variables and subsequently help us
develop any further understanding of the existing dynamics.
d.) Unique features of the work
There has been a lot of research and work carried out on the performance and profitability of firms
with regards to their capital structure and also their different dividend policies that these firms adopt. A
lot of the work looks at both the capital structure and dividend policy separately, even though it may
be in a lot of detail. Needless to say that both these aspects are part of financial management and the
decision making process the finance managers have to make along with the approval and directions of
the board of directors and shareholders.
However I found it very interesting and something worth probing in to that how both these aspects
which are both equally important and equally relevant to the financial decision making process can be
interrelated and have a connection when it comes to the profitability of firms.
Therefore I tried to study and observe any connection that difference in capital structure and difference
in dividend policy may have on the performance and profitability of non-financial firms on the FTSE
All share index, and whether one has an effect on the other while the primary objective remains the
same for all firms; maximizing profit and shareholder wealth.
Hence the uniqueness of this dissertation in my view is that it is factoring in both, the capital structure
and dividend policy of non-financial firms on the FTSE All Share index and the effects both of them
may have collectively or individually on the performance of these non-financial firms.
I am interested in observing and identifying any connection both these aspects may have on one
another, if at all. In the process I will also identify other factors that come into play and determine the
decisions behind these two very important aspects and also to what extent they matter. These other
factors will be represented by a few other variables that will be incorporated in the analysis in order to
give us better information as to how firms can behave in various situations. For example how the size
of a company may be a contributing factor towards any variation in performance and profitability of
the firm.
Chapter 2. Literature Review
Literature Review for Capital Structure
Capital Structure and Dividend Policy of firms are continuously evolving issues for financial
management professionals, and also topics on which research will continue to be carried out for as
long as decisions regarding these two have to be made.
The reason for this is because as the global financial system has evolved, especially at the pace at
which it has in the past two to three decades, financial decisions have had to be made according to the
new and latest dynamics in place. So many other factors have come in to play in recent times that a
wide ranging, analytical yet simplistic decision making process has to be carried out. I say simplistic
because when too much detail is analysed then decision makers can tend to lose the wider picture and
get carried away. This will be clear as we discuss our methodology and findings later in the
dissertation.
There are many theories which touch upon how firms perform with regards to their ‘capital structures’
and ‘dividend policies’.
Any analysis on Capital structure of firms would be incomplete without mention of Modigliani and
Miller and their series of work on this topic. Modigliani and Millers theory of Irrelevance (1958)
suggested that financial leverage does not affect the firm’s market value. They hypothesized that in
perfect markets it does not matter what capital structure firms use. This theory was based on a number
of key assumptions; that there are 1.) No taxes 2.)No transaction costs 3.) No bankruptcy costs 4.)
Equality in borrowing costs for companies and investors alike 5.) No information asymmetry in the
market 6.) No effect of debt on a company’s earnings before interest and taxes.
We know that in reality, these assumptions are not realistic and there are taxes as well as bankruptcy
costs. Both of them were however incorporated by M&M in their later work.
In a later study Modigliani & Miller (1963) introduce the benefit companies derive from debt due to
the tax benefit they get on interest payments they pay to bondholders. So in a way, they relative trade
off theory suggests that companies with higher debt will be more valuable. Therefore they imply that
firms should use as much debt as possible in order to make maximum benefit of the tax benefit they
could get from debt, in turn increasing the value of the firm.
There have been other theories which have explained the capital structure of firms; including theories
on bankruptcy costs, agency theory costs and also the pecking order theory.
Agency costs occur due to the difference in the owners and managers interests (Jensen & Meckling
1976). Two types of agency costs which are identified are those of the relationship between
shareholders and managers, and the other are between shareholders and debt holders (Jensen &
Meckling 1976). Different debt ratios in firms have led to varying degrees of agency costs, with higher
leverage up to a certain point believed to be good, beyond which the risk of agency costs may become
significantly higher; firstly because of possible higher bankruptcy costs (Titman 1984), secondly there
is the possibility of managers putting in lesser efforts to control risk, subsequently leading to higher
costs of financial distress, bankruptcy or even liquidation (Berger and Bonaccorsi di Patti 2005). And
thirdly, there is the possibility of inefficient use of the funds by the managers (Jensen 1986). The need
to correctly balance the benefits and costs of debt financing was identified by Myers (1984) in which
the optimal debt (capital structure) is at the point where any additional level of debt will cause the cost
of bankruptcy to be more than the benefit derived from the tax shield. It values the firm as “the value
of firm if unlevered plus the present value of the tax shield minus the present value of bankruptcy and
agency costs.”
Myers and Majluf (1984) also touch upon the aspect of ‘information asymmetry’ with regards to a firm
intending to issue new common stock to raise capital to undertake a valuable investment opportunity.
The assumption is that the firm’s managers have better information, whereas the potential investors
assess the matter more rationally. The paper emphasizes the importance ‘information asymmetry’
plays during the decision making process and how it may cost firms more to issue new equity over
using internal funds or internal funds over new debt holders because the new equity or new bond
holders will know less about the firm than the managers. The paper suggests that eventually it will lead
to a preference over how the firm finances their new investments.

This preference or ‘pecking order’ theory puts forward the idea that firms first rely on internal funds
i.e. retained earnings, in which the concept of ‘information asymmetry’ will not prevail, and then
secondly the firm will turn to debt and then lastly issue new equity to overcome any further capital
requirements. If followed, this theory means that firms that are most profitable will have less debt as
compared to those which are less profitable.
More recently, Baker and Wurgler (2002) have developed the ‘market timing’ model in which they
suggest that firms time their equity issue in such a way that the price of their stock is overvalued. And
any decision to repurchase stock is at a point in time when the price of stock is undervalued,
subsequently implying that the capital structure of the firm is the cumulative outcome of past attempts
to time the equity market. Therefore fluctuations in stock prices will affect capital structures of those
companies.
Mesquita and Lara (2003) have discussed in their work the relationship between interest rates and debt
with regards to long term financing. They have discussed long term debt and short term debt, with long
term debt exhibiting a negative relationship with interest rates in the long term and a positive
relationship with short term debt as well as equity. This bifurcation of long term and short term debt is
very clarifying as it shows us the strategy of many firms and helps us explain some patterns and trends
to be found in the regression analysis.
Rajan and Zingales (1995) have stated how the capital structure decisions have more similarity with
one another across borders and that how previously there was misconception that institutional
differences were far greater than actual. They have emphasized on the review of individual institutions
within countries is an important factor to be looked in to as it may effect correlation between variables
such as leverage and profitability and firm size.
The data we have on different capital structures is mostly from research and data gathered from
economies of developed countries where there is a lot of similarity amongst all the firms under study,
but research on economies of developing countries has also shown that those variables which are
relevant and significant in developed countries are also relevant and significant in developing countries
(Booth et al 2001). The constant result is that the higher the profitability the lower the levels of debt
which is actually also what the ‘pecking order’ theory suggests. The results basically show that
because external financing is more expensive it is avoided by firms. On the other hand it also suggests
that more profitable firms are less in need of external financing.

