Forster

153
Article
Vision

Determinants of Corporate
16(3) 153–162
© 2012 MDI
SAGE Publications
Dividend Policy: A Tobit Los Angeles, London,
New Delhi, Singapore,

Model Approach Washington DC

DOI: 10.1177/0972262912460152
http://vision.sagepub.com

Monica Singhania
Akshay Gupta

Abstract
Dividend is the return that a shareholder gets from a company, out of its profits, on his shareholding. Equity investors receive returns
in two forms—dividends and capital gains. The factors that drive dividend policy of a company have been topic of extensive research
for a long time now with various, sometimes even conflicting, theories trying to find some pattern in the behaviour vis-à-vis dividend
payouts. The objective of the article is to find the validity of the different views on determinants of dividend policy in India and empiri-
cally prove their significance using Tobit regression model. We develop framework based on major theories on corporate dividends
available in literature so as to examine the determinants of dividends comprehensively. The firm-level panel data of National Stock
Exchange (Nifty 50) companies from 1999–2000 to 2009–2010 is taken for this purpose. Accuracy and validity of the results is ensured
using various diagnostic tests and test procedures to find the best-fit models. The findings suggest that firm’s size (market capitaliza-
tion) and firm’s growth and investment opportunity are significant determinants of corporate dividend policy in India. The firm’s debt
structure, profitability and experience are found to be not significant in the Indian scenario and in this way the results do negate some
theories. The results of the study can be used by investors to take informed decision while deciding on investments based on dividend
yield for Nifty 50 Index companies and to predict dividend yields in future using the significant determinants.

Key Words
Payout Policy, Dividend Behaviour, Determinants, Tobit Regression

Introduction Dividends are commonly defined as the distribution of

Dividend decision has been a subject of enquiry of finan-
cial analysts, academicians and researchers for about six
decades now. The objective of such a decision is to deter-
mine the extent to which the earnings of a company should
be distributed as ‘dividend’ among the shareholders and
thereby also ascertain the retained earnings. The dividend
decision is an integral part of a company’s financial deci-
sion making, as it is explicitly related to the other two
major decisions—the investment decision and the financ-
ing decision. As the underlying objective of all financial
decisions is to maximize shareholders’ wealth, the signifi-
cant determinants of dividend policy are an important input
for dividend decision-making process. The primary objec-
tive of the study is to understand and analyze the determi-
nants of dividend policy. Specially, the study focuses on
and seeks to answer the question: What are the significant
determinants of dividend decision as far as Nifty 50 Index
companies in India are concerned?
earnings (past or present) among the shareholders of the
company in proportion to their ownership (Frankfurter and
Wood, 2003). Dividend policy primarily involves the deci-
sion to pay out earnings or to retain them for re-investment.
Formulation of a dividend policy requires consideration of
major determinants such as profitability of a company as
well as external factors that influence investors’ decision to
acquire, retain or dispose of their investment in the com-
pany. Dividends are paid to the shareholders according to
the regulations1 and also decisions taken by the manage-
ment regarding the type2 of dividend policy it chooses to
follow. The regulations usually give discretion to directors
to retain some part of income and to give the other part as
dividends to owners of companies, also called the share-
holders. Over the last six decades, a number of competing
explanations for dividend policy have emerged with no
consensus on determinants of dividend decision.
Frankfurter and Wood Jr. (2002) try to examine whether
the method of analysis employed, sample period and/or

