International Conference on Governance, Management and Social Innovation (ICGMSI2017)

16 17 October 2017
Kota Bharu, Kelantan, Malaysia

FACTORS AFFECTING DIVIDEND PAYMENTS IN THE CONSUMER

PRODUCTS SECTOR OF MALAYSIA

Ahmad Bukhari Mohd Yasin1*, Nur Ain Muhammad2, Mohd Noor Azam Nafi3 , Amri Ab. Rahman4,
Omar Kairan5 and Mohd Rahimie Md Noor6
1,2
Faculty of Business Management, Universiti Teknologi MARA Kelantan,Bukit Ilmu, Machang, Kelantan, Malaysia
bukhari@kelantan.uitm.edu.my
3,4,5,6Faculty of Computer and Mathematical Sciences, Universiti Teknologi MARA Kelantan, Bukit Ilmu, Machang,
Kelantan, Malaysia

Abstract: The objective of this study is to investigate the relationship between five
common factors discuss in literature:- liquidity, leverage, profitability, company size and
growth towards dividend payments. The sample covered from 2005 to 2015 of consumer
sectors companies listed in Kuala Lumpur Stock Exchange. The study use panel data
analyses and found that the fixed effect model is the best model to assess the relationships.
Based on the result, it was found that leverage, profitability and company size have
significant relationships with dividend payments. On the other hand, liquidity and growth
have no significant relationships.

Keywords: leverage, profitability, company size, dividend payments, Panel data analyses

1. Introduction

Determining the right dividend policy is very vital for companies as it will influence the market
sentiments towards the companies. Balancing between reinvestment of earnings or distribute in the
form of dividend will influence greatly to the value of the companies.

There are two major components of competing theories in dividend:- dividend Irrelevance theory and
dividend relevance theory. The irrelevance theory defines a theory where investors are not concern

desire cash or current income (Asadi and Zendehdel, 2014). This theory has been supported by the
residual theory and the Modigliani and Miller theory (M&M).

Modigliani and Miller (1961) stated that dividend policy is irrelevant because it has zero influence on
vital rate of return. Furthermore, M&M attests that investors are indifferent to dividend payments as
they are more likely interested in investing their shares of dividends in a corporation that can decrease
the risk of their investment (Fairchild, 2010).

The residual theory stated that outside financing to reinvest is too pricey to participate in any
commercial opportunity. The company should invest their retained earnings shall the worthy
investment opportunity arise. If that is not the occasion, the company must be able to pay out
dividends. Residual theory concluded that as more investment opportunity for companies are eligible,
it can lead to higher dividend payments to investors in the future (Baker and Smith, 2006).

However, supporters of dividend relevance theory stated that payments of the dividend are rated
positively by investors and the companies. They convince that regular dividend payments will

earnings is discounted at a lower rate (Baker and Weigand, 2015). They are four supporting theories
normally mooted under dividend relevance theory:- -in-the-hand
and Signalling.

the company and that there is significant relationshi

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 International Conference on Governance, Management and Social Innovation (ICGMSI2017)
16 17 October 2017
Kota Bharu, Kelantan, Malaysia

earnings as dividend (Livoreka et al 2014).

Gordon and Lintner theory stated that shareholders prefer high dividend instead of low dividend. This
theory explains that shareholders prefer a safe return as they are risk averse. In addition to that,
investors perceived that a quick dividend received is less risky than a potential profit from capital
gain, which will only be realised in the future (as cited in Liveroka et al, 2014).

Bird-in-the-hand theory states that investors will better attracted with cash in hand as compare to
future capital gain. The theory deduce that future promise will put the investors at risk. Thus,
investors can avoid from suffering losses by having a high dividend payments (Baker and Kapoor,
2015).

In addition to that, Signaling theory argue that increasing dividend payments indicate a positive signal
of increasing future cash to the investors (Fargher and Weigand, 2009).

Malaysia has proved to be idealistic country for investors. The Malaysia capital market has grown
significantly by RM 1.28 trillion (US$428 billion) in just a decade (2000 to 2010) and it is expected to
increase up to RM 5.8 trillion (US$1.93 trillion) in year 2020 (Security Malaysia report as cited by
Yusof and Ismail 2016). The vast opportunities will attract investors to the market and one of the
major factor that will influence investors decision in investments is dividend payments.

payments as it will assist investors to closely monitor the dividend payments trend and help them to
make a good investment decisions. This study intends to examine five common factors discussed in
the past literature namely, liquidity, leverage, profitability, company size and growth.