Literature Review for Dividend Policy
Many researchers have been fascinated to the study of Dividend policy. One of the most important and
popular research is that of Miller and Modigliani‘s (1961), whose hypothesis states that the cash
dividend policy is not important because it has no effect on a company‘s value and therefore does not
affect the shareholders wealth. This is explained by the fact that companies follow the Residual
Dividend Policy. The residual dividend policy is basically when corporate profits are reinvested in
whatever available investment opportunities there are with a net present value that is positive (Saxena,
1999, Baker, 2009, Chen and Dhiensiri, 2009) and subsequently the surplus cash is then distributed as
cash dividend to the shareholders.
Miller and Modigliani‘s hypothesis triggered a lot of debate and to some extent controversy amongst
researchers at that time. An interesting research which in a way opposes Miller and Modigliani’s
theory is that of Partington (1985). Partington (1985) claims that actually firms do not follow the
residual dividend policy since the decisions regarding dividends are taken separately from the
investment policy.
General Dividend Policy
The board of directors proposes the dividends to shareholders at an annual meeting (Pike and Neale,
2009). Hence when managers prepare for the distribution of dividends they not only look at the profit
for the current year but also at the expected future earnings. This also keeps in view the firm’s ability
to maintain a stable stream of dividend. In a case where a certain company makes a high profit for a
particular year but are not expecting a similar earning in the coming year, they will decide to declare a
normal dividend and then give an additional dividend separately in order to not to dishearten the
investors’ hopes for the future. The profits in this case is divided into two dividends. There is a normal
dividend and then there is an incremental dividend. This conveys to the investors that this dividend
was unexpected and may not continue in the future (DeAngelo et al., 1996). There are several different
ways in which profits and dividend can be distributed. The company can choose to distribute the
profits in the form of regular cash dividends and it can also distribute profits in the form of shares
dividends to the shareholders. Another way is where shareholders can acquire the profits when the
company decides to repurchase its shares.
A number of critics (Gordon, 1959, Blume, 1980, Dyl and Weigand, 1998, Koch and Shenoy, 1999)
consider that increasing cash dividends actually contributes towards increasing a company‘s value and
in turn that increases the wealth of the shareholders. Another group of critics (Litzenberger and
Ramaswamy, 1979, Blume, 1980, Litzenberger and Ramaswamy, 1982, Ang and Peterson, 1985)
consider that increasing the cash dividends can possibly create a downward trend in shareholders
wealth.
A combination of a number of different policies allow shareholders to receive the profits in a single
year, but it’s usually Cash dividend policy, Shares dividend policy and/ or buy back shares policy
(Broyles, 2003, Pike and Neale, 2009).
Not only investors or portfolio managers or economists, but also government officials and policy
makers are interested in what impact the cash dividend policy has on the current prices of company
shares and how the capital markets are performing (Okpara, 2010). The questions that arise is “Can
managers maximize the wealth of the owners of the company through a particular dividend policy?”
“Are the companies with high dividend sold with premium?”, “Should the shares of companies that
retain their profits or distribute a percentage of its profits, be sold at a lower price?” These are those
sort of questions have been the centre for a number of researches and it is difficult to reach a consensus
on how these questions can be answered if at all. This is most probably due to many other factors that
are relevant but we are unable to gauge and measure them and which affect the market value of the
shares and they hinder us to measure the impact of only the dividend policy on the profits of the firm.
The main focus is mostly on how the effect of distributing the cash dividend has on the value of the
company and subsequently on shareholders wealth.
In their study Miller and Modigliani (1961) are of the view that cash dividends do not affect the value
of the company since the company‘s value cannot be influenced by how the profits are divided but
instead they are affected by the ability to achieve those profits. That is why they mention that instead
of making a decision as to how the profits should be divided between dividends and retained earnings,
the focus should be on how to maximize the profits through better investment decisions. Although
there is a difference of opinion (Olson and McCann, 1994, Lipson et al.,1998), and that is the way in
which earnings are divided between dividends and retained earnings will affect the company‘s value
by increasing or decreasing the demand for the shares of the company. That’s because the investors
who have high incomes will tend to prefer those companies without cash dividend if taxes on cash
dividends are more than taxes on capital gains and on the other hand the investors who fall under a
lower tax bracket will tend to prefer companies that give higher cash high dividends. Secondly the
investors of higher growth companies could also not ask the company to pay-out more cash dividends
and may opt to accept low cash dividends as the internal rate of return of those companies tends to be
more than the cost of obtaining funds from other sources than retained earnings, and therefore it
maximizes the shareholders wealth through the retaining all or most of the profits and then using them
to finance future projects that may have a positive net present value. On the other hand investors in
companies with lower growth will tend to look for high dividends (Walter 1963).
It is commonly thought that the cash dividend policy will affect the market value of shares as an
increase or decrease for the company shares will be due to the price of its shares. The decision of
distributing the cash dividend is one challenge that so many company finance managers face and
because decision to distribute means the funds are to be given to the company‘s shareholders or the
funds to remain with the managers in the company to reinvest (Lumby and Jones, 1999).
“The following two main goals are taken into account: maximizing the wealth of shareholders and
meeting the company needs to finance its investments” (Smith and Watts, 1992).
“The optimal cash dividend rate for any company is best determined by the differentiation between a
numbers of factors” (Baker, 2009): (i) Shareholders preference for cash dividend or capital gains; (ii)
Investment opportunities available to the company; (iii) Optimal structure mix for the company‘s
capital (funding sources); (iv) External financing costs.

We are better able to understand the theoretical framework of the relationship between dividend
policies (cash, shares and repurchase) and market value of the company by reviewing the Irrelevant
Theory introduced by Miller and Modigliani in 1958. What they state is that there is no relationship
between dividend policy and market value. A lot of researchers support this theory, many have
suspicions about it.
The relationship between dividend policy and company market value is also affected by many other
factors and which have given birth to a number of other theories and where we find that uncertainty
created a Bird in the Hand Theory; the presence of taxes helped to creates a Tax Effect Theory; and
shareholders‘ loyalty creates a Clientele Effect Theory. If management try to send some information
through the dividend policy, this is covered by the Signalling Effect Theory while the separation of
management and owners (shareholders) has creates the Agency Cost Theory.
The Irrelevance Proposition theory is where cash dividends are not related to the company market
value because the investor can make his own dividend policy, irrespective of which policy the
company has adopted.
The Bird in the Hand Theory is that the market value of the company will improve if the company
increases paying out cash dividends as the investors will consider those cash dividends as a ‘bird in
hand‘. Capital gains are on the other hand a sparrow in the tree‘.
Tax Effect Theory is theory is of the view that cash dividends are exposed to a higher tax rate than the
capital gains tax rate, and therefore investors will prefer companies to retain their profits and let it
reflect as capital gains for the benefit of the shareholders. Retaining the cash dividends will increase
the market value.
Signalling Effect Theory is when investors will assume that since cash dividends are a sign of the
company’s profits and also future earning then a healthy dividend stream is indicating that the
company is performing well and therefore investors will prefer investing in companies that give higher
cash dividends. In this situation the company can choose to maximize its market value by increasing
cash dividends.
Clientele Effect Theory is where the company will look for investors who feel that the company‘s
policy of cash dividends is in tune with their investment requirements and needs and also their tax
position. Because of that the policy of cash dividend
will not affect the company‘s market value because investors chose a company that suited their needs
and requirements.
The Agency Cost Theory is when the cash dividend policy is considered as a best means for reducing
the costs that have arisen due to interest conflicts and due to separating of management from
ownership. In the process the company is able to maximize the market value by reducing agency costs
which it does by increasing the percentage of cash dividends. By learning more about these theories
we can easily realise that they give conflicting and opposing information to managers which in turn
affects their goal and objective to increase the company‘s value and subsequently maximizing the
company owners’ wealth. A very important and vital question is, Which theory can be adhered to in
order to create and increase profitability, performance and a company‘s value.
There has undoubtedly been evolving characteristics of firms in terms of financial decision making,
and dividend distribution is no exception. Fama and French (1998) have highlighted this aspect and
change in financial management decision making in their research. The decrease in the number of
dividends being paid by firms from the early 1970’s to the late 1990’s has been substantial. The drop
has been approximately 46% in those thirty years. This drop can be attributed to the tilt of these
dividend paying firms towards characteristics of those firms that have never paid dividends before.
They are of small size, have lower earnings, and large investments compared to earnings. Fama and
French (1998) also highlight how also in general the propensity to pay dividends has decreased from
the late 1970’s. These include small firms and large firms, and firms with large investments compared
to their earnings.
Chapter 3. Methodology
a.) Hypothesis Development
The main null hypothesis for this study is:
There is no significant statistical relationship between Capital Structure and Dividend Policy with
performance of non-financial firms of the FTSE All share index.
b.) Definition of Independent variables
The choice of independent variables is varied. A number of variables are specific to capital structure,
where as some are specific to dividend policy, and there are also variables which
(i) Debt to Equity Ratio (DER)
The Debt to equity ratio shows us the ratio of debt a company has taken in comparison to
the equity and the proportion of each that it is using to finance its assets.
 Formula for Debt to Equity ratio = Total Liabilities / Total Equity
A high debt to equity ratio means that a company has taken on more debt to finance its
growth and it depicts an aggressive approach by the company. This also means that there
subsequently be higher interest payments and that could lead to volatility in earnings of the
company. As long as the earnings generated by the company exceed the higher debt taken
on then that signifies good decision making and will lead to increased earnings for
shareholders and an increase in shareholder wealth. However if the cost of this increased
borrowing and interest payments outweighs the earnings generated by the company then it
could prove to be too burdensome and eventually lead the company to financial difficulties
and possibly bankruptcy.
Debt to equity ratio is taken as a very important independent variable in this analysis as it
will reveal one of the two main elements of the dissertation, which is capital structure. How
the three dependant variables respond to the Debt to Equity of all the firms in the selected
sample will be interesting to see and a basis for our results.
(ii) Dividend Yield Ratio (DYR)
The dividend yield ratio gives us the amount a company distributes as dividends with
regards to the market value of its share price.
 Formula for Dividend Yield = Annual Dividends per Share / Price per Share
This ratio is ideal for assessing how much return an investor and shareholder get for what
they have invested in the company stock. It also shows the attractiveness of a share to the
shareholder or investor especially in the case where shareholders and investors are looking
for a stable and robust return on what they have invested in the form of dividends.
This is also an important independent variable and crucial to our analysis as it shows us the
behaviour of the firms in the selected sample regarding their dividend policy; one of the
two main aspects under study in this dissertation.
(iii) Dividend Pay-out Ratio (DPR)

