Determinants of Dividend Policy in Pakistan

(Final Project Report………..2021)

Corporate Finance

Submitted1By:

Yasir Mehmood 18272720-048

Muhammad Abubakar 18272720-020

Shahzaib Akram 18272720-058

Kainat Sajid 18272720-084

Zaib un Nisa 18272720-072

MBA- 5th-(B)-FIN

Submitted1To:

Sir Waseem Ullah

Department of Management Science

University of Gujrat

January, 13 2021

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 Determinants of Dividend Policy in Pakistan

LITERATURE REVIEW

Afzal and Mirza (2010) investigate the ownership structure and cash flows as determinants of
corporate dividend policy in Pakistan. They take a sample of 100 financial firms listed on KSE.
The study covers a period of 2005-2007 by using OLS regression technique. Dependent variable
is dividend payout and dividend intensity. Independent variables include profitability and size.
The results showed that Managerial ownership has significant and negative relationship with
dividend payout and dividend intensity. Cash flow and size are the most significant determinants
of dividend behavior but leverage and cash flow do not contribute significantly in determining
the level of corporate dividend payouts. It is concluded that Timely payment of dividend has a
positive impact on reputation of company but unfortunately dividend payout in Pakistan is very
low as compared to others.

Islam, Amir and Ahmad (2012) investigate the determinants and motivators of dividend policy
on cement industry of Pakistan. They take a sample of 8 financial firms listed on KSE and state
bank of Pakistan. The study covers a period of 2004-2009 by using OLS ordinary least square
regression. Dependent variable is dividend payout and independent variables include profitability
and debt to equity. The results showed that PE ratio, EPS growth and sale growth are positively
associated with the dividend payout ratio and profitability and debt to equity are negative
associated with dividend payout. Higher the PE of organization lowers the risks and higher is its
dividend payout ratio. It is concluded that earning per share growth and sales growth also lead to
dividend payout.

Ali khan and Ahmad (2017) investigate the determinants of dividend payout on empirical study
of pharmaceutical companies in Pakistan. They take a sample of all financial firms listed on
PSX. The study covers a period of 2009-2014 by using correlation analysis and backward
multiple linear regression. Dependent variable is dividend payout and independent variables
include taxation, risk, firm size, leverage, audit type, liquidity and growth. The results showed
that Opportunities and profitability are the key determinants of dividend payout of
pharmaceutical companies. Firms with high growth opportunities pay few dividend and firms

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with low liquidity pay more dividends. It is concluded that firms are most likely to pay more
dividends which are audited by big 4 audit firms.

Arif and Akbar (2013) investigate the determinants of dividend policy on sectorial analysis of
Pakistan. They take of sample of 174 non-financial firms listed on KSE. The study covers a
period of 2005-2010 by using panel data analysis and regression analysis. Dependent variable is
dividend payout ratio. Independent variables include Profitability, Tax, size, investment
opportunities and life cycle stage. The results showed that Profitability, tax, size and investment
opportunities as most influential determinant of dividend policy. There is a lack of stable
dividend policy in the market. It is concluded that profitability, tax, size and investment
opportunities are important determinants of dividend policy of non-financial sector.

Afzal and Mirza (2011) investigate the institutional shareholding and corporate dividend policy
in Pakistan. They take a sample of 120 financial firms listed on KSE. The study covers a period
of 2002-2007 by using OLS and Tobit regression model. Dependent variable is dividend payout
and dividend intensity. Independent variables include Size, profitability, leverage, growth,
opportunities and ownership. The results showed that Dividend payouts are positively affected
by growth opportunities and profitability negatively affected by leverage. Large companies are
less likely to pay high dividends but the relationship of size with dividend payout is insignificant.
It is concluded that it is very important to pay dividends for operation but unfortunately in
Pakistan dividend payouts are lo both in terms of value and number of companies.

Asif, Rasool and Kamal (2010) the study takes data for a period of 2002 – 2008. The study takes
190 non-financial firms listed in Karachi stock exchange to investigate the relationship between
dividend policy and leverage in Pakistan. For tested applying extended model of linter (1956).
Dividend policy is used to as dependent variable and leverage as independent variable. In order
to examine the relationship study uses correlation matrix. The result indicates that leverage have
negative impact on dividend policy.

Gul (2012) the study examined the influence of profitability and growth on dividend policy.
Study takes 75 non-financial firm listed in Karachi stock exchange. The study covers the period
of 2005-2010. Dependent variable includes dividend policy and independent variable includes
profitability, growth size using multiple regression and stepwise regression. Data collected from

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companies’ annual report. The result indicates that growth and profitability significant influence
on dividend policy.

Arif, and Akbar (2013) the study takes a sample of 174 non-financial firms listed in Karachi
stock exchange. The study covers the period of 2005-2010. The study is an endeavor to evaluate
the different determinants of dividend policy. Dependent variable includes dividend policy and
independent variable includes profitability, size, and tax. Over all sector analysis has been
performed through panel data and uses sector wise regression. The result identified profitability,
tax, size influence on dividend policy.

