DETERMINANTS OF DIVIDEND PAYOUT OF

COMMERCIAL BANKS IN NEPAL

Graduate Research Project

Submitted To
MBA (Finance) Program in Management
Office of the Dean, Faculty of Management
Pokhara University

Submitted By
Maushmi Vaidhya
Exam Roll No. 10220327
P.U. Registration No. 2010-2-22-0197

In Partial Fulfillment of the Requirements for the MBA Degree in

Management

Kathmandu, Nepal
July 2013
 ACKNOWLEDGEMENTS

This Graduate Research Project entitled “Determinants of Dividend Payouts of

Commercial Banks in Nepal” has been carried out to meet the partial requirement of the
fulfillment for the degree of the Master of Business Administration (Finance) of
Pokhara University. I would like to extend my immense gratitude to my supervisor, Mr.
Rajesh Gurung for his valuable supervision and guidance in completing this study. I am
highly indebted to my supervisor and very thankful for his continuous support and
constructive suggestions that have enabled this research project to achieve its present
form.

It is my utmost responsibility to appreciate and acknowledge other people behind the

success of this research. I am very grateful to Prof. Dr. Radhe Shyam Pradhan
(Academic Director) and Dr. Chakra Bahadur Khadka (Research Director) of Uniglobe
College for their invaluable suggestions, supervision, guidance and inspirations not only
in conducting this research but throughout my MBA study.

The respondents of the sample banks deserve the sincere thanks for their valuable time
and responses. I must acknowledge the various authors of different studies that I have
referred during this study. Moreover, I would like to express my thanks to all friends of
MBA for direct and indirect support and coordination.

Finally, I want to remember my entire family especially my parents Mr. Basant

Narayan Baidhya and Mrs. Renu Baidhya for their care and love that has inspired me to
achieve every success including this study. I have tried my best to keep away this
research project and this report from some possible errors. However, there might be
some errors in this report for which I apologize to all. Further, I would like to ensure
that such mistakes won’t be committed in the future.

Maushmi Vaidhya
July, 2013

i
 CERTIFICATE OF AUTHORSHIP

I hereby declare that this submission of graduate research project entitled

“Determinants of Dividend Payouts of Commercial Banks in Nepal” is my own work
and that, to the best of my knowledge and belief, it contains no material previously
published or written by another person nor material which to a substantial extent has
been accepted for the award of any other degree of a university or other institution of
higher learning, expect where due acknowledgement is made in the acknowledgement
section.

………………………
Maushmi Vaidhya

ii
 TABLE OF CONTENTS

ACKNOWLEDGEMENTS............................................................................................i
CERTIFICATE OF AUTHORSHIP..............................................................................ii
TABLE OF CONTENTS..............................................................................................iii
LIST OF TABLES.........................................................................................................v
LIST OF FIGURES.....................................................................................................vii
EXECUTIVE SUMMARY........................................................................................viii
ABBREVIATIONS........................................................................................................x

CHAPTER I: INTRODUCTION...................................................................................1
1.1. Background of the Study.....................................................................................1
1.2. Statement of the Problem....................................................................................4
1.3. Research Questions.............................................................................................7
1.4. Purpose of the Study............................................................................................8
1.5. Significance of the Study.....................................................................................8
1.6. Research Hypothesis...........................................................................................9
1.7. Operational Definitions and Assumptions.........................................................10

CHAPTER II: LITERATURE SURVEY AND CONCEPTUAL FRAMEWORK....14

2.1. Review of Literatures........................................................................................14
2.2. Conceptual Framework.....................................................................................33
2.3. Concluding Remarks.........................................................................................37

CHAPTER III: RESEARCH DESIGN AND METHODOLOGY..............................39

3.1. Research Design................................................................................................39
3.2. Research Approach............................................................................................39
3.2.1. Qualitative Approach..................................................................................40
3.2.2. Quantitative Approach................................................................................40
3.3. Nature and Sources of Data...............................................................................41
3.3.1. Secondary Data...........................................................................................41
3.3.2. Primary Data...............................................................................................41
iii
 3.4. Data Collection Procedures and Time Frame....................................................42
3.5. Population and Sample......................................................................................43
3.5.1. Sampling Technique...................................................................................44
3.6. Data Analysis Procedures..................................................................................44
3.6.1. Method of Secondary Data Analysis..........................................................45
3.6.2. Methods of Primary Data Analysis.............................................................49
3.7. Reliability and Validity.....................................................................................49
3.8. Instrumentations................................................................................................50
3.9. Analysis Plan.....................................................................................................50

CHAPTER IV: PRESENTATION AND ANALYSIS OF DATA..............................52

4.1. Pattern of Dividend Payout and its Determinants.............................................52
4.2. Examination of the Portfolio Properties............................................................59
4.3. Analysis of the Factors Affecting Dividend Payout..........................................70
4.4. Analysis of Determinants of Dividend Payout of Domestic Private Banks......73
4.5. Analysis of Determinants of Dividend Payout of Joint Venture Banks............77
4.6. Assessment of Management Views...................................................................80
4.7. Concluding Remarks.........................................................................................91

CHAPTER V: SUMMARY, CONCLUSION AND RECOMMENDATIONS..........94

5.1. Summary...............................................................................................................94
5.1.1. Major Findings............................................................................................96
5.2. Conclusions.......................................................................................................97
5.3. Recommendations.............................................................................................98
5.4. Scope for Future Research...............................................................................100

REFERENCES101
APPENDICES

iv
 LIST OF TABLES
Page No.

Table 2.1: Empirical Studies on Dividend Policy till 1990 15

Table 2.2: Empirical Studies on Dividend Policy during 1990s 19
Table 2.3: Empirical Studies on Dividend Policy during mid 2000s 21
Table 2.4: Empirical Studies on Dividend Policy after 2005 25
Table 2.5: Empirical Nepalese Studies on Dividend Policy in Nepal 31
Table 3.1: Response Rate of Questionnaire Survey 42
Table 3.2: Composition of Sample and Population 43
Table 3.3: Summary of Sample Banks and Observations 43
Table 3.4: Coefficient of Cronbach’s Alpha 49
Table 4.1: Pattern of Dividend Payout Ratio of Commercial Banks 53
Table 4.2: Pattern of Net Profit of Commercial Banks 54
Table 4.3: Pattern of Cash Flows of Commercial Banks 54
Table 4.4: Pattern of Total Assets (Size) of Commercial Banks 55
Table 4.5: Pattern of Market to Book Value Ratio of Commercial Banks 56
Table 4.6: Pattern of Leverage Ratio (Debt to Equity) of Commercial Banks 57
Table 4.7: Pattern of Major Shareholder of Commercial Banks 58
Table 4.8: Pattern of Investment Opportunities (Slack) of Commercial Banks 59
Table 4.9: Properties of Portfolio Sorted on Net profit 60
Table 4.10: Properties of Portfolio Sorted on Cash Flow 61
Table 4.11: Properties of Portfolio Sorted on Size 63
Table 4.12: Properties of Portfolio Sorted on Market to Book Value of Equity 64
Table 4.13: Properties of Portfolio Sorted on Debt to Equity Ratio 66
Table 4.14: Properties of Portfolio Sorted on Number of Major Shareholders 67
Table 4.15: Properties of Portfolio Sorted on Slack 69
Table 4.16: Descriptive Statistics of Dividend Payout and its Determinants 70
Table 4.17: Correlation Analysis of Dividend Payouts and its Determinants 71
Table 4.18: Regression Analysis of Dividend Payouts and its Determinants 72
Table 4.19: Descriptive Statistics of Dividend Payouts and its Determinants
for Domestic Private Banks 74
Table 4.20: Correlation Analysis of Dividend Payouts and its Determinants
of Domestic Private Banks 75
v
Table 4.21: Regression Analysis of Dividend Payout and its
Determinants of Domestic Private Banks 76
Table 4.22: Descriptive Statistics of Dividend Payout Ratios and its
Determinants of Foreign Joint Venture Banks 78
Table 4.23: Correlation Analysis of Dividend Payouts and its Determinants
of Foreign Joint Venture Banks 79
Table 4.24: Regression Analysis of Dividend Payout and its Determinants for
Foreign Joint Venture Banks 80
Table 4.25: Response on Priority of Corporate Decision Making 81
Table 4.26: Response on Dividend Relevance and Irrelevance Theory 82
Table 4.27: Response on Dividend as Residual Decision 83
Table 4.28: Response on Preference on Dividend Policy 83
Table 4.29: Response on Preference towards Dividend Types 84
Table 4.30: Response on Reasons Regarding Certain Dividend Policy 85
Table 4.31: Response of Studies on Shareholder’s Dividend Preference 86
Table 4.32: Response on Determinants of the Dividend Payouts 87
Table 4.33: Total Sample Mean, Standard Deviation and Test Statistics 88
Table 4.34: Response on Sufficiency of Dividend Payouts 89
Table 4.35: Responses on Current Dividend Practices and Payouts 90

vi
 LIST OF FIGURES
Page No.

Figure 2.1: Conceptual Framework of the Study 34

Figure 4.1: Movement in DPR across the Portfolios Sorted on Net Profit 61
Figure 4.2: Movement of DPR across the Portfolios Sorted on Cash Flow 62
Figure 4.3: Movement of DPR across the Portfolios Sorted on Size 63
Figure 4.4: Movement of DPR across the Portfolios Sorted on MBV
of Equity 65
Figure 4.5: Movement of Dividend Payout Ratio across the Portfolio Sorted
on Debt to Equity Ratio 66
Figure 4.6: Movements on DPR across the Portfolio Sorted on Number of
Major Shareholders 68
Figure 4.7: Movements on DPR across the Portfolios Sorted on Slack 69

vii
 EXECUTIVE SUMMARY

Despite of several empirical evidences, the dividend policy issues are still puzzling and
unresolved. Identification of the factors shaping the dividend payouts decisions is
crucial for the corporate managers and it is even more crucial in banking sector
especially in case of Nepal because most of the investors in the capital market invest in
the shares of the banks. So, the empirical relationship between the dividend payouts and
its determinants are stated as the research questions followed by the development of the
hypotheses. The major objective of this study is to analyze the factors affecting the
dividend payout decisions of the commercial bank along with the examination of
empirical relationship between them.

The review of literatures has shown relationship between various factors such as net
profit, size of the firm, ownership structure, tax structure, lag dividends, cash flows,
market to book value ratio, leverage ratio, investment opportunities etc. as and the
dividend payouts in case of both developed and emerging countries. In addition, net
profit, cash flows, leverage ratio, ownership structure, taxes are some of the variables
that are found to have significant association with dividend payouts in various context.
Based on the reviews, this study has proposed the conceptual framework identifying net
profit, cash flows, market to book ratio, size, debt to equity ratio, number of major
shareholders and slack as the most important factors affecting the dividend payout ratio
of the commercial banks in Nepal.

For the purpose of study 18 listed commercial banks dividend into two strata is taken as
sample and required data such as dividend payout ratios and other independent
variables are collected from various secondary sources for period of 8 years i.e. 2005 to
2012. Stratified sampling method is used to select the sample commercial banks.
Primary questionnaire survey is also conducted in order to assess the opinions of bank’s
manager on dividend issues. Multiple regression analysis and correlation analysis are
used to examine the connection between the dividend payout ratios and the
determinants of the dividends. Likewise, portfolio sorted on one way sorts of seven
independent variables is also employed to see if the relationship shown by regression
and correlation analysis really exists.

viii
The results of secondary data analysis shows that net profit, cash flows and size of the
banks have strong and significant positive impact on dividend payouts while number of
major shareholders significantly affects the dividend payout ratio in negative manner.
Likewise, market to book value ratio is negligible in explaining dividends; however,
these variables have significant positive impact. In contrast, the study documents that
leverage ratio and the slack as insignificant in explaining the variations in dividend
payout ratios of commercial banks. In line with the findings of the secondary data, the
primary survey reveals net profit and the cash flows as the most important determinants
of the dividend payout ratios followed by the number of major shareholders and the size
of the banks.

The major limitations of this study lies in the fact that this study has excluded some
firm specific and macro economic variables that might have influence on dividends.
Despite the limitations, the findings may have significant degree of implications for
both investors and the bank’s management. So, both groups of these stakeholders are
recommended to take account of the determinants identified by this study and their
relationship with dividend payout ratios. There is wide scope for future studies in same
topic. Future studies can increases the sample size including different class of financial
institutions to make the results applicable for the entire banking industry of Nepal.

ix
 ABBREVIATIONS

Ag : Agree

AMEX : American Stock Exchange

ANOVA : Analysis of Variance

ASX : Australian Stock Exchange

BAFIA : Bank and Financial Institution Act

CA : Cash and Equivalents

CAPEX : Capital Expenditures

CEO : Chief Executive Officer

CF : Cash Flows

CSE : Chittagong Stock Exchange

DE : Debt to Equity Ratio

DEBTQ : Debt to Equity

DisAg : Disagree

DPB : Domestic Private Banks

DPR : Dividend Payout Ratio

DSE : Dhaka Stock Exchange

DW : Durbin Watson

EBIT : Earnings before Interest and Tax

EPS : Earnings per Share

IPO : Initial Public Offering

x
JVB : Foreign Joint Venture Banks

KSE : Karachi Stock Exchange

MBV : Market to Book Value

MPS : Market Price per Share

MSH : Major Shareholders

NEPSE : Nepal Stock Exchange

NP : Net Profit

NRB : Nepal Rastra Bank

NYSE : New York Stock Exchange

NZSE : New Zealand Stock Exchange

OLS : Ordinary Least Square

P/E : Price Earnings Ratio

SEBON : Securities Board of Nepal

SLC : Slack

SOB : State Owned Banks

SPSS : Statistical Packages for Social Sciences

Std. Dev. : Standard Deviation

SZ : Size

TSAM : Total Sample

US : United States

VIF : Variance Inflation Factor

xi
 CHAPTER I
INTRODUCTION

1.1. Background of the Study

The development of an economy requires expansion of productive activities, which in
turn is the result of the capital formation, which is the capital stock of the country
(Malla, 2009). Investment is key factor for capital formation. Investment promotes
economic growth and contributes to a nation’s wealth. Investor always desires return
from the investment either in the form of dividends or capital gains if investment has
been made in the stocks of the firms. Once the company earns a profit, it should decide
on what to retain and what to payout. Dividend is the portion of the net profit of the
firm that the firm decides to distribute to its shareholders. Dividend policy in modern
finance is very crucial decision since it affects the shareholders wealth maximization,
firm’s retained earnings, future growth prospects, leverage, liquidity and many more.
Firms can distribute the dividends to its shareholders in various ways namely cash
dividend (most preferred by investors), stock dividend, stock split and stock repurchase.