The dividend Pay-out Ratio is the amount of earnings of a company given in dividends to
shareholders with regards to the total Net income of the firm. The remaining amount that is
not paid out in dividends is kept as retained earnings for future growth plans the company
may have.
 Formula for Dividend Pay-out Ratio = Dividends / Net income
The Dividend pay-out ratio is also a good depiction of any company’s dividend policy as
shareholders and investors are able to use it to determine how much of the earnings and net
income of a company will be distributed amongst shareholders.
Therefore the dividend pay-out ratio is also a vital and important independent variable in
the analysis as it will be an interesting indicator of the dividend policy of the selected firms
in the sample.
(iv) Interest Coverage Ratio (ICR)
The interest coverage ratio tells us how well the company is positioned to pay the interest it
owes on its debt. It is an indicator of the financial health of the company in a way.
 Formula for Interest Coverage Ratio = EBIT / Interest Expense
The higher this ratio is the better ability it has to service its debt. A low Interest Coverage
ratio is an indicator that the company is not generating enough revenues to pay for its
interest expense on the debt taken out.

Although the interest coverage ratio is not directly related to either dividend policy or the
capital structure of firms, it is however taken as an important and interesting independent
variable in our analysis as it depicts the firms’ individual financial health and wellbeing. It
is indirectly related to the capital structure aspect of the analysis as is it will be interesting
to see the interest coverage ratios of firms with different levels of leverage.
(v) Market Value Capital (MVC)
The Market Value Capital of a firm gives us the total market value of the firm’s total
number of shares. It is derived by multiplying the total number of outstanding shares with
the market value or current market price of the company’s share.
This is also taken as an independent variable in the analysis, although it is also not directly
related to the two main aspects of the dissertation, capital structure and dividend policy.
However it is an important indicator of the firms’ size and value. It will be interesting to
observe any correlation between different leverage and dividend policy with regards to the
size and value of different firms.

c.) Definition of Dependant variables
The dependant variables that have been chosen are (i) Return on Assets, (ii) Return on Equity and (iii)
Earnings per share. These variables will help determine the firms’ performance specifically with
regards to capital structure and dividend policy.
(i) Return on Assets
ROA is a profitability ratio and an indicator of how much profit a firm making with regards
to its assets. It allows us to gauge how well the firm is utilizing its assets in order to
generate earnings. It shows the company’s capability to generate profit before leverage
rather than by using leverage. It is derived by dividing a firms total annual earnings by its
total assets, and is shown as percentage.
 Formula for ROA = Net income / Total Assets
Because various firms operate in different sectors and industries and in different dynamics,
there is a different extent of assets employed in each industry. The manufacturing or
construction sector will be operating in a more capital intensive way than those firms in the
services industry and therefore have lower ROA’s as they would have a higher value of
assets employed.
(ii) Return on Equity
ROE is also a profitability ratio and an indicator of how much profit a firm is generating
with regards to the amount of equity shareholders have invested. It is shown as a percentage
and calculated by dividing Net income by Shareholders equity.
 Formula for ROE = Net income / Shareholders equity
ROE is considered to be a relatively important profitability ratio as it shows how much
profit is being generated with regards to owners’ investment and how profitably the
owner’s wealth is being employed.
(iii) Earnings per Share
EPS is the portion of a firm’s profit which is allocated to each outstanding common stock
of the firm. It is considered to be an important indicator which determines the share price of
the firm.
 Formula for EPS = Net income – dividend for preferred stock / Average outstanding
Shares
EPS is a ratio which helps us to gauge profitability in terms of shareholder ownership and it
helps us determine how much profit the business made in terms of each share.
d.)Econometrics methods
The software that will be used to carry out the Regression analysis and view the output is E-Views 8.
The regression model that will be used is the Multiple Linear regression analysis in order to test the
relationship between the dependant variables and independent variables.

In order to gauge the relationship between the dependant variables and independent variables, three
different models will be run and their out will be analysed.
(i) Model 1
ROA = α + β1 MVC + β2 DER + β3 DPR + β4 ICR + error
Dependent variable: Return on Assets (ROA) and
Independent variables:
(i) MVC
(ii) Debt to Equity Ratio
(iii) Dividend Payout Ratio and
(iv) Interest Coverage ratio
This model will give us the correlation between ROA and the four independent variables
MVC, Debt to equity ratio, dividend pay-out ratio, and interest coverage ratio.
We will be able to determine the effect, whether positive or negative and whether how
strong or weak is the relationship between these four and profitability (ROA) of all the
firms in the sample.
(ii) Model 2
ROE = α + β1 MVC + β2 DYR + β3 DPR + β4 ICR + error
Dependent variable: Return on Equity (ROE) and
(i) MVC
(ii) Debt Yield ratio
(iii) Dividend Payout Ratio and
(iv) Interest Coverage ratio

The second model has ROE as the dependent variable and MVC, Dividend yield ratio, dividend
pay-put ratio and interest coverage ratio as independent variables. This model will allow us to
see how these four independent variables have an effect on the equity of the shareholders of the
firm and also those who directly or indirectly direct the dividend policy and also how leveraged
the firm should be.

(iv) Model 3
EPS = α + β1 DER + β2 DPR + β3 ICR + β4 MVC + error
Dependent variable: Earning per Share and
(i) Debt to Equity Ratio
(ii) Dividend Payout Ratio and
(iii) Interest Coverage ratio
(iv) Market value capital
The third model is with Earning per Share (EPS) as the dependant variable and the independent
variables are debt to equity ratio, dividend pay-out ratio, interest coverage ratio and the market
Value capital of the firms. Earnings per share as the dependent variable is primarily to give us a
strong indicator of the firms’ dividend policy and how much of the firms’ profits are being
directed towards paying out dividends. Although earnings per share is also profitability
indicator but it is more in terms of distribution of dividends. This econometric model will give
us an assessment of how the independent variables included in the multiple regression analysis
and their movement will correlate and effect the dependent variable; earnings per share.
Chapter 4. Data
a.) Data Source
The data used in the analysis has been retrieved from DataStream and Thomson One which includes
all UK companies listed on the London FTSE All share index from the time period of 5 years, from
2009 till 2013.
The companies in the sample are 311 and the ones which have been excluded are all financial sector
companies, and all those companies whose data was either incomplete or not available.
The FTSE All Share index is a capital weighted index comprising of more than 600 companies and it
represents the full capital value of the firms that are included (Financial Times 2014).
b.) Sample Selection
The companies on the UK FTSE All share index were selected as the sample in order to analyse and
measure the effects of varying capital structure and dividend policies on the performance of non-
financial firms.
The advantage of selecting these companies is that it is more valuable to analyse the financial
management policies of firms in an already developed and advanced economy where sophisticated and
advanced financial services and products are available. Secondly, the availability of data is not
something one has to worry about, and especially when these companies are public limited companies
with up to date published financial data for many years and even since inception. The final selected
sample size was of 311 firms after eliminating firms with incomplete or insufficient data as well as
firms related to the financial services sector.
c.) Data filtering