Samy, Mohamed and Amel (2010) the study investigate the relationship between dividend policy
and leverage, profitability liquidity, size. To analyze study takes 48 non-financial firm of Karachi
stock exchange and also cover the period of 1996-2002.Dependent variable include dividend
policy and independent variable includes size, leverage, liquidity, profitability. In order to
examine the relationship the study uses dynamic regression. The result shows that the firm size
and liquidity impact negatively on dividend policy but others determinants like profitability and
leverage has no impact.

Khan (2017) this study takes data of 42 non-financial firms listed in Karachi stock exchange in
Pakistan. The study has been carried out to find the relationship between dependent variable and
independent variable. The study covers the period of 2006-2007. Dividend policy is used as
dependent variable and leverage, profitability, size as independent variable. The result
documented that leverage shows positive and significant impact on dividend policy.

Aurangzeb and Dilawar (2012) examined the study of dividend payout policy. The study takes
the data of textile industry from the year of 1966 to 2008. The dividend payout (DPO) is taken as
a dependent variable and the profitability is taken as an independent variable, and three variables
are treated as control variables; return on equity (ROE), size of the firm (SF) and self-finance
ratio (SFR). Results explored earning management and all control variables have negative
relation with dividend payout policy.

Saeed, Riaz, Lodhi and Munir (2014) investigate the study of determinants of dividend payouts
of non-financial sector firms of Pakistan listed at Karachi Stock Exchange. The study has applied
a panel data methodology. They take dividend payouts as depended variables and Profitability,

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Liquidity, Size, Cash Flow, Asset tangibility and Earnings per share as independent variables.
Data was collected from 21 non-financial sector firms listed at Karachi Stock Exchange. Results
Show that cash flow have significant negative relationship and earnings per share have a
significant positive association with the dividend payout of the company, while asset tangibility,
profitability and size have in-significant negative relationship and liquidity has insignificant
positive relationship with dividend payouts.

Rafique (2012) they take 53 such companies were identified from the listed non-financial firms
in the Karachi Stock Exchange that have been paying out dividend consistently for the past 6
years (2005-2010). The study investigate Dividend Payout polices. They take dividend payout
ratio as depended variable and independent variables are Earnings, Firm Size, Growth,
Profitability, and Corporate Tax & Financial Leverage. These 53 companies represent 11 sectors.
Multivariate Regression Analysis was identified as the most appropriate tool for econometric
analysis of the data. The descriptive statistics revealed the data to be normal. Whereas when the
assumptions needed to be fulfilled for OLS were tested, the data was found to be homoscedastic
and free of autocorrelation. Multi collinearity was partially found only with respect to Earnings
& Profitability variables. Hence, Regression was run in isolation, once with earnings and once
with profitability along with testing the two together in a third regression test. Regression Results
of all three regressions were consistent. Results revealed that Corporate Tax and Firm’s Size had
significant relationship with Dividend Payout.

Rehman (2012) this study examines the determinants of dividend payout ratio in the largest stock
exchange of Pakistan i.e. Karachi Stock Exchange (KSE). The take 50 companies that announced
dividend in 2009. They use dividend payout ratio as depended variable and Profitability equity
ratio and current ratio as independent variables. Relation of debt to equity ratio, profitability,
current ratio and corporate tax was found to be positive with dividend payout ratio while
Operating cash flow per share and market to book value ratio has a negative relationship with
dividend payout ratio. Profitability, debt to equity and market to book value ratios were found to
be the significant determinants of dividend payout ratio in Pakistan.

Mailh, Gull, Tauseef, Rehman and Madiha (2013) examine the study of determinants of dividend
policy of firms listed on Karachi stock Exchange and are part of KSE-100 index. They use panel
data of 100 financial and non-financial firms over the period 2007 to 2009. The study use

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dividend payout ratio as dependent variable, and liquidity, leverage, earning per share, size,
growth and profitability are used independent variables. The results from probity model
estimation reveal that earning per share, company profitability, and size increase the probability
of companies to pay dividend, whereas growth opportunities decrease the probability of paying
dividends. Data is compiled in two different forms, as per the requirement of the two models
used in this study. On the first set of data, panel OLS Regression is used. Secondly, data set is
constructed so as to apply probity model.

Hassan, Ahmad, Rafique and Rehman (2010) the study takes data for a period of 1996-2008. The
study takes 56 non-financial firms listed in Karachi stock exchange to investigate the relationship
between dividend payout ratio and firm earnings in Pakistan. Dividend is used to as dependent
variable and returns on assets and equity as independent variable. In order to examine the
relationship study regression show that no matter what industry. The result indicates that payout
ratio have negative impact on dividend policy.

Nadeem, Basheer and Usman (2018) the study takes non-financial firm listed in Karachi stock
exchange. The study covers the period of 2005-2015. Dependent variable includes dividend
policy and independent variable includes profitability and leverage. Data collected from
company’s annual report. In order to examine the relationship study uses switch Basel ll to Basel
lll the result indicates that leverage and profitability significant influence on dividend policy.