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154 Determinants of Corporate Dividend Policy
data frequency explain the puzzling reality of corporate
dividend behaviour. They find that no dividend model,
either separately or jointly with other models, is supported
invariably.
There have been extensive empirical studies but these
are usually concentrated in developed nations largely due
to lack of reliable data with respect to developing coun-
tries. The aim of this study is to find the validity of differ-
ent views on determinants of dividend policy in the Indian
perspective and empirically prove their significance using
censored regression modelling, namely Tobit regression.
As each country has essentially a different business envi-
ronment, and especially a fast-emerging country like India,
there could be surprises in terms of dividend policies
adopted by Indian companies. The study has been con-
ducted on Nifty 50 Index companies taking data for finan-
cial years 2000–2010, subject to availability. While there
has been prior research in the area of finding determinants
of dividend policy as far as Indian companies are con-
cerned, there exists a research gap in this area in terms of
finding dividend policy determinants using advanced
regression models such as Tobit.
The underlying objective is to get an insight into the
issues emerging from significant determinants of corporate
dividend policies as they influence corporate decision-
making. The structure of the present article is as under:
while the first section introduces the topic, the second sec-
tion prepares groundwork for a meaningful exposition of
the theoretical issues relating to determinants of dividend
policy. The third section provides empirical literature on
determinants of dividend decision in India and abroad.
The fourth section showcases the research design, and fifth
and sixth sections highlight the analysis and concluding
observations.
Theoretical Framework
The topic of dividend policy is one of the most complex
topics in corporate finance. This section provides an over-
view of important and popular theories describing the con-
troversy of dividend decision. Based on various theories,
we establish our model in the research design section to
examine the determinants of corporate dividend policy in
India. The purpose of this section is to prepare groundwork
for a meaningful exposition of the theoretical issues relat-
ing to determinants of dividend policy.
Lintner’s (1956) model on dividend suggests that it
depends in part on the firm’s ‘current earnings’ and in part
on the dividends of previous year which in turn depends
on the earnings of previous year and dividends of the
year before. This is based on the assumption that compa-
nies have long-run target dividend payout ratios. Another
major finding of his study is that it is not the level of
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dividends that increases the share price but the change,
being viewed as an indicator of sustainability of earnings.
He further highlights that ‘mature companies’ with stable
earnings generally pay out a high proportion of earnings,
growth companies have low payouts and that managers
are reluctant to make dividend changes that might have to
be reversed.
According to Deshmukh (2003), apart from earnings
and ‘phase of development’ that the company is in, size of
the company is also a key determinant in dividend deci-
sions. A large company has better access to capital markets
than a smaller company and finds it easier to raise funds
with lower cost, and therefore is less dependent on
internal funding. Hence, large companies are more likely
to afford paying higher dividends to shareholders. However,
a company with a large debt on its balance sheet may not
be able to give high dividends because the cash flow is
required to meet the obligations to the creditors and lend-
ers. Companies that announce dividends show that they
have confidence they will have sufficient cash flow in
future to back them.
Rozeff (1982) finds influence of ‘investment policy’
on dividend policy. He reports fraction of equity held by
‘insiders’, past and expected future revenue growth of the
firm, the firm’s beta coefficient and the number of common
stockholders as significant variables in the cross-sectional
model. Black (1976) finds positive relationship between
dividend announcement and the value of shares. A divi-
dend increase indicates management’s optimism about
earnings and thereby affects the ‘stock price’. But the jump
in stock price that accompanies an unexpected dividend
increase would happen eventually anyway as information
about future earnings comes out through other channels as
well. So the question arises whether the dividend decision
changes the value of the stock or simply provides a signal
of stock value (Myers and Majluf, 1984) . With regard to
dividends impact on stock prices or value of the company,
there are two schools of thought.
The first school of thought includes those who believe
in theory of dividend irrelevance, that is, dividends have no
impact on a firm’s value. Modigliani–Miller hypothesis
states that in the world without taxes, transaction costs or
market imperfections, dividend policy is actually irrele-
vant, that is, it does not impact the firm value (Miller and
Modigliani, 1961). Their proposition is that higher the div-
idends, the less the investor receives in capital apprecia-
tion. Fischer Black also argues on the same lines. The
choice between common stock that pays dividends and a
stock that pays no dividends is similar, if transaction costs
and taxes are ignored. The price of the dividend paying
stock drops on the ex-dividend date by about the amount
of the dividend (Black, 1976). However, if we relax one
or more assumptions of the Modigliani–Miller hypothesis,
Monica Singhania and Akshay Gupta 155