Although the FTSE All Share index comprises of more than 600 companies, all companies related to
the financial services sector were omitted. This is because of the nature of financial services companies
and the lack of real wealth that is reflected in their operations and financials. Firms with missing and
incomplete data were also omitted. This left us with a final sample size of 311 firms.
Chapter 5 - Empirical Research
a.) Descriptive Statistics
Return on Assets (ROA) Descriptive statistics for the period of 5 years
ROA2009 ROA2010 ROA2011 ROA2012 ROA2013

Mean 5.963899 8.481516 8.417870 8.450614 6.920794
Median 4.980000 6.810000 7.370000 6.930000 6.180000
Maximum 75.09000 122.0800 109.5100 175.0400 234.4200
Minimum -34.85000 -16.50000 -49.95000 -29.36000 -59.34000
Std. Dev. 10.13581 11.34292 9.997785 13.66962 16.55100
Skewness 2.523333 6.318766 3.663913 7.568145 9.184463
Kurtosis 19.53657 60.37381 46.39110 88.65840 131.3871
Jarque-Bera 3450.114 39835.62 22350.26 87329.66 194138.4

Probability 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 1652.000 2349.380 2331.750 2340.820 1917.060

Sum Sq. Dev. 28354.77 35510.64 27587.78 51572.93 75606.19
Observations 277 277 277 277 277
Means
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
9
3
00
01
01
01
01
A2
A2
A2
A2
A2
O
O
R
From this table and bar chart we can assess the Return on Assets (ROA) of the sample over a period of
5 years, from 2009-13.

The performance of all the firms in the sample exhibits an upward trend for the first four years of the
time period under consideration. Only in the last year is there a drop in the ROA for the firm taken in
the sample.
The Standard deviation is relatively consistent throughout the first four years, with an increase in the
last year or so. This indicates that ROA as a whole is more or less consistent and stable even while
there are maybe be upward or downward trends in the figure.

Return on Equity (ROE) Descriptive Statistics for the period of 5 years
ROE2009 ROE2010 ROE2011 ROE2012 ROE2013

Mean 15.57398 18.90618 17.52286 16.36367 11.04452
Median 11.19000 15.73000 15.16000 15.41000 12.18000
Maximum 780.3900 265.5700 219.2400 208.7500 200.1200
Minimum -160.4600 -229.3900 -86.48000 -75.43000 -405.8400
Std. Dev. 65.96936 31.11788 21.10954 22.44876 36.51741
Skewness 8.725237 1.080817 3.041379 2.378021 -5.409926
Kurtosis 94.99976 36.19242 36.60118 26.68326 71.07525
Jarque-Bera 94626.46 11940.00 12583.51 6297.118 51274.54

Probability 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 4033.660 4896.700 4538.420 4238.190 2860.530

Sum Sq. Dev. 1122805. 249827.2 114968.1 130018.2 344048.6
Observations 259 259 259 259 259
Means
50
45
40
35
30
25
20
15
9 0 11 12 13
2 00 01 0 0 0
E E2 E2 E2 E2
O O O O O
R R R R R
From this table and chart we are able to assess the Return on Equity (ROE) of the sample from the
FTSE All share index for the period from 2009 till 2013.
Other than the spike in ROE in the second year (2010) taken into consideration there has been a
considerable downward trend though out the last four years in the ROE of all firms in the sample.
There is also a considerable variation in the standard deviation of ROE in the time period of five years.
Although it has been on the decreasing side, except for year 2011 and 2012 the variations have been
relatively large.
There hasn’t been too much variation in the median figure for ROE, which means that it haven’t been
large and unstructured shifts.
We can also see that the maximum value for ROE in 2009 is 780. This is well above the maximum
values for the following years and is an extreme value. This outlier also distorts the value of the
analysis and causes a deviation from the actual reality.

Earnings Per Share Descriptive Statistics for the period of 5 Years
EPS2009 EPS2010 EPS2011 EPS2012 EPS2013

Mean 31.59846 31.01688 35.68051 40.75390 41.47507
Median 18.36500 19.13500 22.50000 25.31000 23.90000
Maximum 287.6300 377.7100 498.7700 439.2800 439.2800
Minimum 0.000000 0.000000 0.000000 0.000000 0.000000
Std. Dev. 39.76514 42.64573 50.33322 53.54805 53.57528
Skewness 2.886594 3.795457 4.563150 3.615531 3.099642
Kurtosis 14.43651 24.57915 33.94260 22.02784 16.99322
Jarque-Bera 1996.836 6366.593 12662.26 5041.223 2849.936

Probability 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 9226.750 9056.930 10418.71 11900.14 12110.72

Sum Sq. Dev. 460148.5 529229.6 737228.9 834411.4 835260.5
Observations 292 292 292 292 292
Means
42
40
38
36
34
32
30
9 10 1 2 13
2 00 20 2 01 2 01 20
S S S S S
EP EP EP EP EP
This table and bar chart shows the figures of Earning per Share(EPS) of all the firms in the selected
sample from the period of 2009 till 2013.

There has been a very steady and gradual upward trend in the first two years and then a slightly
sharper rise from there onwards in the figures for the mean of Earning per share for the firms in the
sample. It shows that profitability per average common stock for the all the firms in the sample has
simple been on the rise for the given period and that more proportion of the firms from the sample
have been allocating their earnings towards distribution of dividends to shareholder and investors. This
consistently steady and upward trend tells us the general tendency of firms’ policy towards dividend
distribution and also profitability.
The standard deviation has also steadily increased in the first two years and then remained stable but
high which means that although there has been a steady upward trend in the earnings per share there
has been a widening range of disparity amongst all the firms from the mean value of earnings per share
for that year. This is a comprehensible phenomenon in a situation where there is growth.
The median has increased very slightly and then remained very stable for the most period.
Debt to Equity Ratio Descriptive Statistics for the period of 5 Years
DER2009 DER2010 DER2011 DER2012 DER2013

Mean 24.18553 38.73924 89.88030 24.02275 58.03758
Median 50.37000 40.02500 41.60500 39.61500 40.86500
Maximum 9793.660 5303.940 2547.560 1512.670 5549.440
Minimum -18028.00 -7120.830 0.000000 -11554.55 -3627.900
Std. Dev. 1297.093 620.4828 233.7037 703.4967 476.5768
Skewness -8.056210 -4.962105 7.285429 -14.89693 2.005449
Kurtosis 138.4189 91.49668 64.40684 245.1111 82.37702
Jarque-Bera 234023.4 99787.75 50120.80 748777.0 79486.39

Probability 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 7304.030 11699.25 27143.85 7254.870 17527.35

Sum Sq. Dev. 5.06E+08 1.16E+08 16439837 1.49E+08 68364768
Observations 302 302 302 302 302
Means
90
80
70
60
50
40
30
20
10
0
09
10
11
12
13
20
20
20
20
20
ER
ER
ER
ER
ER
D
This table and bar chart shows the Debt to Equity ratio of all the firms in the sample for the period
from 2009 till 2013. We can see that for the first three years there has been a somewhat aggressive
increase in the leverage of the firms in the sample from the FTSE All share index, with a sudden
substantial drop from 2011 to 2012, within one year. Then the debt to equity ratio picked up again
rather sharply, but not to the same previous high level of 2011.
Standard deviation is considerably high in the first two years with a decrease in 2011 and then
fluctuating to a high and then a low for the following two years. This shows that a large number of
firms in the sample opt for different leverage positions and there is a wide variation from the mean
figure. The leveraged position of the firms in the sample is varying to a great extent across the sample
size.
Dividend Pay-out Ratio Descriptive Statistics for the period of 5 Years
DPO2009 DPO2010 DPO2011 DPO2012 DPO2013

Mean 31.75283 30.26116 30.93220 33.30694 37.70370
Median 33.52000 33.69000 34.25000 34.40000 38.87000
Maximum 100.0000 90.91000 84.64000 89.01000 97.97000
Minimum 0.000000 0.000000 0.000000 0.000000 0.000000
Std. Dev. 27.00224 22.00400 21.18934 22.33206 25.55135
Skewness 0.326639 0.121039 -0.060062 0.074519 0.072969
Kurtosis 2.186507 2.364633 2.167978 2.440622 2.199046
Jarque-Bera 7.846586 3.332363 5.094056 2.415625 4.777866

Probability 0.019776 0.188967 0.078314 0.298850 0.091728
Sum 5493.240 5235.180 5351.270 5762.100 6522.740

Sum Sq. Dev. 125408.8 83278.25 77225.99 85780.01 112293.9
Observations 173 173 173 173 173
Means
41
40
39
38
37
36
35
34
33
32
09
10
11
12
13
20
20
20
20
20
PO
PO
PO
PO
PO
D
This table and graph show the Dividend pay-out ratio for the five year period from 2009 to 2013.
There is a steady and consistent upward trend.