This study only confines to the companies listed under the consumer sector in Bursa Malaysia as this
sector could be associated as recession proof sector especially for companies based products are
define as essential products. The consumer sector refers to
associated with items purchased by individuals. These sectors include packaged goods, food
production, clothing, beverages, electronics and automobiles.

2. Literature Review and Hypotheses Development

2.1 Liquidity and Dividend

Gupta and Banga (2010) in their study investigate the determinants of corporate dividend policies in
India. The data covered from 2001 to 2007. They conclude that there is significant positive
relationship between liquidity and dividend policy.

Amidu and Abor (2006) employed Ordinary Least Square method in investigating determinants of
dividend payout of Ghana companies. The data was obtained from 1998 to 2003. The finding shows a
significant positive relationship between liquidity and dividend payout ratio.

Jozwiak (2015) examined determinants of dividend policies in Polish by using a panel data technique.
The data was obtained from 2000 to 2013 and the results showed positive relationship between
liquidity and dividend policies.

Al-Najjar (2009) used Lintner model to examine dividend policy in Jordan. The study period was
from 1999 to 2003. They found that the liquidity has no significant relationship with dividend policy.

Malik et al (2013) studies determinants of dividend policy of companies listed in Pakistan. The data
covered from year 2007 to 2009 by using the panel data analysis method. They found that there is no
significant positive relationship between liquidity and dividend policy.

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Kota Bharu, Kelantan, Malaysia

Najjar and Hussainey (2009), studies the association between dividend payout with outside
directorships in United Kingdom by using tobit and logit regression model. The data was obtained
from year 1991 to 2002. The results shown that dividend payout has no significant negative
relationship with liquidity.

2.2 Leverage and Dividend

Thu et al (2013) investigate the determinants of dividend payments in Vietnam from year 2007 to
2012 using panel data analysis method. They found that there is significant positive relationship
between leverage and dividend payout ratios.

Jozwiak (2015), Al-Najjar (2009), Gupta and Banga (2010), Najjar and Hussainey (2009) and Malik
et al (2013) found that there is significant negative relationship between leverage and dividend
policy.

Ardestani et al (2013) has investigate the factors that influenced the dividend payout policy of
companies listed under Industrial Product in Malaysia by using panel data method. The period of
study was from 2006 to 2008 and the findings showed leverage has a significant negative relationship
towards dividend policy.

Nuhu et al (2014) examine the determinants of dividend payout in Ghana by using ordinary least
square panel regression method. The period of study was from year 2000 to 2009. The results showed
it had a significant negative relationship between leverage and dividend payout.

Al-
was obtained from 2001 to 2005 and they found that there are significant negative relationship
between leverage and dividend policy.

Guizani and Abaoub (2011) investigate the effects of decisions shareholders between dividend payout

2007 and the finding showed leverage has a positive relationship towards dividend payout.

2.3 Profitability and Dividend

Amidu and Abor (2006), Al-Najjar (2009), Nuhu et al (2014), Najjar and Hussainey (2009) found that
there is significant positive relationship between profitability and dividend payout ratio.

Demirgunes (2015), had done an investigations on the determinants of target dividend payout ratio in
Turkey. The data was obtained from year 2002 to 2012 by using panel autoregressive distributed lag
analysis. The findings showed a significant negative relationship between profitability and dividend
payout ratio.

Jozwiak (2015), Ardestani et al (2013) and Thu et al (2013) found that the findings showed a
significant negative relationship between profitability and dividend policy.

2.4 Company Size and Dividend

Jozwiak (2015), Najjar and Hussainey (2009), Al-Najjar (2009) found that the company size has a
significant positive relationship towards dividend policy.

Khaled and Rehman (2015) investigate on the factors that contributed towards the decisions of the
dividend policy in Pakistan by using panel data method. The period of study was from 2004 to 2009
and the findings showed a significant negative relationship between company size and dividend
policy.

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 International Conference on Governance, Management and Social Innovation (ICGMSI2017)
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Kota Bharu, Kelantan, Malaysia

Jeong (2013) investigate on the dividend smoothing behaviour in Korea by using Lintner model. The
data was obtained from 1981 to 2012 and the results showed a positive relationship between company
size and dividend policy.

Asadi and Oladi (2015) had done an investigation on the determinant dividend in Tehran by using
panel data method. The period of data was from 2001 to 2010 and the findings showed a positive
relationship between company size and dividend policy.

Guizani and Abaoub (2011) has investigate the effects of the dividend payout and
in Tunisian by using panel data method. The data was obtained from 1998 to 2007 and the findings
showed a negative relationship between company size and dividend payout.