Salem and Alifiah (2017) the study investigate the relationship between dividend policy and
leverage, return on equity and liquidity. To analyze study takes non-financial firm of Karachi
stock exchange and also cover the period of 2008-2015.Dependent variable include dividend
policy and independent variable includes size, leverage and liquidity. In order to examine the
relationship the study uses regression analysis indicates earning management. The result shows
that the liquidity impact negatively on dividend policy but others determinants like leverage has
no impact.

Ali, Jan and Atta (2015) this study takes data of 122 non-financial firms listed in Karachi stock
exchange in Pakistan. The study has been carried out to find the relationship between dependent
variable and independent variable. The study covers the period of 2001-2006. Dividend policy is

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used as dependent variable and growth, firm size as independent variable. The result documented
that payout ratio shows positive and significant impact on dividend policy.

Assad and Youssef (2014) the study takes a sample of 44 non-financial firms listed in Karachi
stock exchange. The study covers the period of 2006-2011. The study is an endeavor to evaluate
the different determinants of dividend policy. Dependent variable includes dividend policy and
independent variable includes leverage. Over all sector analysis has been performed through
OLS techniques and uses sector wise regression. The result identified leverage influence on
dividend policy. The findings show that leverage has significant negative impact on dividend
payment pattern of sampled firms.

Bushra (2012) the study takes 75 non-financial firms listed in Karachi stock exchange. The study
covers the period of 2005-2010. Dependent variable includes dividend policy and independent
variable includes profitability, firm size, growth and leverage. Data collected from company’s
annual report. The result indicates profitability ratios is positive impact and payout ratio is
negative impact on dividend policy The growth in sales which was found positively related with
the dividend payout ratio

Khan and Ahmed (2017) the study investigate the relationship between dividend policy and
leverage, firm size, growth opportunities, taxation and liquidity. To analyze study takes non-
financial firm of Karachi stock exchange and also cover the period of 2009-2014.Dependent
variable include dividend policy and independent variable includes size, leverage and liquidity.
In order to examine the relationship the study uses liners regression analysis indicates earning
management. Independent variables including taxation, risk, firm size and Leverage
insignificantly influence dividend payout decisions of pharmaceutical companies of PSX.

Tariq and Mushtaq (2016) the study takes a sample of non-financial firm listed in Karachi stock
exchange. The study covers the period of 2008-2014. The study is to evaluate the different
determinants of dividend policy. Dependent variable includes dividend policy and independent
variable includes leverage, payout ratio, firm size, growth and liquidity. Over all sector analysis
has been performed through panel data technique and uses sector wise regression. The result
identified payout and growth positive impact on dividend policy. The findings show that
leverage has significant negative impact on dividend payment pattern of sampled firms.

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Khan, Wajid, Javeed and Bassam (2017) the study takes 42 companies of non-financial firm
listed in Karachi stock exchange. This study covers the period of 2006 – 2007. The study has
been carried out to find the relationship between dividend policy and leverage, size. In order to
examine the relationship study uses panel data techniques. Dividend policy is used as dependent
variable and leverage, size uses as independent variable. The result indicates that leverage and
firm size positively affect dividend policy.

Hafeez and Jived (2009) the study examines the dynamics and determinants of dividend policy.
The study takes 320 non-financial firms listed in Karachi stock exchange and covers the period
of 2001 – 2006 to determine the relationship between dependent and independent variables uses
the extended model of Lintner. The study takes liquidity and leverage as independent variable
and dividend policy as dependent variable. The results Indicates that leverage negatively impact
on dividend policy.

Bushra and Mirza (2015) results about using data on 75 companies listed in the KSE 100 index
for the period 2005 to 2010, finding that give high dividend and making loss. Firm size has
negative relationships with payout ratio. Growth in sales positive relate to dividend payments.
Ownership concentrated with in institutions has negative impact on dividend ratio. Institutional
owners retain excess cash and individuals owners prefer capital gains to dividend given the tax
deduction and family owned firms avoid dividend. Finally the market to book ratio is negative
and highly significant: firm with better growth opportunities rely on internal financing more than
on generating external funds.

Ahmed, Hafeez, Javid and Attiya (2008) study about the non-financial firms listed in Karachi
stock exchange period 2001 to 2006 it determinant dividend payout in Pakistan by using
dividend models in context of emerging market. The result sports Pakistani listed none financial
firms rely on both current earning per share and past dividend per share. The non-financial firms
have high speed of adjustment and low target payout ratio show to instability to smoothing their
dividend payment. The determinants of dividend policy dynamic panel regression have been
performed. Ownership concentration and liquidity have negative impact on payout ratio and also
capitalization and size of the firms have the negative impact on dividend payout policy which
clearly shows firms prefer to invest in their assets rather than pay dividends to its shareholders.

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