Dividend Yield Ratio Descriptive Statistics for the period of 5 Years
DYO2009 DYO2010 DYO2011 DYO2012 DYO2013

Mean 3.817397 2.761918 3.059966 3.068425 2.520205
Median 3.275000 2.695000 2.925000 2.930000 2.425000
Maximum 70.77000 29.01000 20.50000 17.50000 12.70000
Minimum 0.000000 0.000000 0.000000 0.000000 0.000000
Std. Dev. 5.284168 2.594482 2.350989 2.262661 1.689492
Skewness 8.355916 3.803515 2.128771 1.795174 1.045891
Kurtosis 97.25455 37.42933 15.22778 11.06433 6.878140
Jarque-Bera 111485.7 15126.15 2039.685 948.0747 236.2222

Probability 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 1114.680 806.4800 893.5100 895.9800 735.9000

Sum Sq. Dev. 8125.427 1958.819 1608.400 1489.814 830.6260
Observations 292 292 292 292 292

Means
4.0
3.8
3.6
3.4
3.2
3.0
2.8
2.6
2.4
09
10
11
12
13
20
20
20
20
20
YO
YO
YO
YO
YO
D
This table and graph show the Dividend yield ratio of all the firms in the sample for the period from
2009 to 2013. We can see that it has been more or less a declining trend with some fluctuations during
the middle period. The mean dividend yield ratio has fallen from 3.8 in 2009 to 2.52 in the five years
to 2013. With this steady declining trend the standard deviation has also decreased over this period
from 5.28 to 1.68 in 2013.
A steady downward trend in the dividend yield ratio implied that the return with respect to the market
value of the share has decreased.

Descriptive Statistics for Market Value Capital for the period of 5 years
MVC2009 MVC2010 MVC2011 MVC2012 MVC2013

Mean 3878.300 4502.255 4653.039 5240.922 5763.716
Median 559.6000 627.9200 695.8050 769.4200 1050.465
Maximum 97553.75 119601.9 123043.7 145627.2 134861.8
Minimum 11.72000 21.51000 33.09000 36.79000 44.85000
Std. Dev. 12601.65 14005.68 14500.52 15976.65 16029.55
Skewness 5.507972 5.425812 5.487293 5.408266 4.953007
Kurtosis 36.29808 36.10755 37.09689 36.67079 30.59523
Jarque-Bera 14966.38 14768.72 15610.32 15217.09 10458.78

Probability 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 1132464. 1314658. 1358687. 1530349. 1683005.

Sum Sq. Dev. 4.62E+10 5.71E+10 6.12E+10 7.43E+10 7.48E+10
Observations 292 292 292 292 292
Means
6,000
5,600
5,200
4,800
4,400
4,000
3,600
09
10
11
12
13
20
20
20
20
20
VC
VC
VC
VC
VC
M
M
This table and bar chart show the Market value capital (MVC) of all the firms in the selected sample
from the FTSE All share index from the time period from 2009 till 2013.
Here we can clearly see that the market value of the firms in the sample has been steadily and
continuously been increasing throughout the selected time period of five years. This is an indicator of
how the firms have been performing over all and that their size and market value has only been
growing.
Although there is a consistent growth in the mean value of MVC, along with that there is also an
increase in the standard deviation from the mean for the MVC value over the same time period. This
means that although the size and value of the firms in the sample have all been increasing, they have
all been increasing at different rates and that some have grown more than others. The disparity of their
MVC value has increased from the mean value over the five year period.
Interest Coverage Ratio Descriptive Statistics for the period of 5 years
ICR2009 ICR2010 ICR2011 ICR2012 ICR2013

Mean 54.96130 39.48559 44.30966 38.63552 28.76973
Median 4.210000 7.170000 7.830000 8.330000 8.100000
Maximum 6027.420 2097.780 1926.940 2583.730 628.0000
Minimum -128.7000 -73.30000 -150.5000 -230.4500 -30.17000
Std. Dev. 405.6431 159.5320 185.8179 182.6746 81.19011
Skewness 12.80202 9.449192 8.531616 11.21922 5.294580
Kurtosis 183.3227 111.8972 83.09685 149.0575 33.47235
Jarque-Bera 360743.7 132846.2 72934.91 237469.6 11317.55

Probability 0.000000 0.000000 0.000000 0.000000 0.000000
Sum 14344.90 10305.74 11564.82 10083.87 7508.900

Sum Sq. Dev. 42782051 6617121. 8977351. 8676199. 1713877.
Observations 261 261 261 261 261
Means
60
50
40
30
20
10
0
ICR2009 ICR2010 ICR2011 ICR2012 ICR2013
This table and bar chart show the Interest Coverage Ratio (ICR) of all the firms in the sample for the
period of five years from 2009 till 2013. As we know that the Interest coverage ratio gives us the
ability of each firm to pay interest on the outstanding debt it has, from these figures we see that there
has been a mixed yet downward trend for the interest coverage ratio of the sample firms. As the
interest coverage is an indicator of a firms financial health and the capacity for it to service the interest
payments on the outstanding debt, from this table we can deduct that either the firms have taken out
more debt over the period of five years and that interest payments have risen to an extent where the
firms’ ability to repay has decreased, or we could also deduct that assuming that more debt has not
been taken on, then the individual financial health of all the firms has generally decreased as depicted
by a decreasing interest coverage ratio mean over the selected time period.
b.) Correlation Analysis
Covariance Analysis: Ordinary

Date: 15/08/14 Time: 08:40
Sample: 1 311
Included observations: 311
Correlation DER DPR DYR EPS ICR MVC ROA ROE
DER 1.000000
DPR 0.995616 1.000000
DYR 0.530093 0.448460 1.000000
EPS 0.260566 0.257627 0.154419 1.000000
ICR 0.026056 0.031552 -0.037052 -0.005903 1.000000
MVC 0.172894 0.169297 0.117387 0.409587 -0.024480 1.000000
ROA 0.234934 0.250142 -0.022671 0.161623 0.137295 0.051609 1.000000
ROE 0.136186 0.138068 0.049717 0.074553 0.012061 0.000794 0.300931 1.000000
From this table we can assess how each of the variables correlate with each other and their variability
compared to one another within the range of -1 to +1.
We can see the relationship between Debt to Equity ratio (DER) and Dividend pay-out ratio (DPR) as
+0.99. This is a strong a positive relationship. The relationship between Debt to equity ratio and
Dividend yield ratio (DYR) is +0.53 which is moderate and positive relationship. The relationship
between Debt to equity and EPS is weak but positive relationship.
Dividend yield ratio has a negative relationship with Return on assets and interest coverage ratio.
Dividend pay-out ratio and dividend yield ratio have a moderate and positive relationship. We can see
from the matrix and the variables involved that debt to equity ratio and dividend yield ratio are the two
variables that have a stronger influence with other variables. Both these variables are taken as
independent variables in the regression analysis.
c.) Regression Analysis

Model 1
Dependent Variable: ROE

Method: Least Squares
Date: 13/08/14 Time: 20:10
Sample: 1 311
Variable Coefficient Std. Error t-Statistic Prob.
C 4.874730 11.57852 0.421015 0.6740

MVC -0.000160 0.000410 -0.390653 0.6963
DYR -0.656891 3.044248 -0.215781 0.8293
DPR 0.781763 0.338379 2.310315 0.0215
ICR 0.000496 0.004437 0.111733 0.9111
R-squared 0.019786 Mean dependent var 26.16322