Dividend policy is to determine the amount of earnings to be distributed to shareholders

and the amount to be retained or reinvestment in the firm. The objective of a dividend
policy should be to maximize shareholder’s wealth position. Retained earnings are used
for making investment in favorable investment opportunities, which in turn help to
increase the growth rate of the firm. What and how much it is desirable to pay dividend
is always a controversial topic and is often termed as primary puzzle in economics of
corporate finance (Feldstein and Green, 1983). It is puzzling because shareholders
expect higher dividend from corporation, but corporation tends to set aside funds for
expansion and growth. The most widely accepted objective of a firm is to maximize the
value of the firm and to maximize shareholder wealth. In general, there are three types
of financial decisions which might influence the value of a firm: investment decisions,
financial decisions and dividend decisions. These three decisions are interdependent in
a number of ways. The investments made by a firm determine the future earnings and
future potential dividends; and dividend policy influences the amount of equity capital
in a firm’s capital structure and further influences the cost of capital and amount of
debt. This may involve comparing the cost of paying dividend with the cost of retaining
earnings. Although firms do not have obligations to declare dividends on common

1
stock, they are normally reluctant to change their dividend rate policy every year as the
firms strive to meet stockholders’ expectation, build a good image among investors and
to signal that the firm has stable earnings to the investors. It is fact that dividend work
as a simple sufficient signal of management’s interpretation of the firm’s recent
performance and its future prospects.

Adequate empirical studies have been carried out on dividend policy, however, what
shapes the dividend policy of the firms is a great question that has not been paid plenty
attention in most of the cases. Many studies tried to cover the issue regarding the
dividend behavior or dynamics and determinants of dividend policy but an acceptable
explanation for the observed dividend behavior of firms is still lacking. It is yet to cover
the complete factors that derive the dividend policy decision and the way these factors
interacts with each other. The firms in the United States adjust their dividends smoothly
to maintain a target long run payout ratio (Lintner, 1956). The findings of the study
regarding the dividend smoothing have also been confirmed by numerous studies since
its publications. The smoothing of the dividend is the well known empirical fact but the
empirical evidence is based on United States market. The dividend policy of the
companies varies from country to country due to various institutions and capital market
differences. Some studies have been carried out in developed countries where capital
markets are developed and enhanced. Still the determinants of the dividend policy or
payout seem to have lesser empirical studies in countries like ours. It has been argued
that it is of great value to identify the factors that influence the dividend payout policy
decisions (Amidu and Abor, 2006).

Academics have developed many theoretical models describing the factors that
managers should consider when making dividend policy decisions. Given perfect
capital markets, the dividend decision does not affect firm’s value and is therefore,
irrelevant (Modigiliani and Miller, 1961) (Miller & Modigiliani, 1961). However, most
financial practitioners and many academicians believe it other way round. Many
theories about how dividends affect firm’s value and how managers should make
dividend policy decisions have been offered. Overtime, the number of factors identified
in the literature as being important to consider in making dividend decisions increased
substantially. There are plenty of potential determinants for the dividend decisions. The
more prominent determinants include protection against liquidity, after-tax earnings of
the firm, liquidity and cash flow consideration, stockholders' expectation/preference,
2
future earnings, past dividend practices, return on investment, industry norms, legal
constraints, growth prospects, inflation and interest rate (Foong, Zakaria and Tan, 2007)
(Foong, Zakaria, & Tan, 2007). Since the earlier theories and empirical evidences have
identified the various determinants of the dividend decisions and payouts, this study
intends to assess whether the previous results can be generalized and applicable in
context of commercial banks of Nepal.

The role of financial sector has immensely grown in Nepalese economy after
deregulation and liberalization of the economy during mid eighties. The only secondary
capital market of the country records more than 50% of the financial institutions like
commercial banks, development banks and finance companies among total companies
listed in it. It also shows that financial sector has great role in developing capital
markets of the country. There are presently 32 commercial banks in Nepal and almost
27 banks have gone to public and others are in a way for IPO. Thus, the dividend
decision is most important and essential that commercial bank have to make today. Not
only for the practicing managers, are the factors influencing the dividend decision
equally important for the investors. Investors if provided the correct information
regarding dividend policy decisions can choose to invest in suitable stocks both in
primary and secondary market that match their investment objectives. Viewed in this
way, this study is expected to provide at least some insight into determinants of
dividend policy and payout decisions in context of Nepal.

There exist several studies on determinants of dividend policy in developed capital

markets. The existing empirical evidence is based mainly on data from developed and
developing countries. The findings based on data from developing countries have not
been adequately tested for its consistency and validity in case of Nepal. Thus, it can be
said that with reference to developing country like Nepal, such empirical evidence is
not enough. Therefore, this study is an effort to test these facts in developing capital
market like Nepal. In doing so, this study has employed most recent data and tried to
cover the multiple dynamics of dividend decisions and determinants of the dividend
payouts that are valued most by the commercial banks. Furthermore, it is essential to
understand how different banks frame their dividend policies and what they consider
before announcing the decisions i.e. the determinants of the dividend payouts.

3
1.2. Statement of the Problem
Despite many studies conducted by financial economists, the issue of dividend policy
determinants still remains unresolved. Dividends issue is one of the top ten important
unresolved issues in the field of advanced corporate finance (Brealey et al., 2005).
Many theories and models have been put forth to examine numerous facets of dividend
study. The first empirical study of dividend policy discovered that firms have long-run
target dividend payout ratios and place their attention more on dividend changes than
on absolute dividend levels (Lintner, 1956). It was also found that dividend changes
follow shifts in long-run sustainable and managers are hesitant to make dividend
changes that may later need to be reversed. Managers also try to stabilize dividends and
avoid dividend cuts. Thus, the position of this study makes it necessary to understand
and identify the factors that are considered by the practicing managers in deciding what
to pay and what to retain. The article by Miller and Modigliani (1961) is also
groundbreaker in the theoretical modeling of dividends, which proposed dividend
irrelevance. The implication of this theory is that given two firms that have the same set
of available investment opportunities, their values would be the same even if one paid
all its earnings as dividend and the other paid no dividends provided that the two firms
belong to the same risk class. On the other hand, theories which support dividend
relevance include tax preference, signaling, and agency explanations (Black and
Scholes 1976; Jensen and Meckling, 1976).

Several studies have developed and empirically tested various models to explain
dividend behavior. Some conducted surveys of corporate managers to learn the most
important determinants of corporate dividend payouts. Different country will have their
owned culture, rules and regulations restricted on the dividend policy and the different
country based corporate also practicing different policy (Chay and Suh, 2005). The
more prominent determinants include protection against liquidity, after-tax earnings of
the firm, liquidity and cash flow consideration, stockholders expectation/preference,
future earnings, past dividend practices, return on investment, industry norms, legal
constraints, growth prospects, inflation and interest rate.

Among a number of studies, several studies contend that dividend payout is the function
of the firm’s profitability (Baker et. al., 1985; Pruit and Gitman, 1991; Gill et al., 2010).
The notion behind this idea is that whenever the firms make good profits, some portion
of the firm’s profit should be distributed to the shareholders in fact the real owners of

4
the firm. Thus, most of the studies have documented positive relationship between the
net profit and the dividend payout. Dividend payouts are usually large in the year of
higher net profits (Gill et al., 2010). It implies that higher the net profit higher will be
the dividend payout ratios. Having said that, it is important to note that some studies has
shown the negative impact of profitability on dividend payouts (Gilsenan, 1994).
Hence, it is of great significance to analyze the effect of profitability on dividend
decisions and payouts in commercial banks which is attempted in this study.

It has been empirically proven that most of the firms look after signaling the market
through its dividend policy. The market value divided by the book value of equity is the
signal for the shareholders that firms pay dividends smoothly and vise versa. The
managers do take certain dividend policy in order to increase the stock price of the firm
(Baker et al., 1985). Market to book value ratio is a proxy for the signaling effect of the
firm. The significant negative relationship between the market to book value ratio and
the current dividend payouts indicate that the firm with higher market to book value of
equity pays fewer amounts as the dividends to their shareholders (Amidu and Abor,
2006). In contrast, the result of linkage between market to book value of equity is
mixed (Essa et al., 2012). Such mixed results and arguments make it necessary to
investigate the role of market to book value of equity in explaining the dividend payout
ratio in case of commercial banks of Nepal.

The solution of agency cost is the structure of ownership of the firms (Rozeff, 1982).
Among others, the study confirmed positive relationship of dividends with number of
shareholders while inverse relationship with insider ownership with dividend payouts.
However, the negative association of number of major shareholders is also evidenced
by extant literatures (Lloyd and William, 1985 and Holder et al., 1998). The studies
posit that when the shares are concentrated within the insiders, the insider shareholder
prefer retention of the profits due to the fact that cash needs of such shareholders are
met with the compensations and benefits. The impact of ownership on dividend payouts
is still an unclear issue which needs more investigation. Therefore, this study has made
such effort to test the empirical validation of previous results in context of Nepal.

The financial leverage (risk) affects firms’ dividend payout decision (Pruitt and Gitman,
1991 and Llyod and William, 1985). But, the fact that many studies have tested these
alternative theories of dividend policy but have not obtained conclusive results. Thus,
the issue of which explanation of dividend policy are most correct remains unresolved.
5
There is positive association between dividend policy and debt implying that the firm
with higher debt ratio or leverage pays more dividends (Yiadom and Agyei, 2011).
However, the general notion is that the firm with more financial leverage tends to
distribute fewer earnings as the dividend; negative relationship of leverage with
dividend payout is observed (Swamy and Rao, 1975). Despite the several empirical
analyses of leverage and dividends, there are very few such studies conducted in Nepal.
So, this study has attempted to test whether the general notion that high leverage
reduces dividend is true for case of commercial banks.

Large companies because of their reputation tend to pay more dividends thereby
showing the loyalty to their shareholders. In addition, most of the investors also believe
that large companies smoothes the dividend and pays more dividends. The large
companies are indeed the ones that are more likely to pay dividends (Redding, 1997).
The results are both statistically and economically significant. The results also indicate,
but not as strongly, that large companies and liquid companies are likely to pay a large
amount of dividends. Furthermore, the large firms distributed a higher amount of their
net profit as cash dividend (Holder et al., 1998 and Alkuwari, 2009). Thus, it is
empirically proven that size of the firms play important role in deciding the dividend
payouts. Whether same relationship exists in case of Nepal is to be tested to validate
such findings to the Nepalese context.

Liquidity was also additional variable found to be the significant determinant variable
of dividend payout (Liu and Hu, 2005). The liquid corporations pay more dividends and
managers take consideration of their liquidity positions in deciding what to pay as the
dividends (Reddings, 1997). In contrast, a negative relationship between dividend
payout and liquidity position of a firm was confirmed in addition to identification of
some factors that influence dividend policy as net profit after tax, working capital and
insider shares in equity (Mehar, 2003). The findings of this study imply that better the
liquidity positions less will be the dividend payouts. These inconsistent results trigger
the need of more empirical investigation in these issues.

Investment expenditure ensures the growth of the firm which increases the net profit
(Swamy and Rao, 1975). The study highlighted that investment expenditure is
positively related with the dividends. The excess amount of investment expenditure
tends to reduce dividends verifying negative association of growth opportunities with
the dividend payouts (Fama and French, 2001). Moreover, the investment opportunities
6
influence dividend decisions and affirmed a significant negative relationship between
dividends and firms investment opportunities (Rozeff, 1982 and Al-Malkawi, 2007).
The idea behind negative relationship is that investment in profitable projects reduces
the distributable income or the dividends. Do same evidences is prevalent in Nepal is a
questions. So, this study attempts to analyze the empirical relationship between the
investment opportunities and the dividend payout ratios.

Among all these studies some empirical evidences has congruency to the theoretical
assumptions while some other shows that there exists difference between what is
observed and what theory suggests. Although there is no consensus solution for the
subject of dividend policy, however many studies are going on this field in order to
obtain a strong theoretical and empirical analysis on dividend and solve this finance
puzzle. With respect to factors affecting corporate dividend policy, the majority of
respondents gave the first priority to earnings, second to availability of cash, the third
priority to past dividends and fourth priority to concern about maintaining or increasing
stock price (Pradhan and Adhikari, 2004). Thus, it is utmost need to conduct the
research on determinants of dividend policy that will help unfold the puzzles regarding
dividends and can have some clear indication of relationship between theory and
practices in Nepalese perspective. In that case, this study attempts to analyze the trend
pattern and relationship of dividend payouts and its determinants namely net profit,
cash flows, size, market to book ratio, number of major shareholders, debt to equity
ratio and slack.