it is found that dividend policy does seem to matter, result-
ing in other competing hypothesis of relevance of
dividends.
The second school of thought includes those who
believe that dividends actually increase a firm’s value. The
‘signalling hypothesis’ belongs to this school of thought.
With dividends providing a sort of a discipline in payment
streams, as well as regular source of income, there is a
natural clientele for such stocks, also known as the ‘clien-
tele effect’. Also, an investor holding a non-dividend pay-
ing stock and in need of cash will have to either sell his
share or take a loan against his shares, with both transac-
tions entailing certain costs. Therefore, dividends are
preferred.
Gordon (1959) model is also a proponent of this school.
It assumes that the investors are rational and risk averse.
They prefer certain returns to uncertain returns and there-
fore put a premium to certain returns and discount uncer-
tain returns. Gordon explained this preference for current
income with ‘bird in hand’ argument. Since a bird in hand
is better than two in the bush, investors would prefer the
income that they earn currently to the income in future
which may or may not be available. In this way, investors
would prefer to pay a higher price for the stocks which earn
them current dividend income and would discount those
stocks which either postpone or reduce the current income.
Another theory supporting this school of thought is the
pecking order hypothesis. The pecking order hypothesis
suggests that companies finance investments first with the
internal finance, and if external financing is necessary,
companies prefer to issue debt before issuing equity to
reduce the costs of information asymmetry and other trans-
actions costs (Myers and Majluf, 1984). Hence, a growth
firm with good investment opportunities will have lower
dividend payouts than mature firms where expectations of
dividends are high.
Holder et al. (1998) find dividends to be a key determi-
nant in reducing ‘agency problems’ between shareholders
and managers. Dividend payments can reduce the pay-
ments associated with information asymmetry and also
reduce the cash flow under management control, thereby
helping to remove agency problems. Another outcome of
the agency theory is the impact of ‘ownership structure’ of
a company on dividend policy. When majority of owner-
ship is by family members, it is reasonable to expect a
lower payout ratio as opposed to companies where the
shareholding is much more diverse, especially with a sig-
nificant ownership of state and financial institutions.
To summarize, there are numerous theories explaining the
determinants of dividend policy and there is no consensus on
which theory should guide the corporate dividend decisions.
The scope of this study is to identify variables from alterna-
tive theories developed in literature and determine their
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impact on corporate dividend decisions in India. Exhibit 1
lists down the various determinants of dividend policy aris-
ing from the theories cited above.
Literature Review
A classic attempt to explain corporate dividend behaviour
has been made by John Lintner (1956). He concludes that
the primary determinants of changes in dividend payout
are ‘most recent earnings’ and ‘past dividends paid’. Fama
and Babiak (1968) found that Lintner’s model continued to
explain dividend behaviour quite well and that slightly dif-
ferent model with lagged earnings (last period’s) as well as
lagged dividends do a slightly better job as it has higher
explanatory power. N.L. Dhameja (1976) examines the
behaviour of corporate dividend when adjusted for bonus
shares and rights issues for Indian companies. The study
finds dividend decisions to be explained by current profits,
lagged dividends and are autonomous of investment and
external financing decisions. Dividend payout ratio varied
inversely with growth. Khurana (1980) finds Lintner’s
model provides adequate explanation of dividend behav-
iour in the Indian scenario. Flow of net debt turns
out to be a significant factor in dividend decision making
of some companies in chemicals and electrical goods
industries. The survey reveals that the policy orientation of
most companies in respect of dividend decision is to treat it
as a ‘primary and active’ decision variable in their financial
policymaking. DeAngelo, DeAngelo and Skinner (1992)
analyzes the relationship between dividends and losses
and the information conveyed by dividend changes about
the earnings performance. Their findings support signal-
ling hypothesis, that is, dividend changes improve the abil-
ity to predict future earnings performance. Bhat
and Pandey (1994) study the managers’ perceptions of div-
idend decision and find that managers perceive current
earnings as the most significant factor influencing their
dividend decision followed by patterns of past dividends.
Ariff and Johnson (1994) report applicability of Lintner’s
model for firms in Singapore. Jain and Kumar (1997) find
majority of sample companies (60 per cent) in India to fol-
low stable a dividend policy (akin to Lintner’s model).
Adaoglu (2000) finds current earnings to be the main
determinant of dividend payments in Turkey. Lee and
Ryan (2002) analyze the dividend signalling hypothesis
and the issue of direction of causality between earnings
and dividends—whether earnings cause dividends or vice
versa. They find that dividend payment is influenced by
recent performance of earnings and free cash flows. Pandey
(2003) reveals dividend behaviour of Malaysian compa-
nies to be sensitive to changes in earnings.
L.M. Bhole (1980) finds stability of dividend to be
dependent upon size of companies. In contrast to other
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156 Determinants of Corporate Dividend Policy