Adjusted R-squared 0.006973 S.D. dependent var 100.7833
S.E. of regression 100.4313 Akaike info criterion 12.07277
Sum squared resid 3086451. Schwarz criterion 12.13290
Log likelihood -1872.316 Hannan-Quinn criter. 12.09680
F-statistic 1.544198 Durbin-Watson stat 2.021454
Prob(F-statistic) 0.189277
ROE
Mean 26.16322
Median 13.65600
Maximum 1583.840
Minimum -101.4640
Std. Dev. 100.7833
Skewness 12.45182
Kurtosis 186.3687
Jarque-Bera 443748.7
Probability 0.000000
Sum 8136.760
Sum Sq. Dev. 3148753.
Observations 311
This is the first regression model that has been run and in it Return on equity has been taken as the
dependent variable. From it we can see that Return on equity generally has a weak relationship with all
four variables. The only variable that it has a relatively stronger relationship with is the dividend pay-
out ratio (DPR). This is logically understandable as well as a higher dividend pay-out ratio does mean
shareholders getting a better return on their investment. The
The return on equity has an extremely weak yet negative relationship with market value capital, hence
indicating that the size and value of the firms does not affect the profitability of the firms in terms of
Return on equity. The relationship with interest coverage ratio is also extremely weak but positive.
This means that the ability of the firms to service the interest on their debt and also the individual
financial health of the company has an extremely low correlation to Return on equity.
F-Statistic – From the F-statistic of this model we can see that the P-value of the F-statistic is 18.92%,
which is more than 5%, and which means it is not significant. From this we can deduce that the
independent variables cannot jointly influence Y or the dependent variable which is ROE.
None of the independent variables can jointly influence ROE and therefore it is safe to say that all of
them have an individual and separate relationship with ROE.
T-Statistic – From the individual T-Statistics of all independent variables we see that the only variable
that has a significant P-value is the DPR (Dividend Pay-out ratio) at 2.15 % ( < than 5% ).
The remaining independent variables all have insignificant T-Statistic P-values of >5%. Dividend pay-
out ratio is the only independent variable which is significant.
Model 2
Dependent Variable: ROA

Date: 13/08/14 Time: 20:21
Sample: 1 311
C 4.399535 1.088381 4.042275 0.0001

MVC 1.41E-05 3.86E-05 0.366455 0.7143
DER -3.811566 1.430797 -2.663946 0.0081
DPR 0.926061 0.301501 3.071499 0.0023
ICR 0.000935 0.000417 2.241221 0.0257

Sum squared resid 27271.90 Schwarz criterion 7.403976
ROA
Mean 7.386116
Median 6.090000
Maximum 140.5720
Minimum -11.14200
Std. Dev. 9.888852
Skewness 8.117594
Kurtosis 107.5894
Sum 2297.082
Sum Sq. Dev. 30314.71
Observations 311
This regression model shows the Return on equity as the dependent variable with four independent
variables. The relationship with market value capital (MVC) is strong and positive at the same time.
This indicates that the size of the firms is a contributing factor with high profitability in terms of return
on assets.
Debt to equity ratio (DER) correlation is -3.81 which is a strong but negative relationship with ROA.
This indicates that firms with higher ROA have remarkably lower leverage.
The correlation of ROA with dividend pay-out ratio is positive and reasonably strong at 0.92.
This shows that profitability in terms of ROA is a positive factor with regards to the amount
of dividends allocated to distribute as dividends; the dividend pay-out ratio.
The relationship with the interest coverage ratio of ROA is positive but extremely weak.
The significant relationship in this regression model is that of ROA with Debt to equity ratio.
Both have a strong but negative correlation form which we can deduce that firms with higher
debt ratios are significantly inclined to have lower profitability in terms of Return on assets.
F-Statistic– The F- value of this regression model is 0.0002% ( < 5% ). This is significant and
therefore signifies that all independent variables jointly influence the dependent variable.
T-Statistic – The T- Statistic value of the variables are all significant except for the T value of MVC
(Market Value Capital). Which is extremely high at 71.43% and not significant.
The other variables; DER (Debt to Equity Ratio) has a P value of 0.81% which is also significant as it
is less than 5% ( < 5%). DPR (Dividend Pay-out Ratio) has a P value of 0.23 %, which is also
significant. ICR (Interest Coverage Ratio) has a P value of 2.5% and this is also significant as it is less
than 5% ( < 5%).
In this regression model we can see that most except one independent variable have a significant
relationship with the dependent variable.
Model 3
Dependent Variable: EPS

Date: 13/08/14 Time: 20:35
Sample: 1 311
C 13.85994 4.668754 2.968659 0.0032

DER 3.123198 6.137594 0.508864 0.6112
DPR -0.195931 1.293330 -0.151494 0.8797
ICR -4.71E-05 0.001789 -0.026322 0.9790
MVC 0.001199 0.000165 7.249252 0.0000