1.3. Research Questions

In examining the dividend payout behaviors of Nepalese commercial banks, this study
has addressed the following research questions:

a. What are the pattern and trends of dividend payouts and its determinants?
b. What properties and movements do the dividend payout shows with respect to
factors affecting it?
c. What are the major factors affecting the dividend payouts of commercial banks in
Nepal?
d. What are the major determinants of dividend payouts in domestic private banks?
e. What are the major determinants of dividend payouts in foreign joint venture
banks?
7
f. What is the relationship of dividend payout ratio with net profit, cash flows, size,
market to book ratio, number of major shareholders, debt to equity ratio and slack?
g. What are the similarities and dissimilarities of the dividend payout practices and
issues between domestic private banks and foreign joint venture banks?
h. What are the management views and opinions regarding dividend payout decisions
and policies?

1.4. Purpose of the Study

The major objective of the study is to examine the determinants of dividend payouts of
Nepalese commercial banks. However, the specific objectives of this study are as
follows:

a. To analyze the pattern of dividend payout and its determinants.

b. To examine properties of portfolios formed on net profit, cash flows, size, market
to book value, debt to equity, major number of shareholder, and slack.
c. To determine the factors affecting dividend payouts.
d. To assess the determinants of dividend payouts in domestic private banks.
e. To examine the determinants of dividend payouts in foreign joint venture banks.
f. To assess the management views on dividend behavior and decisions.

1.5. Significance of the Study

A number of studies has been conducted on the issues of dividend and different
empirical results across countries as well as among industries were witnessed as to the
factors that corporate managers should account while deciding dividend payment.
Limited empirical analysis has been conducted on the issue in context of Nepal.
Therefore, banking sector has been chosen for study purpose because it is important
sector of the economy which is one of the fast growing industries and relatively the
sector has better data and documents which are important for the purpose. Hence, this
study shall offer empirical result as to determine the explanatory variables of dividend
payout and trigger the interest of researchers to conduct similar study but in a broad
observation.

The study will have significance from various directions. First the study supplies
evidence whether factors identified by previous studies are the same as the ones found
to be determinants of dividend payout in developed and developing markets. Second it
8
enhance the stock of information about the determinants of dividend payout in banking
industry of Nepal and the study will be used as a reference for other researchers in this
area. Finally managers of banks may use the result of the study to review their dividend
payout decision in line with the findings of the study (Malik et al., 2013).

Furthermore, in the capital market the investor can earn return in two ways, one is
dividend and another is capital gain. So dividend is important factor for investor while
investing in equity shares. This study is helpful to investor to take rational decision like
where to invest, how to invest, what portfolio should be made to obtain maximum profit
from their investment since this study will identify the major determinants of the
dividend payouts (Knife, 2011). In Nepalese context, most of investors are investing in
the stock without adequate knowledge of the company and performance and dividend
policies. This study helps to aware the Nepalese investors. This study is useful for the
firm’s perspective too. They know the investor objective’s from this study. Basically
this study helps the investor while investing in share capital. So that they can make
correct decision at right time about the influence of dividend in market price of share
and make investment. Basically, this study can help in reducing the information
asymmetry thereby avoiding the problems of adverse selection and moral hazards.

1.6. Research Hypothesis

The major research question dealt by this study is whether the profitability, signaling
effect, ownership, leverage, size, and liquidity and investment opportunities affects the
dividend payout ratio of Nepalese commercial banks? In answering these research
questions, this study has formulated following 4 research hypotheses:

Null Hypothesis 1 H0: There is no difference on pattern of dividend payouts and

its determinants between domestic private and joint venture
banks.
Null Hypothesis 2 H0: There is no relationship between the dividend payout and
factors affecting it.
Null Hypothesis 3 H0: Determinants of dividend payout of domestic private banks
and foreign joint venture banks are not different.
Null Hypothesis 4 H0: Management views on dividend practices and issues of
domestic private and foreign joint venture banks are not
different.
9
1.7. Operational Definitions and Assumptions
This section describes and defines the various independent and dependent variables
used in this study along with the major assumptions made to conduct this study. To
analyze the dividend payout policy and ratios, this study has used total amount of
dividend payout as the dependent variable while other financial variables have been
used as the predictor or independent variable as discussed in wide body of previous
literatures. Financial variables like profitability, signaling, ownership structure,
leverage, size, liquidity and investment opportunities are the independent variables that
are expected to have deterministic power in explaining the dividend payout of the
Nepalese financial institutions. These variables of interest along with their proxies have
been defined and discussed briefly hereunder:

a. Dividend Payout Ratio

Dividend is the portion of the net profit distributed to the shareholders in the
proportionate basis. No licensed institution shall declare or distribute dividends to its
shareholders until it has recovered all of its preliminary expenses and the losses
sustained by it until the previous year, it sets aside such amount as required to be set
aside for the capital fund, risk-bearing fund and general reserve fund and the shares set
aside for subscription by the general public are sold and fully paid-up. A licensed
institution shall obtain the approval of the NRB prior to declaring and distributing
dividends (BAFIA, 2006). The dividend payout ratio in this study is the ratio of total
dividend including the cash and stock dividend as reported in the financial statement of
the sample banks of the study. The formula for calculating the dividend payout ratio can
be stated as:

Dividend Per Share

Dividend Payout Ratio =
Earnings Per Share

b. Net Profit
The level of profit is considered as an invariable starting point in the management’s
consideration of whether dividend should pay or not in any given year. Profit after tax is
used as the profitability variables in this study. The net profit of the banks is calculated

10
as the sum of net interest income, operational profit, profit from regular transactions
and deducting deferred tax to it (NRB, 2010). The balance amount of net profit shall be
transferred to “Profit and Loss Appropriation Account” under the head this year's profit
or this year's loss.

c. Market Book Value

Before publicly issuing its securities, every bank or financial institution shall obtain
approval of the SEBON in relation to the registration of the prospectus in accordance
with the laws in force relating to securities and have the prospectus registered with the
NRB (BAFIA, 2006). After the approval of the SEBON and NRB, the securities of
banks can be listed in securities market for the purpose of trading. The demand and
supply of the securities in the market determines the market price of each shares.
Likewise, banks are required to prepare the financial statements following the
guidelines mentioned (NRB, 2010). So, the banks in their book of major indicators
publish the book value per share or net worth. Market Book Value has been calculated
by dividing the market price per share by book value per share. The formula for
calculating the market to book value can be expressed as:

Market Price Per Share

Market Book Value =
Book Net Worth Per Share

d. Major Shareholder
The major number of shareholders calculated as the shareholder having more than 5%
holding and used as proxy of inside ownership structure. So far, the ownership structure
for the banks is clearly indicated by the Bank and Financial Institution Act (BAFIA,
2006). According to this act, the promoter group should hold 51 percent of the total
shares while 30 percent of minimum shares should be allotted to the general public
including the employees of the bank. In addition, block holding by institutions and the
individual shareholders is also provisioned under the act. Closely held firms are more
likely to pay dividends in response to temporarily changes in earnings than the firm will
diffused ownership.

e. Leverage

11
Leverage can be considered as another feature which has a strong impact on dividend
behavior. Leverage is calculated as ratio of debt to equity. Share capital and reserve and
surplus as the equity capital while the bonds, debentures and loan due to other banks are
the debt for the banks (NRB, 2010). Leverage ratio can be computed as:

Total Debt
Leverage Ratio=
Total Equity

f. Size of the Firm

The large firms are more likely to be mature and thus have an easier access to capital
markets and should be able to pay more dividends. Total assets have been used as the
proxy for the size of the firms. The total assets of the bank is computed as he sum of
cash in vault, cash deposit with NRB, cash deposit with other bank and financial
institutions, Money at short call, investments, loan and advances, bills purchased, fixed
assets, non-banking assets and other assets (NRB, 2010).

g. Cash Flow
A firm’s cash flow is a good measure of the firm’s liquidity and it is very important to
compare a firm’s liquidity position in relation to its dividend payment. The banks
should compute the cash flows for particular year under the headings of cash flow from
business transaction, cash payments, cash flows prior to working capital activities, cash
flow in investment transaction, cash flow from financial source transactions and income
and expenses from fluctuating in exchange rates of cash and bank deposits (NRB,
2010).

h. Investment Opportunities or Slack

The slack is the very important factor for the making the decision regarding dividend
policy. It has been calculated as the accumulated retained earnings divided by total
assets of the firm. There is no restriction on investment of government securities and
the NRB bonds while banks can only invest in shares and debentures of other corporate
bodies listed in NEPSE. Licensed institutions may invest in shares and securities of any
one corporate body up to 10 percent of its core capital maintained at immediately
preceding trimester and not exceeding the cumulative amount of such investment in all

12
the companies by more than 30 percent of its core capital (NRB, 2010). According to
the theory the presences of slack reduce the external financing requirements and
become the important factor to solve the problem of the under investment. The value of
slack can be calculated using following formula:

Accumulated Retained Earnings

Slack =
Total Assets

Some of the assumptions made for this study are listed below:

a. For the significance of the test, the significance level is assumed to be 5 percent for
ANOVA test making the confidence level 95 percent.
b. To check the problem of the multicolinearity, the value of VIF as 10 is considered
as the base point. If the results have VIF less than 10, the model do not have
significant problem of multicolinearity.
c. For Durbin Watson test the acceptable range that does not involve the problem of
autocorrelation is taken between dU and 4 – dU where dU is upper limit critical value
of DW.

CHAPTER II
LITERATURE SURVEY AND CONCEPTUAL FRAMEWORK

13
This chapter provides conceptual framework of the study and deals with review of
empirical studies associated with determinants of the dividend policy. It is divided into
three sections. First section presents an in-depth review of related studies in the context
of both developed and emerging economies. The reviews of previous studies have been
made in chronological order. This section also deals with brief review of empirical
studies conducted in Nepal. And, finally the third section highlights the conceptual
framework of this study. Conceptual framework has been developed based on the
review of literatures and brief explanation on the dividend payouts and its determinants
has also been made in same section.

2.1. Review of Literatures

This section provides a review of major empirical studies associated with determinants
of dividend policy or payout. The reviews of empirical works made on different periods
along with major conclusions are presented in this section. In addition, reviews of
related Nepalese studies have also been made.

2.1.1. Review of Studies on Dividend Policy till 1990s

The major studies regarding dividend policy of the firms till 1990s have been
summarized below in Table 2.1. The table provides the major variables under study and
the major findings of some of the empirical studies reviewed.

Lintner (1956) presented some of the more generally important results of the studies of
corporate dividend policy which had a relatively direct bearing on cyclical fluctuations
and longer term growth trends in the economy. It reviewed some of the results of the
field investigations that were most relevant in this connection. Theoretical model of
corporate dividend behavior and proceed was set to illustrate a statistical tests regarding
the adequacy and reliability of the model and the stability of the indicated patterns of
behavior and policy. Most of the discussion were run in terms of dividend decisions and
dividend policies rather than retained earnings and savings as the evidence indicated
that dividends represent the primary and active decision variable in most situations.
Savings in a given period generally were largely a by-product of dividend action taken
in terms of pretty well established practices and policies; dividends were rather seldom
a by-product of current decisions regarding the desired magnitude of savings as such.
Similarly, the primary effect of taxes on the volume of net corporate savings resulted

14
from their impact on the magnitude of net earnings which was found to be a primary
determinant of the volume of dividends-and this again can most easily be developed by
focusing on dividend decisions and policies.

Table 2.1: Empirical Studies on Dividend Policy till 1990

Studies Major Variables Major Findings
Lintner (1956) Taxation and Net earnings The primary effect of taxes on the
volume of net corporate savings
resulted from their impact on the
magnitude of net earnings was found to
be a primary determinant of the volume
of dividends.
Fama and Babiak Earnings, Taxes and Previous It implied that future earnings and the
(1968) dividend amount lagged dividends are among the crucial
factors considered before the dividend
policy decisions.
Rao and Sarma Taxes, Net profits, lagged Cash flow was found to be a more
(1971) dividends, depreciation and appropriate approximation of the
cash flows capacity variable (dividend policy).
Swamy and Rao Investment expenditures, Investment expenditure was positively
(1975) leverage, net profits, cash and leverage was negatively related
flows with dividend payouts.
Rozeff (1982) Large outside ownership, Positive relationship between the
inside ownership, risk and number of shareholders and dividend
revenues. payout while negative relationship with
risk, insider ownership and revenues.
Lloyd and Size, large outside ownership, Size had positive impact on dividend
William (1985) inside ownership, risk and while inside ownership and risk had
revenues. negative impact.
Baker et al., Future earnings, pattern of Earnings, past dividends and liquidity
(1985) past dividends, availability of had significant positive effect on
cash and stock price. current dividends.

Dividend irrelevance theory in a perfect market, without taxes and transaction costs was
proposed by Modigliani and Miller (1961). The study argued that the dividend decision
has no impact on the value of the firm so it is an irrelevant decision. The capital gains
would be equivalent to dividends in a perfect market without tax considerations or
attached transaction costs. The MM theory states that shareholder wealth will remain
unaffected by dividend policy in that without tax as a consideration, investors place
equal weight in receiving returns as dividends or capital gains as long as the firm’s
investment policy is not affected by dividend policy. Many researchers have tried to
find out the dividend payout decision and its influence on the value of the firm given
imperfect market conditions after this study.
15
The test of the Lintner model on the dividend data of 392 major North American
industrial firms for the years 1946-1964 confirmed that the firms will try to increase the
dividend only when the dividends can be sustained in future (Fama and Babiak, 1968).
It implied that future earnings and the lagged dividends are among the crucial factors
considered before the dividend policy decisions. They concluded that Lintner’s
dividend model has succeeded fairly well in explaining the dividend changes of
individual firms. However, it was argued that the validity of the results in emerging and
less developed capital markets was doubtful.