Exhibit 1. Theories and Identified Proxy Variables

Relation of
Proxy Variables
Proxy Variable(s) with Amount of
Name of Theory Description Identified Dividend
Lintner’s model Dividend depends on firm’s current earnings and dividends of previous EPS (Earnings Per Positive
year which in turn depends on earnings of previous year and Share)
dividends of the year before.
Phase of Mature companies have stable earnings and so they give high payouts. AGE Positive
development Growth companies, on the other hand, have low payouts.
Size of the firm A large company is likely to pay more dividends than a small company MCAP (Market Positive
because it has better access to capital markets and therefore less Capitalization)
dependence on internal funding.
Leverage A firm with a large debt on balance sheet may not be able to give D/E (Debt to Negative
high dividends because cash flow is required to meet obligations of Equity Ratio)
creditors and lenders.
Signalling It suggests that company announcements of an increase in dividend SHARE_TURN Negative
hypothesis payouts act as an indicator of firm possessing strong future prospects. (Share Turnover)
A manager who has good investment opportunities is more likely to
‘signal’ than one who does not because it is in his or her best interest
to do so.
Pecking order Firms with better growth and investment opportunities available MBR (Market Negative
hypothesis will like to retain more funds for internal funding and accordingly to Book Value
pay fewer dividends. The hypothesis suggests that firms finance Ratio)
investments first with the internal finance and if external financing is
necessary, firms prefer to issue debt before issuing equity.
Agency cost It involves costs of resolving conflicts between the principals NO_STOCK (No. Positive
theory (shareholders) and agents (managers) and aligning interests of the of Stockholders)
two groups. INSIDERS (No. of Negative
Insiders)
MM dividend With no taxes or bankruptcy costs, dividend policy is also irrelevant STOCK_PRICE No effect
irrelevance indicating that there is no effect of dividends on a company’s capital
theory structure or stock price.
Bird-in-hand Because of uncertainty of future cash flow, investors tend to prefer STOCK_PRICE Positive
theory dividends to retained earnings. As a result, a higher payout ratio
will reduce the required rate of return (cost of capital) and hence
increase the value of the firm.

studies, this study reveals that retention ratio is an active
decision variable. Fama and French (2001) attribute decline
in dividends of sample companies to changing characteris-
tics of firms.
Studies by Jensen and Meckling (1976) and others
argued that dividend policy have an impact on ‘agency
cost’ and ‘capital structure’ of a firm. These authors argued
that dividends payout reduces agency cost and is a way to
monitor the performance of managers. Agency cost arises
due to the information asymmetry and separation of control
from ownership between managers and shareholders.
Crutchley and Hansen (1989) examined the relationship
between ownership, leverage of firm and dividend policy
and found out that managers make financial policy trade-
off to control agency costs in an efficient manner. A highly
leveraged firm will have fixed obligations which carry risk
of firm being declared insolvent on non-payment of inter-
ests, etc., and hence more leveraging should result in lesser
dividend payout. Leveraging can be a proxy using ‘debt–
equity structure’ of the firm. Jensen, Solberg and Zorn
(1992) traced the interaction between financial policies,
such as dividend policy and leverage, and insider owner-
ship to information asymmetries that exist between insiders
and external investors. Anand (2002) finds that dividend
policy provides a ‘signalling mechanism’ regarding future
prospects of the firm and thereby affects its market value.
Reddy (2002) examines the dividend behaviour and
attempts to explain observed behaviour with the help of a
trade-off theory and signalling hypothesis. The study sup-
ports earlier finding that dividend emissions have informa-
tion content about future earnings.
Roy and Mahajan (2003) provide regulatory oversight
on dividends payout and suggest that regulation of dividend
payout should address the inherent conflict of interest
between shareholders and lenders to address the issue of
information asymmetry between insiders and outsiders. The