Sum squared resid 501828.8 Schwarz criterion 10.31638
EPS
Mean 34.27066
Median 21.26000
Maximum 363.6960
Minimum 0.000000
Std. Dev. 45.12288
Skewness 3.478871
Kurtosis 20.38630
Sum 10658.18
Sum Sq. Dev. 631183.1
Observations 311
The third regression model is that of Earning per Share as the dependant variable and four independent
variables. Earnings per share is a profitability indicator and also an indicator of the firms’ dividend
policy and how much of the net income is each share allocated.
We can see that the correlation between Earning per share and Debt to equity ratio is +3.12. This is a
strong and positive relationship. From this we can deduce that firms with high earnings per share are
more inclined to be highly leveraged. This could be because the firms are either financing their
operations through higher ratios of debt than equity and have a more aggressive approach which is
reflected in their earnings per share.
The dividend pay-out ratio has a weak and negative relationship with earning per share of -0.19.
The market value capital has an extremely weak yet positive relationship with EPS at 0.0011. From
this we can understand that the size and value of the firms have very little to do with profitability in
terms of earnings per share.
F-Statistic- We can see that the F-statistic value is 19.71 and the P-value is 0.00% ( < 5% ) and
therefore it is significant. We can deduce from this that all independent variables are jointly
influencing Y.
T-Statistic- The T-statistic values are all insignificant except one. The P-value for DER (Debt to
Equity ratio) is 61.12% which is higher than 5% ( > 5%) and not significant.
The P- value for DPR (Dividend pay-out ratio) is 87.97% which is also higher than 5% ( > % 5) and
not significant. The P-value for ICR (Interest Coverage ratio) is 97.90% and above 5% ( > 5% ) hence
not significant. MVC (Market Value Capital) has a P-value of 0.00 %. This is significant as it is less
than 5% ( < 5 % ).
Summary of Regression Analysis
We can see from the three regression models that have been run that there are some consistencies and
some differences among the three.
The first consistency that is evident from the three models is that the Interest coverage ratio (ICR) has
an extremely weak relationship with all three dependent variables. The interest coverage ratio is in
many ways an indicator of the firms’ financial health and soundness, where it indicates the ability of
the firm to service the interest payments on its debt. Having such a weak relationship with all three
variables clearly means that whatever the financial health of the company it does not mean or
contribute much towards the profitability and performance of firms. This is situation is even when the
mean of interest coverage ratio between 2009 and 2013 ranges between approximately 59 to 28 over
the five year period. So we can understand that interest coverage ratio is not a factor effecting the
firm’s financial management decision making with respect to its capital structure and/or dividend
policy.
The second consistency that is evident is the market value capital (MVC) of the firms and its
relationship with all the three dependant variables. This variable is an indicator of the size and value of
the firms in the sample, and it has an extremely weak relationship with all three dependant variables.
We can deduce from this that market size and value of the firm have very little to do with a firms’
performance even though that the mean of MVC has consistently risen over the five year period from
2009 to 2013 from approximately 3878 to 5763, a pattern that shares some similarity with the mean for
Earnings per share and to some extent the mean for Return on Assets over the same period.
The first difference in terms of the relationship of the independent variables with the three dependant
variables is that of the Dividend pay-out ratio. This variable has a relatively strong and positive
relationship with both Return on assets (ROE) and Return on equity (ROE) at +0.78 and +0.92 but a
relatively weak and negative relationship with Earnings per share (EPS). We can deduce from this that
because firm performances have been increasing over the five year period as we can see from a
consistent increase of the mean of return on assets (ROA) and mean of earnings per share (EPS) we
can safely assume that Net income of the firms have been increasing over this period of time because
of which dividend pay-out ratio has decreased in relation to earning per share; as dividend pay-out
ratio is derived by dividing total dividends by net income. An increase in net income also leads to an
increase in earnings per share as earnings per share is derived by dividing net income by the number of
outstanding shares. So we can understand this inverse correlation of earning per share with dividend
pay-out ratio through the increasing trend of net income over the years.
The positive relationship between dividend pay-out ratio and both Return on assets (+0.92) and Return
on equity (+0.78) shows us that well performing firms have been maintaining a positive and active
dividend policy and at the same time are less likely to be leveraged as we can see from the very strong
and negative relationship between Return on assets (ROA) and Debt to equity ratio (DER) which is -
3.81. We understand from this that firms with robust performance are simply ones with a healthy
dividend policy, extremely low debt and have very little to do with the size, value of the firm or its
financial soundness.
Another difference is in the relationship between the debt to equity ratio variable with regards to the
two dependent variables; Return on assets and Earnings per share. The debt to equity ratio is very
strongly and negatively correlated to ROA (-3.81) but very strongly and positively related to Earnings
per share (+3.12). The inverse correlation of Return on assets with the debt to equity ratio can be
understood with the reasoning that higher return on assets are fuelled more by financing through equity
rather than debt financing, therefore with high Return on assets the debt to equity ratio is low.
Chapter 6. Conclusion
a.) Summary of findings
As we can see from the results of the regression analysis there is a variation amongst different
variables but more or less a pattern can be observed. The three dependant variables are also
effected differently by the independent variables and reflect a different perspective from which
we can derive certain conclusions.
We can see that the size of the firm which we derive from the market value capital (MVC)
variable does not play a major role in influencing the dependent variables. It is safe to say that
in today’s dynamics there are other factors which play a far more significant role than mere
firm size.
Another significant factor which is noteworthy is that of the relationship of debt to equity with
profitability with regards to Return on assets. We can see that the higher the profitability the
lower the debt.
Although the regression models have given quite a few good evidence on how the performance
of firms is varying in terms of the dividend policy and capital structures, it is probably sensible
to say there is no clear pattern in terms of the performance and involved variables and it cannot
be plainly concluded what factor is most significant and dynamic in influencing either dividend
policy or capital structure of well performing and profitable firms. So many factors play a role
that not only is it difficult to gauge the criteria for optimal dividend and capital structure
policies but also difficult in identifying all the factors that may do so and then correctly and
accurately measuring them.
b.) Recommendations and Implications
A wider analysis should be undertaken allowing more factors to be incorporated in the analysis
which in turn would put us in a better position to explain and analyse the deviation in the
results for profitability; which is taken as the primary measure for this analysis.
A number of other factors that could also be incorporated include any economic indicator such
as the GDP growth rate of the country of the selected sample of firms for the time period under
study. This would allow us to see how the economy performed during that period and whether
that had a role to play in not only the performances of the firms but also the decisions regarding
debt and dividend distribution.
Taking the interest rates or LIBOR is also something that may help us better analyse and assess
whether that had any effect on debt and whether a decrease in the borrowing rates especially in
the recent past encouraged firms to take up more debt. Allowing us to see if the borrowing rates
had an impact on the capital structure of firms and consequently on the profitability will be
interesting as it will put a perspective on the financial management choices.
Another variable that could have a meaningful effect is that of the age of the firm. This will
allow us to see whether older and more established firms make decisions any differently to that
of newer and possibly more aggressive firms.
The ownership concentration of the firms is a variable that can prove to be instrumental in
giving us a good idea about the dividend policy and also to some extent the capital structure of
firms. Whether the shareholders are individuals or whether they are financial institutions is
something that could dictate the dividend policy. Individuals may have a preference for higher
dividends whereas financial institutions such as pension funds and mutual funds or even other
large investment companies may want to adhere to a conservative approach towards dividends
and focus more on growth and retention of profits. The demographic and age group of
shareholders is also a factor that may well influence the dividend policy. Shareholders of an
older age group may prefer a steady and stable stream of dividends and on the other hand
younger shareholder may want aggressive growth and would not mind a little volatility in share
prices and dividend income stream.
Measuring the free float of firms is another variable that may add a dimension to the study.
Companies with a higher free float may have a tendency to play in the hands of market forces
more and have lesser influence of the board of directors and management of the company.
Management of companies with a smaller free float may have tighter control over company
policy and hence be in a better position to dictate financial management choices and decisions.
The size of the board of directors of a firm is a factor that can give us another angle as to how
the decisions are made regarding both capital structure and dividend policy. Although it is an
aspect best covered under corporate governance, from the board size we can deduce how
influential the board members are; whether a small and cohesive board of directors and an
advantage for better firm performance or whether a large and diversified board size is what
seems to have a more positive effect on performance and profitability. Although that would
spark a further debate as to what may be the optimal board size; as mentioned a topic best
covered under corporate governance, but nonetheless something that should not be totally
ignored for a more concise set of analysis even in a study concerning capital structure and
dividend policy with regards to firms performance and profitability. .
The inclusion of control variables is vital for a comprehensive analysis of the subject under
study. They allow for us to help clarify the relationship between the other variables. Variables
such as sales and tangibility of assets are some that could provide an interesting insight to the
regression analysis. Sales of the firms could give us interesting and somewhat supportive
justification for the behaviour of the variations in the trends of profitability variables, mainly
Return on assets, Return on equity, and Earnings per share.
c.) Limitations
Due to the fact that an MSc. Dissertation is carried out under a strict time constraint, along with
the fact that it is an academic piece of work required to be carried out with an academic and
theoretical perspective in mind, there are many aspects of it that limit its scope and hence
findings. The same is the case with this dissertation.
Although all theories and variables that have been used, related to and referred to are real and
practical in essence, but as I mentioned, the time frame under which it is carried out and the
requirement of MSc. Dissertations in general restricts the depth in which one can explore and
examine the dynamics of the topic which has been chosen.
The following are some limitations that I identified and recognised while carrying out my
dissertation work;
Firstly, I felt that a larger number of independent variables would’ve helped bring the results to
a more fine-tuned conclusion, although one also has to understand that it may have caused the
interpretation process to be lengthier and to some extent more complicated, but it would have
brought a lot of other issues to the surface. If and how they affect the results and outcomes
cannot be foretold.
The addition of some variables such as company age, company size, ownership structure
(showing how many of the shareholders are individuals and how many are Financial
Institutions – something worth keeping in mind while assessing the dividend policy), the ratio
of long term debt to short term debt in the case of capital structure, financial soundness of
individual companies are all factors that if incorporated can provide us with a broader insight to
how capital structure and dividend policy both effect profitability of non-financial firms
Secondly, if a longer time period had been taken into account, a time perspective would’ve
been incorporated in the results. That would’ve allowed us to see how different factors have
affected different policies and decision making over so many years. Changes in technology,
globalization and advancement in financial markets, products and services will have all
contributed to the different ways in which managers decide how to either leverage their firm
and/or give out dividends in order to improve performance and profitability. Whether they wish
to retain their earnings depending on the availability of financial services and opportunities or
give them out as dividends. The longer the trend analysis factored in, the better idea one could
have of a decision making pattern amongst all the firms in the sample. The time period analysis
could also be split into time segments such as decades. That could give us a break up of how
the results varied from different time periods, and due to which factor and reasons; possibly
leading to better information on the importance of different variables at different times. It may
be that twenty to thirty years ago, the size of the company was more significant in deciding on
how much leveraged the firm should be, where as in more recent times that may no longer be
the case. Moreover, the age of the company could previously have been a factor in deciding if
and how much dividends are to be paid, whereas in more recent and advanced financial
systems that no longer may be the case due to varying ownership structures.
Taxation is an extremely important aspect when it comes to financial decision making
throughout the world, but a more complex issue in advanced developed economies. Tax as a
variable is almost always necessary to incorporate in one’s analysis of capital structure and
dividend policy both. Directly or indirectly it effects the decision making process of financial
managers whatever form of taxation it may be (Abor 2005). That is why an absence of the
effect of tax in this study surely hinders our aim to achieve the accurate and realistic dynamics
of the factors effecting profitability of non-financial firms with respect to varying capital
structures and dividend policies. Factoring in the effects of taxation will only make the study
more in touch with reality.
Another aspect which is not only frequently missed out on but also difficult to quantify and
measure the effects of is the evolution of the financial system where the banking channel is
omitted by many firms as a means of source financing. Shadow banking (Sunderam 2013) is
one of the elements which has emerged in the modern financial system which has helped create
the supply of credit through unconventional methods.
The types of financing is also something that needs to be analysed with more detail. Long term
financing and short term financing can both be incorporated in the analysis separately. This
would give us a clearer picture of the effects of both these two different types of financing may
have on profitability. Mesquita and Lara (2003) have discussed this aspect and study has shown
that many firms that are leveraged with short term debt have performed better in comparison to
those firms that have long term debt. Firms with higher ratios of long term debt have lower
profitability than those that have short term debt. Therefore including a variable to indicate
long term debt in the regression analysis would enhance our results.
While collecting and sorting the data, there were some outliers and extreme values that were
identified while running the regression models. It was realized that these outliers were
distorting the results to a certain extent. It was difficult to remove them from the analysis as it
was creating a further distortion of the rest of the analysis and creating some misrepresentation
and therefore was thought best to leave them included in the regression analysis; but mentioned
here. This value was that of the maximum value for ICR (Interest coverage ratio) in the year
2009 which was coming to 6027.42.
d.) Further/ future research
 Is ‘profitability’ what firms are actually looking for, and how important is ‘profitability’ when
it comes to choosing the optimal capital structure and/or dividend policy.
Research is a continuous process especially when with the passage of time the dynamics and
the parameters with which we measure them tend to evolve. It is important for us to identify
what we are measuring, and whatever it is that we are measuring is leading us to what we need
to know rather than what we want to know.
For instance, in my dissertation I attempted to analyse the factors related to both capital
structure and dividend policy and how they affect the profitability of the firm. This we did by
taking independent variables related to the firm’s internal financial statements and certain
external variables not directly related to the financial indicators of the firm. We measured the
correlation of these independent variables with three dependant variables. These three
dependant variables are variables that help us measure and quantify profitability. While
working on all this there were instances where it occurred to me that the research to figure out
factors affecting profitability are only rational if the objective of the firms shareholders or
finance managers is actually to maximise profit. What if when deciding on the dividend policy
or even the capital structure of the firm, the respective shareholders and/or financial managers
are not placing profit maximization as the primary objective. What if it is an important factor
but not ‘the’ factor. Maybe the shareholders are seeking higher dividend returns for various
reasons, or maybe the finance managers are not wanting to push unnecessary pressure on
themselves by taking on high levels of debt financing especially when they feel they can get the
job done with the existing level of retained profits that they have. Elements such as these
contribute to the idea that when it comes to making a decision, it may not be simple objective
analysis that is being taken in to consideration, rather there may be other reasons that the
stakeholders may be abiding by. These could depend on the type of shareholders or ownership
concentration. If the shareholders are individuals then they may be more inclined to receive
regular dividends (bird in hand theory), especially more so if the shareholders are of older or
pensionable age. If majority of shareholding is with financial institutions then they may have a
different investment strategy in mind and would want the firm and its share price to focus on
growth. Same is the reason facing the decisions when it comes to making choices with regards
to capital structure. The finance managers who are also the ones running the day to day
operations of the firm may have a very different approach towards the amount and level of debt
they wish to take on compared to the board of directors or shareholders. This reminds us of the
agency theory costs (Lumby and Jones, 1999) and how they contribute to financial decision
making. The advantage the board of directors and shareholders have with debt financing is that
the element of external monitoring is placed upon the management of the firm through the
routine scrutiny and terms and conditions the financial institutions and banks carry out initially
and there onwards until the liabilities are fully adjusted. This external monitoring works to the
advantage of shareholders and the board as it helps them keep the management on their toes.
This difference of opinion may well bring about dissent between the two and prove costly in
the form of a slowdown in communication and consequently productivity.
Therefore it is important to identify and then measure what it actually is that the stakeholders
are giving utmost priority to when deciding on both the dividend policy and the capital
structure of the firm; whether it is simply and clearly profit maximization or whether some
other elements are also kept in mind, and what those elements are and how they can be
measured and quantified. Identifying and measuring them both is an extremely difficult task
because some aspects of corporate goals and objectives are not expressed openly for various
reasons, and until they are not done so, deciding on the optimal dividend policy or capital
structure may be a futile exercise. This is a challenge to researchers but something that needs to
be factored in while carrying out a study of financial management, especially dividend policy
and capital structure. Hence it may not be absolutely correct to measure the optimal capital
structure and dividend policy by simply profitability; it could be something totally different, or
profitability could be in addition to that some other measure or variable.
Another aspect which can be looked in to for future research on this topic is measuring the
speed at which firms can now be able to make and change the choices for financing. As I
mentioned earlier the global financial system has evolved and is continuing to do so and that
too at a fast pace. What this means is that not only to firms have more choices in terms of
financing choices but there is also competition amongst financial institutions in providing those
services faster than their competitors to these firms. This helps them beat their competitors at
grabbing business and also reduces transaction costs. Therefore the choices firms have to make
nowadays regarding their capital structure are quite different to the choices they had to make a
decade or two ago. They are able to choose and switch between different products and services
within less time and less costs, allowing them to have different capital structures in a short
period of time. This means that it is not necessary for a firm to have and follow a similar capital
structure over the long run; the variation and subsequent adjustment to a change in the capital
structure of firms is likely and to be considered while studying the trends in the optimal capital
structures. The fact that some firms suffer delay in adjusting to new circumstances which in
turn cause and incur costs which may discourage and inhibit firms to adjust to their preferred
ratios completely in a certain time period (Guney et al 2009) also implies that there is a certain
time factor involved in the decision making process. Antonios et al (2002) also acknowledge in
their study how firms in different countries have different abilities to firms in other countries to
adjust to their varying capital structure preferences, with some countries having a better
environment and allowing firms to adjust more quickly than others. France is the country
where the adjustment process is the quickest and a number of factors are responsible for that;
namely term structure of interest rates and the long term interest rates being high.
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How Capital Structure and Dividend Policy Impact Firm Performance