Preliminary testing of Lintner model based on aggregate time-series data from 1955 to
1965 pertaining to all public limited as well as private limited companies covering four
major industrial groups- agriculture and allied activities, mining and quarrying,
processing and manufacturing of metals and chemicals and their products of India was
carried out by Rao and Sarma (1971). The study tested three variants of Lintner’s
equation: First, with profits net of taxes and lagged dividends as explanatory variables;
second, with net cash flows substituting net profits; and third, with depreciation entered
as a separate explanatory variable rather than as part of the capacity variable. The
results showed that Lintner model adequately explains the dividend behavior of Indian
corporations. Cash flow was found to be a more appropriate approximation of the
capacity variable (dividend policy) for industries such as cotton textiles, iron and steel,
paper, electricity generation and supply, whereas depreciation had a separate effect in
the case of jute textiles and engineering industries.

In an attempt to study the determinants of the dividend payouts in Indian firms, Swamy
and Rao (1975) found investment expenditures have a positive and significant
coefficient with dividend payouts while external finance (leverage) had a negative and
significant coefficient in the preferred equation. However, the magnitude of the impact
of two variables was observed to be very small. The findings of the study suggested that
the firms with more investment opportunities or slack paid more dividends while highly
leveraged firms paid less dividends. The results observed for the investment
opportunities and dividend payout was surprising and inconsistent with empirical
evidences. With regard to methodological issues, the study tried Lintner model along
with alternative specification of profit variable i.e., net profits after tax and cash flow of

16
external finance. The study opted in favour of Lintner’s model with net profits and
confirmed that the basic Lintner model seemed to provide adequate explanation of the
dividend behavior.

In an empirical investigation 1000 US companies from 64 different industries on the

effect of two agency factors on dividend payment, Rozeff (1982) argued that as outside
equity holders own a larger share of the equity, they will demand a higher dividend as
part of the optimum monitoring package. The study tested the correlation between the
dividend payout ratio and a number of company factors. The study revealed that there is
a positive relationship between the number of shareholders and the dividend payout
ratio. It was argued that companies with a larger amount of external shareholders have
to pay higher dividends in order to reduce the agency conflict. The results also indicate
that there is a negative relationship between dividends payout ratios and risk, insider
ownership and growth (in revenue). The negative relationship between dividends and
insider ownership is also related to the agency conflict, since a large part of the share is
held by insiders the company does not have to pay high dividends. It was also stated
that future growth opportunities have a greater impact on the dividends than past
realized growth.

In an attempt to test the applicability of Rozeff (1982) results in another period, Lloyd
and William (1985) presented a research regarding the relationship between the
dividend payout ratio and the company’s selected factors. This study added size as one
additional variable to the tested factors. The study argued that large companies tend to
have a better access to capital markets, which makes them less dependent on internally
generated funds which in turn contributes to that they are able to pay higher dividends.
This argument was supported by empirical data and it showed a positive relationship
between a firms dividend payments and the size of the company. Apart from size, the
study found the same results as Rozeff (1982) and dividend payments are negatively
correlated to risk, insider ownership and growth (in revenue). It was stated that risk is
negatively correlated to dividend payments since riskier companies face higher
uncertainty and therefore chose to retain earnings instead of paying dividends to
shareholders.

17
In a survey of the management views on dividend policy decisions, Baker et al., (1985)
selected 562 NYSE firms were from three industry groups: utility, manufacturing, and
whole-sale/retail. A mail questionnaire was used to obtain information about corporate
dividend policy. This study followed the Lintner's classic 1956 model which found that
major changes in earnings "out of line" with existing dividend rates were the most
important determinant of the company's dividend decisions. The most highly ranked
determinants were the anticipated level of a firm's future earnings and the pattern of
past dividends. The high ranking of these two factors was consistent with Lintner's
findings. A third factor cited as important in determining dividend policy was the
availability of cash. Although Lintner does not directly address this determinant, it was
noted that liquidity was an important managerial consideration. A fourth major
determinant was concern about maintaining or increasing stock price. This concern was
particularly strong among utilities that ranked this factor second in importance.

2.1.2. Review of Studies on Dividend Policy during 1990s

Empirical investigations made by different authors in context of various capital markets
have been briefed Table 2.2 along with the major findings. The table is followed by the
reviews of the same literatures.

The survey of 1,000 largest US firms in terms of investment, financing, and dividends
decisions showed that the important determinants of dividends policy are the current
and past profit level, the volatility of earnings and the expected future earnings in term
of the growth in earnings (Pruitt and Gitman, 1991). It was also found that prior years'
dividends are the important factor that influences the current dividends. Therefore, it
was argued that the consistency in the level of their firms’ dividends is the significant
factor when companies are making the dividends policy decisions. In addition,
companies are likely to follow a steady stream of dividends rather than any major
change in dividends.

In an attempt to indentify the determinants of corporate capital structure and dividend

policy, Gilsenan (1994) incorporated multiple measures of leverage and investment
opportunities in order to determine whether contradictory results of previous studies
were due to spurious correlations. In particular, the impact on dividend policy choice of
firm level differences in investment opportunities, firm size, regulation and profitability
was examined. A positive association between leverage and both assets in place and
18
firm size was found. In addition, no support was documented for an inverse relationship
between leverage and profitability with dividends. Results of tests involving regulation
were inconclusive. Moreover, evidence of a positive association between dividends and
both firm size and growth options was presented. Dividends and leverage were found to
be negatively correlated, implying some redundancy in the benefits each provides to the
firm.
Table 2.2: Empirical Studies on Dividend Policy during 1990s
Studies Major Variables Major Findings
Pruitt and Gitman Current and past earnings, Current earnings and expected
(1991) volatility of earnings, earnings had positive relationship
expected future earnings and while volatility had negative
lagged dividends relationship with dividend payouts.

Gilsenan (1994) Leverage, investment Positive association of leverage and

opportunities, firm size and size with dividends was found while
regulation. negative relationship with leverage
and profitability was confirmed.
Lasfer (1996) Corporate tax rate, personal Corporate tax rate was positively and
tax rate personal tax rate was negatively
associated with dividend payouts.

Holder et al., (1998) Size, free cash flows, risk, Size and free cash flows affects
internal ownership and dividends positively while risk,
growth internal ownership and growth affects
negatively.
Dsounza (1999) Institutional shareholdings Both institutional ownership and
and insider ownership insider ownership had inverse
relationship with dividend payouts.

Another extension of the Lintner model was proposed by Lasfer (1996). The study
employed tax exhaustion and discrimination variables in the Lintner's original model. In
this modified model the desired dividends level D' was hypothesized to be a function of
current earnings, firm's corporate tax (tax exhaustion) and the personal income tax rate
of shareholders (tax discrimination). For this model, the signs of tax exhaustion
(corporate tax) and discrimination variables (personal tax) were expected to be
respectively positive and negative. This model was estimated for 108 industrial and
commercial British companies over the period 1973-1983. The estimation results
showed corporate tax has positive relationship while personal tax had negative
relationship with dividend levels. The above literature, therefore suggested that the
Lintner model describes well the dividend behavior of firms operating in developed

19
countries. However, it was not clear whether the Lintner model is applicable to firms in
emerging markets.

A study regarding the determinants of dividend policies in United States among 477 US
companies for period of 1983-1990 indicated that there is a positive relationship
between dividend payout ratio and size (log of sales) and the free cash flow (Holder et
al., 1998). The study stated that large companies have easier access to capital markets
and should therefore be able to pay higher dividends compared to small firms.
Companies with high free cash flow also tend to pay higher dividends and this supports
the agency theory, companies with larger free cash flow have to pay higher dividends in
order to reduce the agency conflict. A negative relationship was discovered between
dividends and risk (standard deviation of returns), internal ownership and growth (in
sales).

Dsounza (1999) used international data to examine the effects of institutional holdings
on dividend payment. This variable was used as a proxy for agency cost mitigating
factor and was therefore hypothesized to have a negative effect on dividends. The
empirical results were consistent with this hypothesis and thus suggesting that firms
with significant institutional ownership have relatively low payout ratios. The empirical
findings showed that the insider variable was negatively correlated with payout ratio but
was insignificant for the regulated sample. This implies that the agency cost variables
do not significantly influence the dividend behavior thus supporting the hypothesis that
dividend payment reduces agency costs.

2.1.3. Review of Studies on Dividend Policy during mid 2000s

Recent studies have initiated the empirical test of determinants of the dividend policy in
case of the emerging markets as well. Such studies are important in a sense that the
findings of such studies may have empirical validation in Nepal too. The studies on this
matter from 2000 to 2005 have been summarized in Table 2.3 along with major
variables and findings.

Table 2.3: Empirical Studies on Dividend Policy during mid 2000s

Studies Major variables Major Findings

20
 Fama and French Firm size, profitability and Firm size and profitability had
(2001) growth opportunities positive relationship and growth
had inverse relationship with
dividend payouts.
Jose (2001) Earnings, leverage, size, Earnings and leverage are
growth and regulation positively and negatively related
with dividend respectively. No
significant impact of growth.
Baker and Powell Tax and agency variables. Dividends are used as the signals to
(2002) the market.
Ho (2003) Profitability, size, liquidity, Positive effect of size in Australia
leverage, risk, asset mix and and positive effect of liquidity in
growth. Japan. Risk was negatively related
with dividends in Japan.
Mehar (2003) Profit, liquidity, investment Dividends are positively affected
opportunities and large by profits and large shareholder
shareholders. concentration while negatively by
liquidity.
Al-Deehani (2003) Shareholder’s requirement of Investment opportunities and
income, investment liquidity had negative association
opportunities and liquidity with dividends.
Eriotis (2005) Distributed earnings and size Earnings and size are significant
of the firm. factors affecting dividend
decisions.

Fama and French (2001) empirically analyzed the importance of firm size, profitability
and growth opportunities in the firm's decision to pay dividends among non financial
and non utility firms listed in NYSE, AMEX and NASDAQ for the period of 1963 to
1999. The evidence suggested that three fundamentals variables namely profitability,
investment opportunities, and size are factors in the decision to pay dividends. The
study showed that dividend payers tend to be large, profitable firms with earnings on
the order of investment outlays. In addition, the study argued that firms that have never
paid are smaller and they seem to be less profitable than dividend payers, but they have
more investment opportunities, higher asset growth rates, and their investment outlays
are much larger than their earnings.

Using the data from the year 1991 to 1998 for 484 European banks belonging to 22
countries, Jose (2001) found a positive relationship between earnings and dividends
such that an increase in profit enables higher payments. The study argued that in market
oriented countries, financial entities will try to increase their market presence through
their dividend policy in order to have a good company reputation, while in bank

21
oriented countries, the most profitable entities pay higher dividends to reduce
managerial discretions in the usage of funds. The study also documented that the
companies with a higher level of debt pay out lower dividends. In this case, the good
reputation the company seeks is with its creditors to ensure the attainment of debt in the
future. It will therefore fulfill the restrictions to dividends proposed by the debt
contracts - principally in market oriented countries or by legal regulation more common
to bank oriented countries. However, no significant dependence between growth
opportunities and dividends was reported contrary to research that a company with
future investment projects obtains higher values of the variables; require great
quantities of financing which will lead them to put the brakes on dividend payments.
Lastly, a negative influence of size with respect to the dividend decision was found.

A Revisit on “Managerial Perspectives on Dividend Policy” provided new evidence

about how managers view dividend life cycles and residual dividend policy. The
evidence showed that managers stress the importance of maintaining dividend
continuity and widely agree that changes in dividends affect firm value. Managers give
the strongest support to a signaling explanation for paying dividends, weak to little
support for the tax-preference and agency cost explanations, and no support to the bird
in the hand explanation (Baker and Powell, 2002). The firms studied were generally in
the maturity stage of their lifecycle, authors expected the views of senior financial
managers to resemble those of NYSE-listed firms with a similar dividend pattern. The
initial group of firms consisted of all 651 firms whose stocks were traded on NASDAQ
that paid eight consecutive quarterly cash dividends during 1996 and 1997. Standard &
Poor’s COMPUSTAT was used to identify those firms.

A comparative study of dividend policies in Australia and Japan was conducted by Ho

(2003) which examined the panel data from the constituent stocks of the ASX 200
Index of the Australian stock market and the Nikkei 225 Index of the Japanese stock
market from 1992 to 2001 using fixed effects regression models. The results supported
the agency, signaling and transactions cost theories of dividend policy. The study
concluded that out of all the regressed variables of profitability, size, liquidity, leverage,
risk, asset mix and growth, the dividend policies were affected positively by size in
Australia and liquidity in Japan and negatively by risk in Japan only. However, all other
variables remained insignificant in explaining the dividend payouts. An industry effect

22
was also found to be significant in both Australia and Japan which indicated the
importance of the industry in which a firm competes.

A verification of a positive relationship between dividend and net profit after tax was
provided by Mehar (2003). An investigation of the long-term return behavior of
dividend-changing firms concluded that about 23 percent additional profit was only
transformed into dividend while the remaining profit of about 77 percent were utilized
for additional investment. In addition, the study observed a negative relationship
between dividend and liquidity position of a firm. That is, if a firm has a good liquidity
position, it does not mean that it will pay higher dividend, in fact the evidence supports
for poor dividends when firms are liquid. The higher retention shows that firms adopt a
self-financing way for growth and expansion. Moreover, the study found that a large
number of shares held by the board lead to high dividends or low retention, which leads
to low reserves funds. The study concluded that if a company has a large concentrated
ownership then chances of dividend would be higher, because by such a manner
dividend will go into the pockets of directors and that the chances of dividend payment
will be low if a significant large amount is paid as dividend to outsiders.