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Monica Singhania and Akshay Gupta 157
bird-in-hand theory states that in our uncertain world with
information asymmetry, dividends are perceived differently
when compared to retained earnings (capital gains)
(Gordon, 1959). The uncertainty of cash flows ensures that
investor will like to have cash (dividend) rather than let firm
retain the earnings and thus dividend payouts should reduce
the rate of return required and thus increase the value of the
firm. Glen et al. (1995) study dividend policy of firms in
emerging markets. They find that dividends have little sig-
nalling content in these markets.
Ramcharran (2001) uses a macroeconomic approach and
finds evidence for pecking order hypothesis—lower divi-
dends are paid when higher growth is expected. Pecking
order theory suggested by Myers and Majluf (1984) states
that firms with better investment and high growth opportu-
nities prefer internal funds than the external financing due
to lower costs and other associated inconvenience with
external funding.
Han, Lee and Suk (1999) test agency cost based hypoth-
esis, which predicts dividend payout to be inversely re-
lated to the degree of institutional ownership, and the
tax based hypothesis, predicting dividends to be positively
related with institutional ownership. Narasimhan and
Vijayalakshmi (2002) analyze the influence of ownership
structure on dividend payout of 186 manufacturing firms.
Regression analysis shows that promoters’ holding has no
influence on average dividend payout in India.
Miller and Modigliani (1961) and subsequently many
others showed that re-alignment in ownership structure
depending on preference for dividend and payout policy of
the firm is feasible. Friend and Puckett (1964) use cross
section data to test the effect of dividend payout on share
value. Black and Scholes (1974) study presents strong
empirical evidence that before tax returns on common
stocks are unrelated to corporate dividend payout policy. In
this way firm’s value will be unrelated to its dividend pol-
icy. Both Friend and Puckett, and Black and Scholes stud-
ies tend to support the conclusion that value of the firm is
independent of dividend yield.
Bhattacharya (1979) suggests that corporate dividend
policy is designed to reveal prospects of firm to investors.
Healy and Palepu (1988) found that initiation of dividends
does not signal a decline in earnings growth. Moreover,
investors interpret announcements of dividend initiations
and omissions as manager’s forecast of future earnings
changes. Akhigbe, Borde and Madura (1993) measure com-
mon share price response to unregulated firms to find a
positive relation between the two. However, market reac-
tion is not related to firm-specific variables like profitabil-
ity, leverage or firm size.
In summary, the literature suggests that there is no una-
nimity regarding the exact functional relationship pertain-
ing to dividends and its explanatory variables.
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Research Design
This section showcases the objective of the study, selection
of sample companies, sample period, choice of variables
employed for the purpose of analyzing determinants of
dividend policy and the method of investigation used in
the study.
Objective: The objective of this article is to find validity of
different views on determinants of dividend policy and
empirically prove their significance for Nifty 50 Index
companies in India using Tobit regression model.
Sample Selection: We have taken Nifty 50 composition for
our analysis as the index comprises the best representative
companies of the Indian capital market and the selection of
this index is done after comprehensive analysis by the
National Stock Exchange (NSE), India. As we have taken
data till 2010, the cut-off date for the composition of the
Nifty 50 has been taken as 31 March 2010 and in this way
the corresponding index composition companies as
on this date have been taken for the study. Many compa-
nies from this index composition would have been added/
subtracted with regularity, but for the sake of the study we
have taken data for the companies comprising Nifty 50 as
on the cut-off date for the entire sample period under con-
sideration. The data has been sourced from Capitaline
database due to its completeness and trustworthiness. The
frequency of data is annual.
Sample Period: The time period selected is from 2000 to
2010. For 50 companies, we have 424 complete firm-year
observations after removing the incomplete entries. The
pooled cross section and time series data have been used to
get maximum possible data entries.
Selection of Variables: The dependant variable is ‘dividend
yield’ (in %). This is the return earned by an equity share-
holder by way of dividends. Dividend yield (DYLD) is
dividend to price ratio. The independent variables have
been selected after considering various dividend theories/
hypothesis with their possible quantitative representation
and the availability of reliable data in the Indian scenario
for our empirical research work. Due to non-availability of
information regarding the date of declaration of dividend
for sample companies over the sample period, MM hypoth-
esis and bird-in-hand theory could not be tested. In addi-
tion, while information on share turnover was not accessi-
ble leading to non-inclusion of signalling hypothesis,
information on ownership structure was available in case of
select companies only and that too from 2006 onwards. All
other variables as identified in Exhibit 1 have been consid-
ered in the regression model. The reason for selection of
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158 Determinants of Corporate Dividend Policy