Malik et al (2013), found that the company size has no significant positive relationship towards
dividend policy.

2.5 Growth and Dividend

Al-Najjar (2009) and Jeong (2013) found that there is significant positive relationship between growth
and dividend policy.

Demirgunes (2015), Amidu and Abor (2006) found that there is significant negative relationship
between growth and dividend payout ratio.

Malik et al (2013) and Najjar and Hussainey (2009) studies showed no significant negative
relationship between growth and dividend policy.

Based on these literature, five hypotheses can be advanced:

Hypothesis 1

H1: There is significant relationship between liquidity and dividend policy.

Hypothesis 2

H1: There is significant relationship between leverage and dividend policy.

Hypothesis 3

H1: There is significant relationship between profitability and dividend policy.

Hypothesis 4

H1: There is significant relationship between company size and dividend policy.

Hypothesis 5

H1: There is significant relationship between growth and dividend policy.

3. Methodology

3.1 Sampling Method

There are 130 companies of consumer products sector in Malaysia. The study cover from 2005 to
2015. All the companies selected as sample must have complete data for all variables as to ensure that
pre-condition of balance panel data analysis is fullfill. After screening with the criteria set, only 29
companies are eligible.

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 International Conference on Governance, Management and Social Innovation (ICGMSI2017)
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Kota Bharu, Kelantan, Malaysia

3.2 Measurement of Variables

Table 3.1 indicates formula for variables and literature resources that has been referred to.
Table 3.1: Measurement of Variables
Symbols Variables Description Literature Source
Dependent Variable
DPR Dividend per share/ Earning per share Nuhu et al (2014)
Independent Variables
LIQ Current ratio/Current liabilities Jowziak (2015)
LEV Total Debt/ Total Assets Nuhu et al (2014)
PROF Net income/ Total Assets Asadi and Oladi (2015)
LNCOMPANY Natural logarithm Total Assets Jowziak (2015)
GROWTH Market to book Value Al-Najjar (2009)

The model for this study takes the form of

yt 1X1it 2 X2it 3X3it 4X4it 5X5it+ui

y= Dividend payout ratio
t = Period
i=company

X1=Liquidity
X2=Leverage
X3=Profitability
X4=Company Size
X5=Growth
ui= Error term

3.3 Data Analysis

This study used Stata 12 to assist the data analysis process.

3.3.1 Preliminary analysis

There are two preliminary analyses take place before model selection process is conducted, namely
the stationary test and multicollinearity test. For stationary test, the research use Levin-Lin-Chu test.
If the p-value of Levin-Lin-Chu test is less than 0.05, it indicates that the data is stationary. To detect
multicollinearity problem, this study has used Variance Inflation Factor Value (VIF). No
multicollinearity issue is concluded if the Variance Inflation Factor (VIF) is less than 10 (Ardestani et
al 2013). After both criteria met, the next process is model selection process.

3.3.2 Model selection process

The process of selecting the final model is as follows: -

Step 1: - Panel Pool vs Panel Random Effect model and Panel Pool vs Panel Fixed Effect model

To choose between Panel Random Effect and Panel Pooled (OLS) model, the test used was Breusch-
Pagan LM test. If the p-value of Breusch-Pagan LM test is less than 0.05 it indicates that Panel
Random Effect model is better than Panel Pooled (OLS).

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 International Conference on Governance, Management and Social Innovation (ICGMSI2017)
16 17 October 2017
Kota Bharu, Kelantan, Malaysia

To choose between Panel Fixed Effect and Panel Pooled (OLS) model, the test used was F-test. If the
p-value of F-test is less than 0.05 it indicates that Panel Fixed Effect model is better than Panel Pooled
(OLS).

No further process will take place if Panel Pooled (OLS) model is superior than Panel Random and
Panel Fixed Effects Model. However, if the results show otherwise, then the step 2 will take place

Step 2: - Panel Random Effect Model vs. Panel Fixed Effect model

To determine which model is the best model, Hausman test will be conducted. If the p-value of
Hausman test is less than 0.05 it indicates that Panel Fixed Effect model is the best model for the
hypothesis testing analysis.