In an effort to present empirical results in the area of dividend policy determinants in

Kuwait, Al-Deehani (2003) highlighted the top management's perception of value
relevant and value-irrelevant determinants of dividend policy. For the study purpose
data were collected from primary sources through conducting the survey of CEOs for
all Kuwaiti companies listed on the Kuwait Stock Exchange were asked to answer nine
questions concerning their views about the motives to pay dividends. The sample
companies represented six sectors; banking, investment, insurance, manufacturing,
services and food. The study found shareholder’s requirement of income as the most
important factors that determine the dividends while signaling effect to increase share
price was the second most important. Among others investment opportunities and the
liquidity was found to be least preferred factors in deciding to pay the dividends. It was
concluded that the high level of significance for group 1 indicated that all sectors agree
on the relative level of importance of clientele-effect as a value determinant of dividend
payment, which rejects the irrelevance proposition of dividend to the value of the firms
proposed by Modigliani and Miller (1961). Similarly the high level of significance for
group 2 indicated that all sectors agree on the relative level of importance of the motive

23
"signal for company’s future profitability" as a motive for paying dividends, which also
rejects the irrelevance notion of the dividend policy.

A panel sample of a large number of firms listed on the Athens Stock Exchange for the
period 1996 – 2001 suggested that distributed earnings and size of firm include an
indication about the firm’s dividend (Eriotis, 2005). The study also tested previous
results of the Greek market that Greek firms have a long run target dividend payout
ratio. The model used in this study included two variables that determine the corporate
dividend decisions, the distributed earnings and the size of the firm. The results of this
model provided a significant estimation with explanatory power. It was found that the
dividend can be expressed as the long-run target dividend payout represented by both
the changes in dividend and in distributed earnings and an adjustment to distributed
earnings and last year’s dividend of the firm. Thus, on the evidence so far available, it
appeared that the Greek sample companies have a general dividend policy: to distribute,
each year, dividend according their target payout ratios, which was adjusted to
distributed earnings and size of the firm.

2.1.4. Review of Studies on Dividend Policy after 2005

Most recent studies on factors influencing the dividend policy and decisions have been
briefly discussed along with the major findings and main variables of interests. Table
2.4 presents the studies conducted after 2005.

In an examination of the determinants of dividend payout ratios of listed companies in

Ghana, Amidu and Abor (2006) performed an analysis using data derived from the
financial statements of firms listed on the Ghana Stock Exchange during a six-year
period. Ordinary Least Squares model was used to estimate the regression equation.
Institutional holding was used as a proxy for agency cost. Growth in sales and market-
to-book value were also used as proxies for investment opportunities. The results
showed positive relationships between dividend payout ratios and profitability, cash
flow, and tax. The results also showed negative associations between dividend payout
and risk, institutional holding, growth and market-to-book value. However, the
significant variables in the results were profitability, cash flow, sale growth and market-
to-book value.
Table 2.4: Empirical Studies on Dividend Policy after 2005
Studies Major Variables Major Findings
24
 Amidu and Abor Institutional Profitability and cash flows are
(2006) shareholdings, growth, positively related with dividends.
market to book value, Institutional holdings, growth and
investment opportunities, market to book value are negatively
tax, cash flows and related.
profitability.
Al-Malkawi (2007) Number of shareholders, Age, size and profitability showed
insider ownership, positive relationship with dividends
profitability, age, size and while leverage indicated negative
leverage. relationship.
Kanwal and Kapoor Liquidity, profitability Liquidity and profitability had
(2008) and variable earnings. positive impact on dividend payouts.
Chen and Steiner Ownership variables and Ownership structure is most important
(2009) tax. determinant of dividend policy.
Kinfe (2011) Profitability, growth, Liquidity and lagged dividends are
lagged dividends, size, most significant factors explaining the
liquidity and leverage. dividend payouts.
Essa et al., (2012) Cash flows, price to book The study found positive relationship
value ratio, dividend between dividends and cash flows,
yields, EBIT and EPS. dividend yields, EBIT and price to
book ratio.
Abu (2012) Net income, cash and Net income and liquidity have
equivalents, earning per positive impact on dividends. P/E
share, P/E ratio. ratio and revenues or sales had no
significant effect.
Malik et al., (2013) Liquidty, profitability, Positive relationship of dividends with
earning per share, growth, liquidity, leverage, size and EPS was
leverage and size. found. Growth and profitability had
insignificant impact on dividends.

An application of the Tobit model in studying determinants of corporate dividend

policy in Jordan documented that the number of stockholders seems to not be related to
dividend policy in Jordan (Al-Malkawi, 2007). In addition, the fraction of shares held
by insiders, the second proxy for the agency costs hypothesis, had negative impact on
the level of dividends paid. Similarly, the existence of government or its agencies in a
firm’s ownership structure (controlling shareholder) affected the amount of dividends
positively. By and large, the evidence was consistent with the agency costs explanation.
The firm’s age, size, and profitability positively and significantly affected its dividend
policy. The use of age, and especially age squared as proxies for growth has not been
used in empirical testing of dividend policy, it was therefore suggested interesting
avenues for future research. The analysis also found that a firm’s financial leverage was
significantly and negatively related to its dividend policy. The study demonstrated that
much of the existing theoretical literature on dividend policy can be applied to an
25
emerging capital market such as Jordan. 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.

Liquidity and profitability have been identified as the important determinant of

dividend payout ratios (Kanwal and Kapoor, 2008). The study was carried out to
investigate the determinants of dividend payout ratios in Indian IT sector companies.
Source of data were taken from period 2000-2006, which covered both recessionary and
booming phase of IT industry. The data was sourced from Prowess database of CMIE.
Statistical techniques of correlation and regression were used to explore the relationship
between key variables. The study concluded that profitable and liquid firms pay more
dividends ascertaining the positive relationship between these two variables with the
dividend payouts. Moreover, it was also found that even if there is year to year
variability in the earnings of the firms they can easily pay huge dividends. It indicates
negative relationship with the slack i.e. investment opportunities.

The panel data of Korean banks during 1994-2005 showed that consistent with the
general findings of the previous research, the banks with higher profitability or
performance pay more dividends (Lee, 2009). Furthermore and more importantly, the
study found very strong, significant, and consistent evidences that the safer banks pay
more dividends. In the test for the partitioned sample, the tendency of the banks with
higher safety and profitability to pay more dividends was observed more strongly and
transparently. Considering that banks are subject to monitoring and surveillance of
regulator about their operation and riskiness in addition to the pressure form capital
market, dividend policy of banks would be more closely associated with their riskiness
than other types of industries. To examine how the dividend policy of the banks which
was measured by the payout ratio was associated with various measures capturing the
bank’s level of safety (or riskiness) and profitability, variables like capital-to-asset ratio,
loan-to-asset ratio, the ratio of non-performing loans-to-asset, the ratio of investment
securities-to-asset, return on asset, and the payout ratio were estimated.

The data of 76 non-financial sector companies listed in NZSE during 1991 – 1999 and
76 firms revealed that a dividend payout ratio was positively related to the degree of
ownership dispersion and negatively related to the degree of insider ownership (Chen

26
and Steiner, 2009). Further, firms that experienced recent growth in revenues tend to
pay lower dividends. There was a weak evidence to support the imputation tax credit
hypothesis and found no evidence to support the dividend stability theory and the
signaling theory. Author recommends that the ownership structure seemed to be the
most important determinant of dividend policy for NZSE firms. The objective of this
research was to investigate the extent to which four theories of dividend policy, namely,
signaling theory, agency theory, residual theory and stability theory of dividends,
together with the dividend imputation system in New Zealand influence corporate
dividend policy of New Zealand firms listed on NZSE.

In an attempt to extend findings of previous studies regarding the determinants of

dividend payout ratios, Gill et al., (2010) examined the same for the American service
and manufacturing firms. The study constructed a database from a selection of
approximately 500 financial-reports announced by public companies in year 2007 out
of which only 266 financial reports were usable. The selection was drawn from a
random sample of service and manufacturing companies. The study found that for the
entire sample the dividend payout ratio was the function of profit margin, sales growth,
debt-to-equity ratio, and tax. For firms in the Services industry the dividend payout
ratio was the function of profit margin, sales growth, and debt-to-equity ratio. For
manufacturing firms it was documented that dividend payout ratio is the function of
profit margin, tax, and market-to-book ratio. It also found that the results were different
when the dividend payout ratio is defined as the ratio between the cash dividend that the
after-tax cash flow, not the after tax earnings of the companies. In addition, the study
did not find any significant relationship between leverage ratio and the dividends.
Profitability was positively related with dividends in service and negatively in
manufacturing firms. Thus, the study argued that dividends are industry specific. The
study found no significant relationship between cash flows and dividends. Moreover,
tax and market to book value was positively related with dividends while growth was
found to have negative impact on dividend payouts.

Yiadom and Agyei (2011) investigated the determinants of dividend policy of banks in
Ghana. Panel data covering the five-year period 1999 – 2003 were analyzed within the
framework of fixed and random effects technique. The results showed that profitability,
debt, changes in dividend and collateral capacity were the statistically significant

27
factors which positively influenced dividend policy of banks in Ghana. On the other
hand, it was found that growth and age influenced bank dividend policy negatively and
significantly. Although, surprisingly, cash had a negative relationship with dividend
policy, the results were not significant. Consequently, the major determinants of
dividend policy of banks were profitability, leverage, changes in dividend, collateral
capacity, growth and age. In all, the study found support for the profitability theory and
agency cost theory and partial support for life cycle theory even though no support was
found for the free cash flow theory.

An empirical study on the determinants of dividend payout of banks in Ethiopia failed

to establish significant relationship between dividend payouts and profitability, growth
(investment opportunities) and leverage (Kinfe, 2011).The study used data for six
sample banks of Ethiopia from 2006 to 2010 and found Ethiopian banks more rely upon
past dividends to fix their dividend payments. The result also showed the positive
relationship between firm size and dividend payout ratio. Furthermore, the study
concluded that the firm’s liquidity had negative relationship with dividend payout. By
using the Lintner’s model, the study finally concluded that banks in Ethiopia took into
account of agency conflicts, previous year’s dividend and liquidity, more than
profitability, leverage and growth when making decision to pay dividends.

Dividend payout policy has potential roles to be considered as part of the firm’s
strength to operate smoothly in the corporate world (Abu, 2012). The study argued that
the profitability along with other essential factors has significant impact on dividend
decisions of a corporation. Thus, it becomes an important issue for firm’s to identify the
factors determining dividend payout policy. Considering the existing literatures on
dividend determinants, the paper attempted to construct an empirical model for selected
commercial banks in Bangladesh and provide recommendations in order to develop the
dividend payout policy for banks and other industry listed in Dhaka and Chittagong
Stock Exchange (DSE & CSE). The empirical findings revealed that current earnings
and liquidity has potential roles for firms to determine payout policy. In addition, EPS
was found to have negative relationship with dividend payouts. Likewise, the study
identified NI had positive effect on dividend payout with 5% to 10% significance at
different estimations. In order to the estimations, the striking point is that banks revenue
(Sales) had no effect on dividend payout for the selected samples. Thus, higher revenue

28
always not an essential factor to determine dividend payout for banks. At the same time,
P-E ratio had no effect dividend payout policy. The banks with high liquidity or cash
and equivalents (CA) may have significant role for dividend payout but the published
bottom line CA figure may not correctly reflect the banks performance in order to the
findings. The estimated payout ratio is much reflected to firm’s performance on NI
rather than CA. It concluded that dividend payout of commercial banks is based upon
NI rather than other variables selected in the analysis.

In attempt to shed light on factors shaping dividend policy decisions, Essa et al., (2012)
used different regression models containing dependent and independent variables to
determine the most important factors that affecting on dividends policy decisions in
industrial corporations listed in Amman stock exchange. The research population
contained all industrial corporations listed in Amman stock exchange that equal 77
companies according to Amman stock exchange company guide 2011, and selected a
statistical simple random sampling of 25 companies for the period of 2005 to 2011.
Based in the data of these selected samples, the study analyzed 1225 observations in
order to conduct the target results. After using the appropriate statistical analysis, the
study found a positive relationship between dividends and net cash flows, earnings
before interest and tax, earning per share, price to book value ratio, dividends yield, and
firm size. It was further confirmed that earnings per share had the highest effect on
dividends, followed by dividends yield and price to book value. In addition, the study
also found a negative relationship between dividends and debt ratio i.e. leverage. Final
results indicated that large firms have a greater impact on dividends policy decisions
than small firms.

Naser et al., (2013) explored the perception of managers of companies listed on Abu
Dhabi exchange about dividend policy. Majority of the practicing managers of
companies listed on Abu Dhabi Securities Exchange were asked to reflect their
experience about different aspects of dividend policy. The bird in hand theory received
the highest support. The current study extends limited previous research based on
questionnaire and survey related dividend policy. It thus provided new evidence from
an emerging and fast growing economy. It was also evident from the analysis that
external factors related to the economic conditions together with the state of the capital
market and lending conditions are all important factors in formulating dividend policy.

29
An empirical analysis of panel data of 100 financial and non-financial firms over the
period 2007 to 2009 found that liquidity, leverage, earning per share, and size are
positively related to dividend, whereas growth and profitability are found to be
insignificant determinant of dividend policy (Malik et al., 2013). The study examined
the determinants of dividend policy of firms listed on Karachi stock Exchange and part
of KSE-100 index. The results from probit model estimation revealed 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 was 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 was used. All financial
factors, as independent variables, were calculated in terms of percentage except for the
sales which was in log form. The dependent variable Dit was also used in percentage of
dividend paid per share. Secondly, data set was constructed so as to apply probit model
where the study categorized firms among dividend-paying and non-dividend-paying,
and all independent variables were taken as three years averages.