independent variables is derived from theoretical frame- where DYLD = Dividend yield (in %)
work and literature review and is briefly given below:
MBR = Market price to book value ratio
Market Price to Book Value Ratio (MBR): This is the ratio AGE = Years that company has been into exist-
between market price prevalent in capital market and the ence (in years)
book value of the company. The unit of data is in number.
MCAP = Market capitalization (INR ’000 crore)
According to pecking order hypothesis, companies with
better growth and investment opportunities available will DER = Debt–equity ratio
like to retain more funds for internal funding and accord-
EPS = Earnings per share (INR)
ingly pay fewer dividends.
Method of Analysis: We use Tobit regression model for our
Age: Years that company has been into existence. The
analysis. However, before applying regression we check
unit of data is in number. According to pecking order
for some assumptions that are made before applying
hypothesis, the firm in mature stage will have less attrac-
regression and are valid for pool data as under:
tive further growth and investment opportunities and, in
this way, is more likely to give more dividends in order to
Multicollinearity: The independent variables used for the
attract investors.
study should not have high correlation among them. They
should be unique to the extent that each one of the inde-
Market Capitalization (MCAP): Total market capitaliza-
pendent variables should be counted as separate and so we
tion of firm, which is equal to the product of total shares
check for correlation among the variables.
outstanding and market price of unit share of the firm. The
unit of data is in INR ’000 crore. The firms with larger size
Heteroscedasticity: The error term and the variables used
and better access to capital market tend to rely less on
should have constant variance and so we will test for pres-
internal sources of funds and, in this way, will tend to dis-
ence of heteroscedasticity. We test for heteroscedasticity
tribute more dividends, and therefore market capitalization
using White’s3 test.
is a determinant of dividend policy.
Tobit Regression Model: As far as the dividend decision is
Debt–Equity Ratio (DER): This is the ratio between total
concerned, companies have only two options, either to pay
debt (including short-term and long-term debt) and total
or not to pay dividends. As a result, the observed dependent
equity (including shareholder equity and reserves and sur-
variable (dividends) exhibits a special feature as it can take
plus) of the firm. The unit of data is in number. The more the
only two outcomes. It is either equal to zero or positive.
debt and consequent leverage that a firm keeps in its books,
Dividends can never be negative. Therefore, ordinary least
the more is the need to retain funds in order to meet the
square (OLS) is not an appropriate method to analyze the
fixed obligation in terms of interest on debt, and in this way
payment of dividends because of the nature of the dependent
such a firm is less likely to give dividends and therefore
variable. In such a backdrop, it is better to apply Tobit esti-
leverage is an important determinant of dividend policy.
mation (Kim and Maddala, 1992). Therefore, in the present
study evaluation of determinants of dividends is carried out
Earnings Per Share (EPS): This is the ratio of total earn-
using the general specification of censored data estimation,
ings and number of shares outstanding. The unit of data is
namely the Tobit model. Data is then censored in the lower
in INR. The more profitable a firm is, the more is the ten-
tail of the distribution. Censored regression models, such as
dency to share the earnings with shareholders and in this
Tobit, are used in cases where the dependant variable is only
way, higher earnings should ensure better payouts.
partially observed such as is the case in our present study.
The dependant variable, which is dividend yield, can take
Research Methodology: The study applies Tobit regres-
either zero value or a positive value and no negative value
sion model and tries to find out if the dividend policy
under any circumstance. With the biasing of the data towards
determinants, as are evident from the literature, are also
positive side, the general latent variable regression model
significant in the case of Nifty 50 Index companies in
can be represented as shown:
India. The preliminary tests to check for validity of data
and regression model are applied. The econometric model yi* = xi´b + i,
that we plan to study is:
where ‘σ’ is a scale parameter. The scale parameter
DYLD = γ0 − γ1MBR + γ2AGE + γ3MCAP − ‘σ’ is identified in censored regression models, and is
γ4DER + γ5EPS + ε, (1) estimated along with the ‘β’.