4. Finding and Data Analysis

4.1 Preliminary Analysis

4.1.1 Stationary Test

The table 4.1 indicates the results of Levin-Lin-Chu test for dividend payout ratio, liquidity, leverage,
profitability, company size and growth.
Table 4.1: Levin- Lin-Chu
Variables P-Value Hypothesis
Dividend Payout ratio 0.0000 Reject null hypothesis
Liquidity 0.0003 Reject null hypothesis
Leverage 0.0000 Reject null hypothesis
Profitability 0.0057 Reject null hypothesis
Company Size 0.0435 Reject null hypothesis
Growth 0.1462 Failed to reject null hypothesis

Hypothesis:

H0: Data contain unit roots >0.05

H1: Data are stationary< 0.05

Based on table 4.2, shows that dividend payout ratio, liquidity, leverage, profitability and company
size, was stationary because p-value less than 0.05 and reject null hypothesis. However, for growth
the p-value is more than 0.05 which indicated that it has unit root problem.

The table 4.2 indicates the result for growth after rectifying the unit root problem by using first
different approach.
Table 4.2: Levin-Lin-Chu first difference
Variables P-Value Hypothesis
Growthdiff 0.0000 Reject null hypothesis

4.1.2 Multicollinearity Test

Variance Inflation Factor (VIF) test was used to test whether the independent variables has
multicollinearity problem. The table 4.3 indicates the result for multicollinearity test.

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 International Conference on Governance, Management and Social Innovation (ICGMSI2017)
16 17 October 2017
Kota Bharu, Kelantan, Malaysia

Table 4.3: Variance Inflation Factor

Variables Variance Inflation Factor
Liq 1.58
Lev 1.50
Prof 1.24
Lncompany 1.18
Growthdiff 1.12
Mean Vif 1.32

Table 4.4 shows no multicollinearity issues, as the Variance Inflation Factor value are less than 10.

4.2 Data Analysis

After conducting preliminary analysis, the next step is to select the best model to conduct hypothesis
testing.

4.2.1 Panel Pooled (OLS) versus Panel Random Effect Model

Table 4.4 shows comparison between Panel Pooled (OLS) and Panel Random Effect model using
Breusch-Pagan LM test.

Table 4.4: Breusch- Pagan LM test

Var Sd=sqrt(Var)
Dpr 372.3538 19.29647
E 139.5443 11.81289
U 194.8531 13.95898

Var (u)

Chibar2 (01) = 361.72

Prob> x2 = 0.0000
Hypothesis:
H0: Panel Pooled (OLS) more preferable> 0.05
H1: Panel Random Effect more preferable< 0.05
The p-value is less than 0.05, thus it indicate that the Panel Random Effect model is preferable than
Panel Pooled (OLS) model.

4.2.2 Panel Pooled (OLS) versus Panel Fixed Effect Model

Table 4.5 illustrate of F-test to select between Panel Pooled (OLS) or Panel Fixed Effect model.
Table 4.5: F- test
Number of observation 290
Number of groups 29
R-squared( Within) 0.0578
Between 0.0791
Overall 0.0315
F(5, 256) 3.14
Probability > F 0.0090

Hypothesis:

H0: Panel Pooled (OLS) more preferable> 0.05

H1: Panel Fixed Effect more preferable< 0.05
The result on F-test (0.0090) is less than 0.05 which indicates the null hypothesis (H0) is rejected and
Panel Fixed Effect is more statistically appropriate than Panel Pooled (OLS) model.

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 International Conference on Governance, Management and Social Innovation (ICGMSI2017)
16 17 October 2017
Kota Bharu, Kelantan, Malaysia

4.2.3 Panel Random Effect versus Panel Fixed Effect Model

Table 4.4 and 4.5 indicates that Panel Random Effect and Panel Fixed Effect model better than Panel
Pooled (OLS) model. Thus, to conclude which model should be used, a Hausman test is conducted.
Table 4.6: Hausman test
(b) (B) (b-B) Sqrt (diag (V_b-V_B) )
Fixed Effect Random Effect Difference
Liq .1873245 -.2520312 .4393557 .1932572
Lev -.2334761 -.2346514 .0011752 .0537949
Prof -.3277798 -.2300677 -0.97712 .
Lncompany -6.104286 -.5232196 -5.581066 1.536312
Growthdiff -1.62205 -1.021311 -.6007397 .

Chi2 (5) = (b- V_B) (- 1)] (b B)

= 19.31
Prob> x2 = 0.0017
(V _b- V_B is not positive definite)
Hypothesis:

H0: Panel Random Effect model more preferable if p > 0.05

H1: Panel Fixed Effect model more preferable if p < 0.05

Table 4.6 shows p-value is less than 0.05, therefore Hausman test indicate that Panel Fixed Effect
model is the best model.