Dividends decision constitutes one of the most crucial business decisions as it affects
the organization’s value and shareholders’ wealth (Akinyomi, 2013). This study
examined the opinions of managers on factors influencing dividends decision in
Nigerian listed firms. The study employed survey research design and obtained primary
data from selected managers through the administration of questionnaire. The result of
the study revealed that pattern of past dividends, level of current earnings, current
degree of financial leverage, availability of alternative source of capital; liquidity
constraints such as availability of cash, growth and investment opportunities have
significant influence on dividend decision in Nigeria. The study recommended that
future researchers should investigate the relationship between dividend payment and
firms’ value.

2.1.5. Review of Empirical Studies in Nepal

Empirical studies on determinants of dividend policy and payouts in Nepal are limited.
However, some of the important studies have been carried out is this issue in context of

30
Nepalese enterprises mainly the financial institutions. These studies have been
summarized in Table 2.5.

Table 2.5: Empirical Studies on Dividend Policy in Nepal

Studies Major Variables Major Findings
Pradhan and Earning, availability of Earnings, availability of cash and past
Adhikari (2004) cash, past dividends, dividends comes under top priority
increasing stock price or respectively to decide dividends by
signals. managers.
Paudyal (2005) Net current earnings, Current dividends have significant
liquidity and past positive relationship with all the
dividends. variables under study.
Ghimire (2005) Earnings per share, net Earnings per share and net profits
worth, net profits and affect the dividend behavior of banks.
market price per share.
Adhikari (2010) Stock price, Cash dividends There is no existence of dividend
clientele effect.
Joshi (2011) Dividend per share, market Stock price and dividend per share is
price per share, dividend positively related.
yield, price earnings ratio
Bhandari and Price earnings ratio, net EPS affect dividend positively and
Pokharel (2012) worth, total number of MPS affect negatively. P/E ratio did
shares, earnings per share not have any impact on dividends.
and lagged price earnings
ratio.

A survey of the views of 135 practicing managers on dividend policy of 50 large

Nepalese enterprises revealed that that managers of Nepalese enterprises assign the first
priority to earning, second priority to availability of cash, the third to past dividend,
fourth to concern about maintaining or increasing stock price (Pradhan and Adhikari,
2004). In addition, this study found that the managers give the third priority to the
dividend decision in the large Nepalese enterprises after financing and investment
decisions. Moreover, it was confirmed that cash dividend is paid to communicate the
shareholders that their companies are doing good. Majority of the managers do not
conceive the dividend decision as a residual decision and believe that announcement of
earnings of the companies help to push up the market price of the share.

Both primary and secondary data were used to analyze the dividend policy relationship
of banks and insurance companies. Data were obtained from financial statement of
listed companies and annual reports of concerned banks and insurance companies.
31
Multiple regression models were used for the analysis found the current net earnings as
the most important determinant of dividend payouts followed by liquidity and the past
dividends (Paudyal, 2005). The significant positive relationship between the earnings,
liquidity, past dividends and the current dividends was documented. Likewise, majority
of the company paid cash dividend but paid stock dividend when they had no cash to
pay dividend.

In an attempt to highlight the dividend behavior of Nepalese commercial banks,

Ghimire (2005) analyzed the relationship of dividend with earning per share. The study
also aimed to provide the suggestion and recommendation to concerned authority in
making their policy decisions relating in dividend payout ratio. Secondary data were
used and the financial statement of five years from 1994/96 to 1999/99 were taken for
commercial banks and from 1994/95 to 1998/99 taken for insurance companies from
respective firms and websites. Simple and multiple- linear regression analysis was used
to study the relationship. The major findings of this study included a change in dividend
per share affects the market price per share in stock market differently in different
commercial banks, a change in dividend per share affected the net worth differently in
different commercial banks in Nepal, the dividend behavior of commercial banks in
Nepal was not uniform and the earning per share and net profit affects the dividend
behavior differently in different commercial banks.

Taking financial indicators of 8 commercial banks for the period of 1996/97 to 2006/07,
Bhandari and Pokharel (2012) attempted to elucidate the dividend practices of
commercial banks of Nepal. Abound by controversies and unpredictability, this study
concluded that commercial banks of Nepal do not show uniform trend of dividend
policy. Dividend policy practiced by commercial banks of Nepal was neither fully
explained by residual theory nor stable theory. It was found that dividend per share had
significant positive relationship with earnings per share while negative with price
earnings ratio and net worth. However, no significant relationship was observed
between dividends and total number of shares. Finally, it was revealed that commercial
banks of Nepal generally made dividend policy based on earning from the share. It
concluded, higher the earning from share, more likely to increase dividend per share
whereas market value of share negatively explains the dividend practices and lagged
price earnings ratio does not explain dividend practices.

32
In an attempt to examine the contention that dividend has a strong effect than retained
earnings in developed countries, Joshi (2011) studied the impact of dividends on stock
price in the context of Nepal particularly in the banking and non-banking sector. A
multivariate linear regression analysis has been applied in which current market stock
price was taken as a dependent variable and four other variables namely dividend per
share (DPS), retained earnings per share (REPS), lagged price earnings ratio (P/E ratio)
and lagged market price per share (MPS) as the explanatory variables. The overall
conclusion drawn in this study revealed that the impact of dividends is more
pronounced than that of retained earnings in the context of Nepal. Dividend has a
significant effect on market stock price in both banking and non-banking sector.

The pre-dividend anticipatory price rise tends to be more concentrated in a week before
the ex-dividend date. This finding implies that the last one week before the ex-dividend
date is a good time for an investor to buy stocks other thing remaining the same
(Adhikari, 2010). The dividend clientele effect was examined using survey data
retrieved from 126 responding investors while ex-dividend date effect and stock price
behavior were analyzed using secondary data of 52 and 40 cash dividend
announcements respectively. The descriptive, correlational, and causal-comparative
research designs were adopted in the study. The study revealed that there is non-
existence of dividend clientele effect and the stock price drop-off is 68.5 percent of cash
dividend on ex-dividend date.

2.2. Conceptual Framework

Dividend policy has drawn attention from a number of researchers. One of the most
famous studies in this respect is Miller and Modigliani‘s (1961), whose hypothesis
asserts that the cash dividend policy is not important because it has no effect on a
company‘s value and thus does not affect a company owner‘s wealth. This is due to the
fact that companies follow a residual dividend policy which is based on reinvestment of
corporate profits in the available investment opportunities with a positive net present
value and then the distribution of the surplus cash as a cash dividend to shareholders.
Miller and Modigliani’s hypothesis aroused controversy among researchers. An
important study opposing Miller and Modigliani is that of Partington (1985) which
claims that in practice companies do not follow the residual dividend policy as dividend
33
decisions are taken independently from the investment policy. However, even today
controversies continue without arriving at any decisive results.

The conceptual model proposed by Ahmad and Javid (2009), has been employed as the
conceptual framework of this study. The conceptual model includes dividend payout
ratio which is used as the dependent variable and independent variables are net profits,
market to book value of share price, number of major shareholders, leverage ratio, total
assets, cash flows and slack. The relationships between the dividend payout ratio and its
determinants have been shown in Figure 2.1.

Figure 2.1: Conceptual Framework of the Study

Independent Dependent
Variables Variable

Profitability Net Profit

Signals MBV

Ownership MSH

DIVIDEND
Leverage Debt/Equity
PAYOUT

Size Total Asset

Liquidity Cash Flows

Investment
Opportunities Slack

a. Net Profits and Dividend Payouts

According to Fama and French (2001), the profits tax represents the capacity of
corporation to pay dividends and thus it has a positive relationship with dividends.
34
Besides that, the level of profit is considered as an invariable starting point in the
management’s consideration of whether dividend should pay or not in any given year.
Having said that, it is obvious to say that a firm in profit pays higher dividends;
however, some empirical studies have rejected this notion. Among others, Gilsenan
(1994) found negative impact on current dividends. In addition, Knife (2011) and Malik
et al., (2013) found no significant relationship between the profits and the dividends.

b. Market to Book Value and Dividend Payouts

It has been empirically proven that most of the firms look after signaling the market
through its dividend policy. The market value divided by the book value of equity is the
signal for the shareholders that firms pay dividends smoothly and vice versa. Baker et
al., (1985) found that managers do take certain dividend policy in order to increase the
stock price of the firm. Same finding was documented by the Pradhan and Adhikari
(2004) in context in Nepal. Market to book value ratio is a proxy for the signaling effect
of the firm. Among others, Amidu and Abor (2006) found the significant negative
relationship between the market to book value ration and the current dividend payouts.
In contrast, Essa et al., (2012) reported the positive relationship with dividends.

c. Major Shareholders and Dividend Payouts

According to the Rozeff (1982), the solution of agency cost is the structure of
ownership of the firms. The study found positive relationship of dividends with number
of shareholders while inverse relationship with insider ownership. Lloyd and William
(1985) and Holder et al., (1998) also confirmed the negative relationship between the
insider ownership and the dividends. The study argued that when the shares are
concentrated within the insiders, they prefer retention of the profits due to the fact that
they meet their cash needs with the compensations and benefits.

d. Debt/Equity and Dividend Payouts

Debt equity ratio (capital structure) can be considered as another feature which has a
strong impact on dividend behavior. According to Al-Malkawi (2007), the demand for
external finance by the company usually arises on account of constraints imposed by its
internal resources since the company cannot continue with the investment opportunities
with the limited internal resources. The study documented inverse relationship between
the leverage and dividends. Baker and Powell (2002) also stated that firms with less

35
financing outside will lower dividend payouts. In his research, he states that firms with
higher levels of debt will need higher levels of liquidity to allow payoffs on potential
implicit claims and firms will normally choose to use more equity instead of financing
outside to avoid costs of financial distress. However, Jose (2001) found positive
association between the leverage and the dividend payouts. Their empirical results from
the research provide strong support to the statement in which low debt ratio corresponds
to high dividend payments which suggests that financial constraints affect dividend
policy but the results are mixed.

e. Size and Dividend Payouts

Eriotis (2005) argued that size is the significant factor affecting the dividends payouts.
The general notion is that the larger companies pay more dividends. In line with this
statement, Lloyd and William (1985) reported positive relationship between the size of
the firm and their payouts. The findings confirmed that the firms which pay more
dividends are the larger one. Gilsenan (1994) and Holder et al., (1998) further
confirmed the findings of Lloyd et al., (1985) indicating the positive link of size of the
firms with the dividend payouts. However, Ho (2003) in comparative analysis found
positive association between the size and dividends in Australia but documented no
significant relationship in Japan. Thus, the study argued that the dividend behaviors are
country specific. In contrast, Jose (2001) concluded that size of the firms do not
significantly explain the dividend payouts.

f. Cash Flows and Dividend Payouts

A firm’s cash flow is a good measure of the firm’s liquidity and it is very important to
compare a firm’s liquidity position in relation to its dividend payment. According to
Amidu and Abor (2006), cash dividend distribution does not only depends on the
profitability of firms but also depends on the free cash flow which is the amount of
operating cash flow left over after the payment for capital expenditures. The empirical
results of this study indicate a significantly positive relationship between cash flow and
dividend payout ratios and thus the liquidity or cash-flow position can be considered as
an important determinant of the dividend payout ratio. Besides that, Pradhan and
Adhikari (2004) confirmed liquidity as the second most considerable factor in making
dividend decisions by Nepalese managers. In contrast, Al-Deehani (2003) found cash
flow to have negative impact on dividend payments where firms facing high levels of

36
cash flow uncertainty are likely to pay low dividends fearing cash shortfalls in the
future.

g. Slack and Dividend Payouts

The slack is the very important factor for the making the decision regarding dividend
policy. One of the most important theories of dividend is residual policy in which the
firm pays dividend to its shareholders after all the investments made. According to the
theory the presences of slack reduce the external financing requirements and become
the important factor to solve the problem of the under investment. Al-Deehani (2003)
found significant negative relationship between the investment opportunities or slack
and the dividend payouts confirming that the presence of higher slack reduces the
dividends. However, Slack was found to be insignificant in explaining the relationship
with dividend payouts by Amidu and Abor (2006) and Jose (2001).

2.2. Concluding Remarks

By dividend policy, we mean the payout policy that managers follow in deciding the
size and pattern of cash distribution to shareholders over time. Dividend payout has
been an issue of interest in financial literature. Academicians & researchers have
developed many theoretical models describing the factors that managers should
consider when making dividend policy decisions. The setting of corporate dividend
policy remains a controversial issue and involves ocean deep judgment by decision
makers. There has been emerging consensus that there is no single explanation of
dividends. Previous empirical studies have focused mainly on developed economies.

Numerous studies concerned to determinants of dividend policy have been carried out
in context of developed and emerging economies. Even though there are some handfuls
of studies made in context of Nepal, there remains enough ground to carry on further
studies. Wide range of studies are yet to be made in underdeveloped economy like
Nepal that will enable to test the relevancy of results that were obtained in developed
and emerging markets. Thus, this study is an attempt to identify the determinants of
dividend payouts and the relationship between them mainly in Nepalese banking sector.

In Nepalese case previous empirical studies on the nature of dividend practice could not
be found directly but inference can be taken from the very few previous studies. Many
of the unresolved issues like how managers should formulate dividend policy
37
decisions? What are the various factors affecting dividend payout ratio of a firm? Why
is it necessary for firms to have a dividend policy? etc. are of profound importance.
Numerous researches concerned to determinants of dividend policy have been carried
out in context of developed and emerging economies. Even though there are some
handfuls of studies made in context of Nepal, there remains enough ground to carry on
further researches. Among others, earnings, availability of cash and past dividends
comes under top priority respectively to decide dividends by managers in Nepalese
enterprises. The net profits, liquidity and the past dividends are crucial determinants of
dividend payouts.