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Monica Singhania and Akshay Gupta 159
In the Tobit model, the observed data are given by:
 0 if yi* ≤ 0
yi = 
 yi* if yi* > 0
In this way, all negative values of yi* are coded as 0 and
the data is then left censored at 0. The parameters β and
σ are estimated by maximizing the log likelihood
function. We used E-views software for analysis. The LR4
test and Wald5 test are used to judge the significance of
results.
Limitations of the Study
1. Business cycles and other macroeconomic devel-
opments affect most companies in any economy.
These disturbances can lead to opposite or unex-
plained relationships and can distort the final results.
As we are trying to find the relationship between
dividend yield and other independent variables and
as dividend yield itself would also get affected in
same direction as independent variables, in case of
business cycles and other macroeconomic distur-
bances, therefore we expect the effect of these to be
minimized.
2. We have tried to find factors that might be contribut-
ing to the dividend decision in India but as it varies
for each country, the list cannot be exhaustive.
3. As we are using specific statistical methods to ver-
ify our model, the basic limitations of statistical
methods used will apply to our model also.
Analysis and Findings
Summary Descriptive Statistics: Table 1 (see Appendix)
provides summary statistics of variables used in the study.
Descriptive statistics give an overview of the data we are
working with and as can be seen there are some outliers
present in the data set and variation is high in some varia-
bles. The range of values is also high for most of the
variables.
Multicollinearity: The results of the correlation test are
given in the Table 2 (see Appendix). Correlation matrix
confirmed the absence of multicollinearity among
the explanatory variables used in regression analysis. We
find low correlation among independent variables and so
all of them can be used for the model without affecting
other independent variables in a major way.
Heteroscedasticity: The results of the White’s test are
given in Table 3 (see Appendix):
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H0: No heteroscedasticity is present.
Using White’s test without cross-terms, we find no evi-
dence to reject the null hypothesis. This means there is no
heteroscedasticity present.
Tobit Regression Results: Now we run the Tobit regres-
sion model and the results are as mentioned in Table 4 (see
Appendix):
H0: There is no relationship.
The results re-affirm the importance of growth opportu-
nity of the firm (MBR) and size (market capitalization) as
significant determinants of dividend policy in Indian sce-
nario using the data from Nifty 50 Index companies. The
unexpected results includes insignificance of other determi-
nants, namely, age of firm, debt–equity structure and the
earnings per share and negative significance of ‘size’.
Overall, Model 1 and Model 2 have been found to be signifi-
cant as is apparent from p-values of Wald test and LR test.
The LR test results reported at the bottom of Table 4 pro-
vides a formal test for pooled (Tobit) estimator against the
random effects panel estimator. For all estimated regres-
sions, the results of LR test indicate that the panel-level
variance component is important and, therefore, the pooled
estimation is different from the panel estimation. Table 4
shows two models in which dividend policy is measured by
dividend yield (DYLD).
The general model (Model 1) includes five variables and
encompasses all of models, with 424 firm-year observa-
tions. Of the five variables used in the model, three have the
hypothesized signs with the exception of AGE and MCAP.
Two variables are statistically different from zero.
In the process of moving from general to specific model,
three variables (AGE, DER and EPS) were dropped from
Model 1 generating Model 2. The LR test is performed to test
Model 2 (restricted) against Model 1 (unrestricted) and see
whether this process statistically provides additional explana-
tory power to the model. Since the computed value is less
than the critical value, the null hypothesis is not rejected, that
is, the null model (Model 2), which is the restricted model,
cannot be rejected. Therefore, Model 1 does not provide a
statistically significant increase in likelihood over Model 2,
which supports our exclusion of the aforesaid variables.
Table 4 predicts that companies with high growth and
investment opportunities tend to retain their income to
finance those investments, thereby paying less or no divi-
dends. The variable MBR is used as proxy for pecking order
hypothesis. From the regression results (Model 1) in Table
4, as expected, the coefficient of MBR is negative and sig-
nificantly different from zero. These findings indicate that
market-to-book value ratio is related to dividend yield.
Vision, 16, 3 (2012): 153–162
160 Determinants of Corporate Dividend Policy

Table 4 reports that age of the firm is negatively related
to dividend yield as shown by the insignificant negative
coefficient on AGE and explain the non-linear relationship
between the age of the firm and dividend yield. This may
imply changes in a firm’s life cycle, that is, movement from
a lower growth phase to a higher growth phase.
Another variable found to be a determinant of corporate
dividend policy in India is the firm size. However, contrary
to expectations, Table 4 reports that the coefficient of size
(MCAP) is negatively correlated with dividend yield. Firm
size as measured by market capitalization is negatively
related to DYLD. The negative and significant correlation
between dividend yield and size suggests the ability of
smaller firms to pay more dividends. This result may be
attributed to the special characteristic of Indian capital
market in which majority of the firms are relatively small
in size as compared to global companies. Also the theories
that apply to developed economies might not always apply
for emerging economies such as India and thus further
probe is needed to find what determines dividend policy in
emerging economies.
The expected relationship between a firm’s financial lev-
erage and dividend yield is negative. However, contrary to
expectations, Table 4 shows that the coefficient on debt-to-
equity ratio (DER) is positive and statistically insignificant.
This suggests that firms with high debt ratios tend to pay
higher dividends, and the level of dividend payments thus
seems to be positively correlated with the level of financial
leverage. As far as firm’s profitability is concerned, the esti-
mates of earnings per share (EPS) are positive and contrary
to expectation, insignificant. This suggests that profitability
is not a critical determinant of level of dividends paid by
Indian companies.
companies while other determinants, namely, age, earnings
and debt–equity structure were found to be insignificant
along with negative significance of the market capitaliza-
tion. The study demonstrated that much of the existing the-
oretical literature on dividend policy can be applied to an
emerging capital market such as India. Many of the factors
that were found to be significant in the determination of
dividend policy are the same as those found in developed
capital markets. The results of the study can be used by
investor to take informed decision while deciding on invest-
ments based on dividend yield, and significant determinants
can be used to predict dividend yields in future.
Notes
1. Regulation of dividends under Companies Act, 1956
(Sections 93, 205 and 207) provides for four basic aspects
of dividends, namely determination of distributable profits,
sources, declaration and payment of dividends.
2. There are primarily four different types of dividend poli-
cies: constant payout (based on earnings), regular and stable
dividend, regular and extra dividend and multiple increase in
dividend policy.
3. White’s test establishes whether the residual variance
of a variable in a regression model is constant (that is for
homoscedasticity) (White, 1980).
4. Likelihood ratio (LR) test determines whether additional
parameters in the unrestricted model significantly increase
the likelihood. Alternatively, the test is used to confirm
whether or not the unrestricted model is statistically different
from the restricted model.
5. The Wald test statistic follows a χ 2 distribution with degrees
of freedom equal to the number of coefficient restrictions.
6. LR test provides a test for pooled (Tobit) estimator against
the random effects panel estimator.