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THE UNIVERSITY OF xxx

The Effects of Dividend Policy & Capital Structure on Firm

being a Dissertation submitted in partial fulfilment of

the requirements for the Degree of

in the University of xxxx

(i) Research background…………………………………………………………………….......1

(i) Literature review – Capital Structure……………………………………………………….10

(i) Hypothesis development……………………………………………………………………20

(i) Data source………………………………………………………………………………….30

(i) Descriptive statistics…………………………………………………………………………32

(i) Summary of findings………………………………………………………………………...56

an ever changing and dynamic world.

financial services easier, quicker and more competitive.

technology, communication, globalization of businesses, political and financial agreements and

management decisions were made.

concept of ‘financial flexibility’.

well as the long term strategy of the firm.

relationship that may be interfering with the regression equation.

place, to sustain operations and continue to remain in business.

Q2. What is the relation between dividend pay-out and Profitability?

interesting and fascinating to observe.

pay-out and Profitability?

to this, from modernisation of communication infrastructure to advancement in financial products and

accuracy in doing so is very difficult.

affect the firms’ performance.

study or research is attempted or carried out.

2. To understand the significance of a company's profitability in terms of Earnings per

share, Return on Assets, Return on Equity.

on equity gives us profitability in terms of shareholder equity.

provide us with a performance measure for each of their own domains.

on each other with respect to firms’ profitability and performance.

develop any further understanding of the existing dynamics.

d.) Unique features of the work

the board of directors and shareholders.

interrelated and have a connection when it comes to the profitability of firms.

same for all firms; maximizing profit and shareholder wealth.

may have collectively or individually on the performance of these non-financial firms.

Literature Review for Capital Structure

long as decisions regarding these two have to be made.

and ‘dividend policies’.

to a preference over how the firm finances their new investments.

compared to those which are less profitable.

to be found in the regression analysis.

such as leverage and profitability and firm size.

that more profitable firms are less in need of external financing.

cash dividend to the shareholders.

General Dividend Policy

company decides to repurchase its shares.

(Broyles, 2003, Pike and Neale, 2009).

company and subsequently on shareholders wealth.

capital (funding sources); (iv) External financing costs.

suspicions about it.

company has adopted.

the market value.

position. Because of that the policy of cash dividend

order to create and increase profitability, performance and a company‘s value.

The main null hypothesis for this study is:

performance of non-financial firms of the FTSE All share index.

b.) Definition of Independent variables

(i) Debt to Equity Ratio (DER)

 Formula for Debt to Equity ratio = Total Liabilities / Total Equity

and possibly bankruptcy.

sample will be interesting to see and a basis for our results.