CHAPTER III
RESEARCH DESIGN AND METHODOLOGY

38
Research methodology sets out overall plan associated with a study. It provides a basic
framework on which the study is based. Before presenting the analysis and
interpretation of data, it is necessary that research methodology should be clearly
defined. The research methods enable to avoid the misinterpretations and the
misunderstandings of the observed results and findings. This chapter therefore explains
the methodology employed in this study which includes various sections describing
research design, nature and sources of data, population, samples and sampling
procedure, data analysis methods and techniques, models used for this study and finally
some limitations of this study.

3.1. Research Design

This study has employed descriptive and correlation research designs to deal with issues
associated with the determinants of dividend policy. Descriptive research design has
been used in order to identify the factors affecting dividend policy and to get adequate
information on such determinants. Since the primary questionnaire survey with
executives has been made to collect the opinions on determinants of dividend policy in
Nepal, descriptive research design seems to be helpful. Moreover, this study depends on
correlation research design in order to investigate the direction and magnitude of the
correlations among the dependent variable i.e. dividend payouts and the independent
variables. Furthermore, causal comparative research design has been employed to
ascertain and understand the directions, magnitudes and forms of observed relationship
between dividend policy and its determinants. It helps in analyzing the cause and effect
relationship among the variables of interest.

3.2. Research Approach

This section focuses on the way that the main issue of the study is going to be
addressed. The selection of which research approach is appropriate in a given study
should be based upon the problem of interest, resources available and the skills. The
research approach can be qualitative and quantitative, inductive and deductive etc but
this study focuses mainly on two types of research i.e. qualitative and quantitative.

3.2.1. Qualitative Approach

39
Qualitative research approach is often a broad term that describes research focusing on
how individuals and groups view and understand the particular issues and construct
meanings out of their experiences. It essentially is narrative and uses content analysis
methods on selected levels of communication content. It is the examination, analysis
and interpretation of observations for the purpose of discovering underlying meanings
and patterns of relationships, including classifications of types of phenomena and
entities. Qualitative research methods are sometimes used together with quantitative
approach to gain deeper understanding of the causes of social phenomena, or to help
generate questions for further research.

To be more specific, this study attempts to examine the opinions of the bank managers
regarding the dividend decisions and the determinants of the dividend payouts in
banking sector. The qualitative approach used in this study is directed towards
gathering the perspective and opinions like current dividend practices, sufficiency of the
current dividends, trends in current dividends, dividend policies adopted by banks etc.
So, in short it can be said that this study has employed qualitative research approach.

3.2.2. Quantitative Approach

Quantitative research is an inquiry into an identified problem based on testing a theory,
measured with numbers, and analyzed using statistical tools and techniques. The goal of
quantitative research methods is to determine whether the predictive generalizations of
a theory hold true. It is the systematic scientific investigation of quantitative properties
and phenomena and their relationships. The process of measurement is central to
quantitative research because it provides the fundamental connection between empirical
observation and mathematical expressions of quantitative relationships. It is generally
used to draw conclusions, tests a specific hypothesis.

Quantitative approach in this study includes the generation of models, theories and
hypotheses, development of instruments and methods for measurement, experimental
control and manipulation of variables, collection of empirical data, modeling and
analysis of data and finally evaluation of results.
3.3. Nature and Sources of Data
Both primary and secondary data have been used for this study. Primary data has been
used in order to assess the opinions of bank managers on dividend policy and its
determinants. In addition, the primary data attempts to reveal other various facets
40
regarding dividend policy in Nepalese banking sector. At the same time, secondary data
has been employed in order to analyze the form of relationship, cause and effect
associations between dividend policy and factors affecting it. Furthermore, predictive
strength of such factors has also been assessed using secondary data.

3.3.1. Secondary Data

The data for firm specific variables including dividend payout ratio, net profits, market
to book value ratio, and number of major shareholders, debt to equity ratio, total assets,
cash flow, and slack have been collected from annual reports of the sample firms
recorded in the database provided in their respective websites. In addition, data bank of
NEPSE, SEBON and NRB have also been used to extract the required data for the
purpose of this study. Two sets of data of determinants of dividends for DPB and JVB
have been collected for each year from 2005 to 2012. Thus, this study has used panel
data to analyze the relationship between the dividend payouts and factors influencing it.
The number of observations varies among different banks mainly due to the
unavailability of continuous years’ data for several sample banks in different year.

3.3.2. Primary Data

The questionnaire survey has been conducted to record the opinions and perceptions of
managers regarding the dividend practices in Nepalese commercial banks. In addition,
it has been emphasized to identify the major determinants of the dividend payouts as
practiced by the managers of the sample banks. The survey has been basically designed
to understand the opinions of respondents as how they perceive the factors affecting
dividend policy and other various aspects of dividend policy. The questionnaires for the
primary survey contain the categorical, continuous and likert scale questions designed
to assess the dividend practices in Nepal along with identification of the factors
influencing the dividend payouts.

3.4. Data Collection Procedures and Time Frame

As discussed in previous sections, the primary data have been collected with the help of
survey among the bank managers regarding the dividend practices and determinants
affecting the dividend payouts. For the purpose of the primary survey, the printed

41
questionnaires were distributed to the managers of the sample banks. Out of 130
questionnaires distributed, 80 questionnaires were dropped personally in sample banks
while 50 questionnaires were emailed to the managers of the various sample banks. In
addition, 24 questionnaires were personally dropped in Biratnagar while remaining 56
were distributed in Kathmandu. All questions were collected after follow ups to the
managers which almost took 1 months or even more in some cases. This has shown the
difficulty in conducting the primary survey in context of Nepal. Further, the response
rate was discouraging which has been depicted in the table 3.1 below:

Table 3.1: Response Rate of Questionnaire Survey

S.N. Survey Type Distributed Received Response Rate
1. Field Survey 80 58 72.5 %
2. Email Survey 50 23 46.05 %
Total 130 81 62.30 %
Source: Response in Survey Questionnaires in Appendix A

So, it is evident from Table 3.1 that out of 80 questionnaires dropped personally, 58
were received while 23 questionnaires were responded out of 50 emailed. Thus, overall
response rate of the primary survey is 62.30 %. However, out of 81 questionnaires
collected, just 73 were received in useable formats.

Moreover, the secondary data regarding the dependent and independent variables were
collected from the annual reports of the sample banks and from the published and
online reports of SEBON, NEPSE and NRB. In collecting data, the financial statements
like balance sheets, profit and loss accounts, cash flow statement, shareholder
information report, major indicator statements of the sample banks were used. In
addition, consolidated financial reports prepared by SEBON, NEPSE and NRB were
also used as the source for the secondary data collection. It is to be noted that most of
the secondary data used for this study were collected online rather than searching in the
published reports. During the collection of secondary data it was noted that the websites
and its information are not well updated which posed difficulty in collecting the
secondary data. In overall, it took almost three months to complete this research project.
3.5. Population and Sample
Commercial banks in Nepal can be grouped as the State Owned Banks (SOB),
Domestic Private Banks (DPB) and the Foreign Joint Venture Banks (JVB). Population
of this study includes all commercial banks listed in Nepal Stock Exchange (NEPSE)
which is the only secondary capital market in Nepal.
42
 Table 3.2: Composition of Sample and Population
Bank Category Population Sample (n) Sample % No. of
(Listed Banks) Obs.
Domestic Private Banks 21 12 57.14 88
Foreign Joint Venture Banks 6 6 100 48
Total 27 18 66.67 136

State owned banks are not included in the study and total of 27 commercial banks were
listed in NEPSE as of mid-April 2012.

Table 3.3: Summary of Sample Banks and Observations

Observatio
Strata Bank Symbol Study Period
n
Nabil Bank Ltd. NABIL 2005-2012 8
Foreign Himalayan Bank Ltd. NIB 2005-2012 8
Joint Standard Chartered Bank SCB 2005-2012 8
Venture Nepal SBI Bank Ltd. HBL 2005-2012 8
Banks Nepal Bangladesh Bank SBI 2005-2012 8
Everest Bank Ltd. NBB 2005-2012 8
Nepal Investment Bank EBL 2005-2012 8
Bank of Kathmandu BOK 2005-2012 8
Nepal Credit and Com. Bank NCCB 2005-2012 8
Nepal Industrial and Com. Bank NICB 2005-2012 8
Lumbini Bank Limited LUBL 2005-2012 8
Domestic
Machhachapuchhre Bank Ltd. MBL 2005-2012 8
Private
Kumari Bank Ltd. KBL 2005-2012 8
Banks
Laxmi Bank Ltd. LBL 2005-2012 8
Siddhartha Bank Ltd. SBL 2005-2012 8
Citizen Bank International CZBIL 2007-2012 6
Bank of Asia BOA 2008-2012 5
NMB Bank Ltd. NMB 2008-2012 5
Total Observation 136

Out of 27 listed commercial banks, 21 banks are DPBs and remaining 6 are the JVBs.
Among 21 DPBs, 9 banks lack complete data available for the period of 8 years from
the period of 2005 to 2012. Therefore, these 9 commercial banks have been excluded
from the sample and only 12 of them with more recent years’ observations have been
included in sample whereas all 6 JVBs have been included in the sample. The
43
information concerning the composition of population, sample and total number of
observations have been summarized in Table 3.2. It shows the composition of
population and sample taken for the study. The sample represents 57.14 percent of
listed DPBs and 100 percent of the listed JVBs. Altogether; the sample for the study
constitutes 66.67 percent of the total population and provides 136 observations
regarding various dependent and independent variables. The sample bank and the
observation years have been presented in Table 3.3. Due to unavailability of data for
BOA and NMB banks, 5 years data have been used for both banks. Total number of
observations for this study is 136 including 48 observations from JVB and 88
observations of DPB. Since there is unequal observation years for sample banks, the
data is unbalanced pooled.

3.5.1. Sampling Technique

Even though the population for this study is finite, it is difficult to include whole
population in the study because of various constraints. Thus, sample for the study is
very essential. Probability stratified sampling technique has been employed to
categorize sample banks in two strata namely domestic private banks (DPB) and the
foreign joint venture banks (JVB) out of total population of 27 commercial banks listed
in NEPSE. After dividend into two strata, 100 percent of joint venture banks are
included in the study while 57 percent of domestic private banks are included in the
sample that makes the number of sample domestic private banks 12. To select the
sample of 12 domestic banks from cluster of 21 banks, systematic random sampling
method have been used. Likewise, for primary survey the selection of sample
respondents have been conducted using systematic random sampling of the bank
branches.

3.6. Data Analysis Procedures

The main purpose of data analysis in this study is to analyze the magnitude and
direction of the determinants of the dividend payouts with the independent variables
employed in this study like net profits, market to book value ration, number of major
shareholders, size, debt to equity ratio, cash flows and the slack. In addition, the
secondary data analysis tends to explore the predictive power of determinants of
dividend policy in explaining dividend payout behavior for selected financial
institutions in the context of Nepal. Therefore, this section deals with statistical and
44
econometric models used for the purpose of analysis of both primary and secondary
data.

The methods of data analysis used in the study have been divided into three
subsections. First section deals with the methods of secondary data analysis. This
includes descriptive statistics, correlation analysis, analysis by forming portfolios and
regression analysis. Second section will describe different statistical tests of
significance for validation of model such as t-test, F-test, detection of autocorrelation
and multicolinearity. Third section will presents the methods used for primary data
analysis.

3.6.1. Method of Secondary Data Analysis

The method of secondary data analysis used in this study consists of econometric
models. Among others, the study has employed a multivariate regression model which
aims to test the effect of the independent variables on the dividend payouts. The study
has also used descriptive statistics, correlation analysis along with statistical test of
significance such as t-test, F-test, Prob. Value, Adjusted R 2, test of autocorrelation and
multicolinearity. Details of models and statistical test of significance have been dealt in
the following sections.

a. Regression Analysis
The econometric models employed in this study intend to analyze the relationship
between dividend policy and determinants i.e. explanatory variables. The relationship
between the dependent and independent variables can be stated in the following form:

Yt= β1 XtBz eut…………………………… (i)

Taking natural logarithm of in left hand side, the log linear regression equation
becomes:

LnYt = α + β1 X1+ β2 X2 +……..+ βn Xn + eit ……….. (ii)

In equation (ii), LnYt is the natural logarithm of the dependent variable, X1, X2 and Xn are
the independent variables, β1, β2 and βn are regression coefficients, eit is the error term.

Model Specification

45
In order to explain the effect of firm specific explanatory variables used in this study,
the multiple regression model of the form including all variables as specified in
following equations have been used.

Ln TSAMDPRit = α + β1 NPit + β2 MBVit + β3 MSHit + β4 DEit + β5 SZit + β6 CFit + β7

SLCit + eit ................ (iii)

Ln DPBDPRit = α + β1 NPit + β2 MBVit + β3 MSHit + β4 DEit + β5 SZit + β6 CFit + β7

SLCit + eit ................ (iv)

Ln JVBDPRit = α + β1 NPit + β2 MBVit + β3 MSHit + β4 DEit + β5 SZit + β6 CFit + β7

SLCit + eit ................ (v)

where, Ln TSAMDPRit refers to the natural logarithm of dividend payout ratio of total
sample of the study, Ln DPBDPRit refers to the natural logarithm of dividend payout
ratio of domestic private bank ‘i’ for period‘t’ while Ln JVBDPRit is the natural
logarithm of dividend payout of foreign joint venture banks. NPit is the net profit after
tax of firm ‘i’ for period ‘t’, MBVit is the market to book value ratio of the bank ‘i’ for
time ‘t’, MSHit is the number of the major shareholder of bank ‘i’ for time ‘t’, DEit is the
debt to equity ratio of bank ‘i’ for time ‘t’, SZit denotes the size of the bank measured by
total assets of bank ‘i’ for time ‘t’, CFit is the cash flow of bank ‘i’ for period ‘t’, SLCit is
the slack of the bank ‘i’ for time period ‘t’. Similarly, ‘eit’ refers to the unexplained
residual error terms and α is the intercept term, and β1 β2, β3, β4, β5, β6 and β7 are the
respective parameters (beta coefficients or regression coefficients) of the explanatory
variables to be estimated.