4.2.4 Result of the Models

Tables 4.7 is the summary of all the three models:- Panel Pooled (OLS), Panel Random Effect and
Panel Fixed Effect.
Table 4.7 Result of the models
Panel Fixed Effect Model Panel Random Effect Panel Pooled (OLS)
Model Model

Liquidity
.1873245 -.2520312 -2.932067
t-value 0.18 -0.24 -2.72
p-value 0.858 0.807 0.007
Leverage
-.2334761 -.2346514 -.3593427
t-value -1.76 -1.94 -3.57
p-value 0.079 0.053 0.000
Profitability
-.3277798 -.2300677 -.0577891
t-value -2.07 -1.45 -0.28
p-value 0.039 0.147 0.783
Company size
-6.104286 -.5232196 3.362799
t-value -2.78 -0.33 3.75
p-value 0.006 0.739 0.000
Growth
-1.62205 1.021311 3.273788
t-value -0.90 -0.56 1.27
p-value 0.370 0.577 0.204

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R- square 0.1006
Within 0.0578 0.0336
between 0.0791 0.0053
Overall 0.0315 0.0000
F-statistic 3.14
p- value 0.0090
Wald Chi2
p-value 0.2909
No Observation 290 290 290
Hausman test 19.31
p- value 0.0017
BP LM test 361.72
p-value 0.0000

4.2.5 Panel Fixed Effect Model

Panel Fixed Effect model had been selected for the final model. The table 4.8 indicates the result of
Panel Fixed Effect model.
Table 4.8: Fixed Effect model
[95 %
Dpr Coefficient Standard Deviation T P>t Interval
Coefficient
Liq .1873245 1.047204 0.18 0.858 -1.874907 2.249556
Lev -.2334761 .1325522 -1.76 0.079* -.4945076 .0275554
Prof -.3277798 .1583622 -2.07 0.039** -.6396383 -.0159213
Lncompany -6.104286 2.199044 -2.78 0.006** -10.43481 -1.773766
Growthdiff -1.62205 1.80767 -0.90 0.370 -5.181847 1.937746
_Cons 123.0113 29.01118 4.24 0.000 65.88031 180.1422
Statistically significant at 0.05 (**) and 0.10(*)

Table 4.8 shows the result of the Panel Fixed Effect model. The empirical results indicate statistically
significant negative relationships between dividend payments with profitability, company size and
-6.104286.
Whereas Liquidity and Growth does not have significant influence on the dividend payments.

5. Conclusion

The main focus of this research is to investigate five factors namely ;liquidity, leverage, profitability,
company size and growth towards dividend payments of consumer products sector in Malaysia. The
data covered from 2005 up to 2015. There are 130 listed companies in the consumer products sector
but only 29 companies are selected for this study as to fullfill panel balance data requirements.

After all the variables have been confirmed as stationary and there are no multicollinearity problems,
the next step is to determine which model is the most statistically appropriate to determine the
relationships. The final model selected is Panel Fixed Effect model. The Panel Fixed Effect model
found significant relationship between leverage, company size and profitability towards dividend
payments. Whereas there is no significant relationship for liquidity and growth.

These findings can be summarised as follows:

1) Profitability has a significant negative relationship towards dividend payments. This finding
supported by Demirgunes (2015), Thu et al (2013), Jozwiak (2015), and Aderstani et al
(2013). Thu et al (2013) explained that companies prefer to reserve funds to backup for
future uses.
2) Leverage has a significant negative relationship towards dividend payments. This finding
supported by Ardestani et al (2013), Jozwiak (2015), Gupta and Banga (2010), Nuhu et al

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 International Conference on Governance, Management and Social Innovation (ICGMSI2017)
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Kota Bharu, Kelantan, Malaysia

(2014), Al-Twaijry (2007), Al-Najjar(2009),and Malik et al (2013). Gupta and Banga (2010)
explained that more exposure of the company to high external financing, the riskier the
company will be and thus it will lower of dividend payments.
3) Company size has a significant negative relationship towards dividend payments. This
finding supported by Khaled and Rehman (2015). They justified that negative relationship
exists because big companies prefer reinvest their profits rather than pay dividend to
investors.
4) Liquidity has a no significant positive relationship towards dividend payments. The finding is
supported by Demirgunes (2015).
5) Growth has no significant negative relationship towards dividend policy. This finding
supported by Malik et al (2013) and Al- Najjar Hussainey (2009).

Negative relationship between profitability, leverage and company size towards dividend payments
could be conclude as evidence to support the dividend irrelevance theories. The findings shows that
the future performance of the companies is more concern to the investors rather than the current
income.

Future studies may consider adding more variables, extend the study period to cover more economic
cycle scenario or extend the research on other sectors. This three suggestions may give a better picture
on Malaysia dividend payments scenario.

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