Summary and Conclusion Appendix

In the article we examined the determinants of dividend Table 1. Summary Statistics of Variables Used
policy of Nifty 50 Index companies in India. Tested proce- Standard
dures were followed to arrive at the best-fit model. In order Variable Mean Medium Maximum Minimum Deviation
to ensure that our results are robust, several diagnostic tests
DYLD 13.46   2.325 800 0 63.58
were performed. Using the censored regression model, MBR   4.46   3.03   32.36 0.32   4.431
Tobit model, and maximizing the log likelihood function, AGE 42.11 37.5 115 2 25.92
we showed that only two of the determinants, market price MCAP 32.99 17.91 351 0.04 44.46
to book value ratio and market capitalization are found to be DER   0.832   0.44   10.4 0   1.422
significant for dividend policy determination for the sample EPS 36.47 26.77 239 0 35.66

Table 2. Results of Correlation Test

Price to Book Value Age Market Capitalization Debt Equity Earnings Per Share
MBR 1.000000 0.040950 0.169568 –0.092771 –0.025019
AGE 0.040950 1.000000 0.007867 –0.208239 0.158873
MCAP 0.169568 0.007867 1.000000 –0.095960 0.203805
DER –0.092771 –0.208239 –0.095960 1.000000 –0.040927
EPS –0.025019 0.158873 0.203805 –0.040927 1.000000

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Monica Singhania and Akshay Gupta 161

Table 3. Results of White’s Test

Variable Coefficient Std. Error t-Statistic Prob.

MBR –14.86566 18.58384 –0.799924 0.4242
AGE   –0.735818   0.653452 –1.126048 0.2608
MCAP   –0.105298   0.175350 –0.600501 0.5485
DER –78.18398 161.7713 –0.483300 0.6291
EPS   –0.177351   0.297425 –0.596288 0.5513
Notes: *Significant at 5% level, **Significant at 10% level.

Table 4. Results of Tobit Regression Model

Dependent Variable: Dividend Yield [DYLD]

Model 1 Model 2
Independent Variables Coefficients Z-Statistics Coefficients Z-Statistics
MBR   –1.653264   –2.361145*   –1.690772 –2.426153*
AGE   –0.104963 –0.863325
MCAP   –0.147866   –2.074207*   –0.146223 –2.104900*
DER    0.230561   0.104712
EPS    0.013449   0.152039
Constant 29.46872   3.799591* 25.84459   5.538483*
LR test6 13.05453 12.22740
p-value 0.0229* 0.0022*
Wald test χ2 (5) = 13.25758 χ2 (2) = 12.40541
p-value 0.0211* 0.002*
Note: *Significant at 5% level.

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Monica Singhania (monica@fms.edu) is Associate Professor,
Faculty of Management Studies (FMS), University of Delhi,
Delhi, India. She is a Fellow Member (FCA) of the Institute of
Chartered Accountants of India. She has been awarded Ph.D. in
the area of corporate finance and taxation from the University of
Delhi. She is the author of seven books on direct tax laws and has
several research papers published in leading journals. She teaches
management accounting, management control systems, project
management and corporate taxation to MBA students at FMS.
Akshay Gupta (akshay.g11@fms.edu) belongs to the MBA Class
of 2011, Faculty of Management Studies (FMS), University of
Delhi, Delhi, India. He is also Bachelor of Engineering (with
distinction and merit) from Delhi College of Engineering,
University of Delhi. Prior to joining FMS, he has worked as Soft­
ware Engineer with Cisco Systems and as an Intern with various
organizations such as Mentor Graphics, Defense Research and
Development Organization (DRDO) and Central Electronics
Engineering Research Institute (CEERI). His interest lies in Quan­
titative Finance, Equity Research and Portfolio Management.