As one of major objectives of this study is to ascertain the predictive power of

determinants in the variability in dividend payout and to evaluate the direction of
relationship between these variables, the test involves estimating several pairs of
regressions equations.

b. Descriptive Statistics
This study has used the summary of descriptive statistics associated with dividend
payout ratio and its determinants of sample banks to explain the nature, characteristics
and trend of these variables during the sample period. The descriptive statistics such as
46
mean, standard deviations, minimum and maximum values of the variables like DPR,
NP, MBV, MSH, DE, SZ, CF, and SLC have been used to describe the characteristics
of dividends and its determinants for sample firms during the period 2005 through
2012. Among others, mean and standard deviation for the variables of interest can be
calculated using the following formula:

Mean (X )=
∑X
n−1

where, X is the value of DPR, NP, CF, MBV, SZ, DE, MSH and SLC and n is the total
numbers of the sample observation. The mean is the measure of central tendency. It
gives the idea about the average statistics from the sample observations.

√ ∑ ( X −X )
2

Standard Deviation ( δ ) =
n−1

where, X is the DPR, NP, CF, MBV, SZ, DE, MSH and SLC; X is the mean value of
variables and n is the total numbers of the sample observation. The standard deviation is
the measure of dispersion. It gives the idea about the how far and wide the observations
fluctuate on an average.

c. Correlation Analysis
As stated in section 3.1 of the present chapter, this study is also based on correlation
research design. This design has been basically adopted to identify the direction and
magnitude of relationship between different pairs of variables. For this purpose,
correlation analysis has been used. It is a statistical tool to identify direction and
magnitude of relation between two set of variables. It shows how two variables move
together and also shows the degree of association between them. The relationship has
been explained by using Pearson correlation coefficient. The value of correlation
coefficient ranges from -1 to +1. If correlation coefficient is exactly -1, two variables
are said to have perfect negative correlation as such that they move together exactly into
opposite direction. On the other hand, if correlation coefficient is +1, the variables are
said to be perfectly positively related. The correlation coefficient can be computed as:
47
 n ∑ XY - ∑ X ∑ Y
Correlation ( ρ ) =
√ {n ∑ X - ( ∑ X ) } {n ∑ Y - ( ∑ Y ) }
2 2 2 2

where, ‘X’ denotes dividend payout ratio, ‘Y’ denotes net profit, cash flows, market to
book ratio, size, number of major shareholders, debt to equity ratio and slack and ‘n’ is
the total number of observations for the variables mentioned above.

d. Analysis of Portfolios Formed on One-Way Sorts

Secondary data has also been analyzed using univariate sort of portfolios formed on NP,
MBV, MSH, DE, SZ, CF, and SLC. For the purpose of univariate sort of portfolios,
total 136 observations of all sample firms over the period from 2005 through 2012 has
been grouped into 4 groups of portfolios from small to large. A total of 7 univariate
sorts of the portfolios have been used to study the pattern of movement in dividend
payout with respect to explanatory variables. The portfolios have been formed on the
basis of univariate sort on net profit, market to book ratio, major shareholders, debt to
equity ratio, size of the firm, cash flow and finally on slack. At each sort, the properties
of dividend payout movement has been observed and analyzed with respect to the
movement in explanatory variables on the basis of mean value and standard deviation.

e. Test of Significance
There are various assumptions of classical linear regression model. Some of the
important assumptions are regarding the significance of the regression coefficients,
overall significance, the problem of multicolinearity and autocorrelation etc. This study
has employed employ t-statistic to perform significance test of regression coefficients.
In the language of significance test, a regression coefficient is said to be statistically
significant if the critical p-value of test statistic is less than the level of significance
specified. In other words, the statistical significance of the coefficients validates the
explanatory power of the associated independent variables. The levels of significance
specified in this study are at 1 and 5 percent level.

Besides the statistical test of significance of individual regression coefficient, it is

necessary to test the overall significance of the model. This can be done by using
adjusted coefficient of determination (Adj.R2) and F- statistics. The adjusted coefficient
48
of determination has been used to identify the percentage of total variation in dependent
variable that has been explained jointly by all explanatory variables. The statistical
significance test of this joint explanatory power has been conducted by using F-statistic.
The p-value of F-test has been examined to confirm whether the regression models are
significant at 1 and 5 percent level.

3.6.2. Methods of Primary Data Analysis

The primary data obtained from the questionnaires survey are analyzed using the
descriptive statistics which calculates the mean and the standard deviation for certain
responses. In addition, the frequency and percentages has also been used. Cross
tabulation on the basis of the strata of the banks and chi-square analysis have also been
performed in order to test for the significance of the responses.

3.7. Reliability and Validity

Validity is the extent to which a test measures what we actually wish to measure. It
refers to the accuracy of a measure and a measurement is valid when it measures what it
is suppose to measure and perform the functions that it purports to perform. Methods of
establishing validity of the measurement technique fall into one of three categories:
self-evident measures, pragmatic measures and construct validity.
Table 3.4: Coefficient of Cronbach’s Alpha
Cronbach's Alpha Standardized Cronbach's Alpha N of Items
.771 .782 25
Source: Response in Survey Questionnaires in Appendix A

Reliability is to do with the accuracy and precision of a measurement procedure. It

refers to the credibility of the test, and it mainly tests measurements results and
measurement tools ‘stability and consistency. The result of qualitative data shows the
coefficient of 0.782 which shows that 78.20 percent of the data taken for the study is
reliable.

3.8. Instrumentations
As discussed earlier, this study relies on both the primary and the secondary data.
Primary data were gathered by surveying the bank managers. The self-administered

49
survey questionnaire has been used as the main data-gathering instrument to trace the
opinions and the dividend practices prevailing in the context of Nepalese banking
sector. After collecting the questionnaires, the responses derived were coded in a way
that all responses can be assesses in simple way. A code file for the primary survey was
prepared and various analyses were conducted with that primary data code file. User
friendly SPSS package was used in order to obtain meaningful results from the primary
data. Among others, percentage, frequency, mean value, standard deviation and chi-
square analysis were conducted. Secondary data for the study were collected via
various sources as mentioned in earlier section of this chapter. The data regarding the
dependent and independent variables of the sample banks were collected and coded
with unique code for each sample banks so that the data could be easily identified and
assessed. Secondary data were also analyzed using the SPSS package. Descriptive
statistics including correlation and the linear regression tools were used in SPSS
package in order to derive the meaningful relationship among the dependent and
independent variables.

3.9. Analysis Plan

The analysis starts with the analysis of the pattern of dividend payout ratios and factors
affecting it for sample banks. Mean and standard deviation of the variables have been
used to analyze the pattern. Second section deals with the portfolio analysis which
intend to analyze the properties of portfolios formed on factors affecting dividend
payouts. The movements of the dividend payout with respect to movement in the
determinants have been analyzed in this section. The examination of the relationship
between the dividend payouts and its determinants of total sample commercial banks
have been dealt in third section followed by separate analysis of domestic private banks
and joint venture banks respectively. For the purpose of analysis, descriptive statistics,
correlation analysis and regression analysis have been employed as the statistical tools.
The descriptive statistics of the sample observations include the mean, standard
deviation, minimum and maximum values of the observations. All the observed
relationship and findings have been interpreted to derive the meaningful conclusions
regarding the dividend practices and the determinants of the dividend payouts.

The analyses of the primary data have been made based on the sequence of the
questionnaire design. Percentage distribution, frequency and chi-square test have been
50
employed to analyze the primary data obtained from the survey. The primary data
analysis has helped in exploring the opinions and practices of the dividends while chi-
square tests in particular has been used to examine whether such opinions are
significantly different from one to another group of sample banks. For instance, the
difference in practices in domestic private banks and foreign joint venture banks has
been assessed using the chi-square test. Similarly, likert scale and ranking item
questionnaires have been analyzed calculating the weighted mean. Further, the
percentage of respondents agreeing and disagreeing to the statement has also been
reported. Moreover, the help of the tables and diagrammatic representation have also
been taken to present and interpret the data in more effective way.

CHAPTER IV
PRESENTATION AND ANALYSIS OF DATA

This chapter systematically deals with the presentation, interpretations and analysis of
both the primary data and the secondary data. Along with the presentation and analysis,
51
the findings of this study have also been made with various other studies in context of
developed and emerging markets. Various statistical and econometric tools described in
previous chapter have been used to present and analyze the data in meaningful manner.
This chapter starts with the analysis of pattern of the dividend payouts and its
determinants of the sample commercial banks for the study period. Second section
analyzes the properties formed on different determinants of dividend payouts while
third section is devoted in analyzing the relationship between the dividend payouts and
factors affecting it. Descriptive analysis, correlation analysis, and panel regression
analysis has been conducted in order to analyze the relationship. Fourth and fifth
section is directed towards analysis of dividend payout and its determinants for
domestic private and joint venture banks respectively. Moreover, an assessment of the
management views from primary survey is presented in the sixth section followed by
the concluding remarks.

4.1. Pattern of Dividend Payout and its Determinants

This section accomplishes the first objective of this study. The pattern and movement of
the dividend payouts and its determinants are shown in this section. Table 4.1 portrays
the pattern of dividend payout ratio of commercial banks for period of 2005 to 2012.
Based on the mean DPR, Standard Chartered Bank Nepal limited (SCB) is the highest
dividend payer among others. Smaller standard deviation of the bank indicates the
consistency of the dividend payment of the bank. Second to the SCB is the Nabil Bank
limited which has mean DPR of 80 percent and third ranked bank in paying more
dividend is Himalayan Bank limited with mean dividend payout ratio of 37.15 percent.
Similarly, Nepal investment bank limited is the fourth highest dividend paying bank
with average of 32.98 percent while Bank of Kathmandu stands fifth with mean DPR of
32.94 percent. All these banks are consistent with their dividend payouts as revealed by
standard deviation of dividend payout ratios. In other hand, Bank of Asia and Nepal
Bangladesh Bank limited are among the least dividend paying banks in the study
period.

Table 4.1: Pattern of Dividend Payout Ratio of Commercial Banks

(in percentage)
Std.
BANKS 2005 2006 2007 2008 2009 2010 2011 2012 Mean
Dev.
NABIL 70 85 140 100 85 70 30 60 80.00 31.96
NIB 12.5 55.5 30 40.8 20 25 50 30 32.98 14.77
SCB 120 140 130 130 100 70 50 60 100.00 35.46
52
 HBL 31.6 35 40 45 43.6 36.8 36.8 28.4 37.15 5.65
SBI 0 5 47.6 0 42.1 17.5 17.5 17.5 18.40 18.02
NBB 0 10 0 0 0 0 0 6 2.00 3.25
EBL 20 20 30 30 30 30 10 30 25.00 7.56
BOK 15 48 20 42.11 47.37 30 34.75 26.32 32.94 12.33
NCCB 5 13 8 14 9 15 12 5 10.13 3.94
NICB 30 10.53 21.05 21.05 15.71 26.32 20 25 21.21 6.14
LUBL 11 15 10 12 15 16 10 12 12.63 2.39
MBL 5.75 15.79 6.25 21.05 22 10 25 30 16.98 9.00
KBL 21.05 21.05 21.05 10.53 10.58 12 8.44 10 14.34 5.64
LBL 15 25 15 21.05 5.26 13 15.79 10 15.01 6.11
SBL 15 12 15 13.79 15.79 10.03 15.79 8.42 13.58 3.01
CZBIL 0 0 7 8 10 12.63 10.53 8.42 7.07 4.69
BOAN 0 0 0 7 5 10.53 7.37 7.5 4.68 4.15
NMB 0 0 0 10.5 12.3 12.1 13 15 7.86 6.63
Mean 20.66 28.38 30.15 29.44 27.21 23.22 20.44 21.36
Std. Dev 30.07 35.50 40.45 34.23 27.46 19.23 14.39 16.99
Source: Panel Data in Appendix B

The average DPR of Bank of Asia is 4.68 and that of NBB is 2 percent. On an average,
the commercial banks paid more dividends in the year 2007 when mean DPR was 30.15
percent while year 2011 saw less dividends of 20.44 percent.

Table 4.2 depicts the pattern of the net profit of the commercial banks for the study
period. The figures of the net profit is expressed in million Rs. Based on Table 4.2 the
bank earning highest net profit on average is Nabil Bank limited with mean net profit of
Rs.1054 million followed by Standard Chartered Bank Nepal limited with mean net
profit of Rs.916.3 million in the period of 2005 to 2012. The standard deviation of the
net profit for both of these banks is Rs.335.9 million and Rs.205.9 million respectively.
Likewise, Nepal SBI Bank limited earned third highest profit of Rs.886 million on an
average while Nepal Investment Bank and Himalayan Bank stand in fourth and fifth
place respectively with mean net profit of Rs.848.6 million and Rs.842.3 million. In
contrast, Bank of Asia and Machhapuchre Bank limited are among the lowest earners
with average net profit of Rs.95.15 million and Rs.95.12 million.

Table 4.2: Pattern of Net Profit of Commercial Banks

(Rs. in millions)
BANKS 2005 2006 2007 2008 2009 2010 2011 2012 Mean Std. Dev.
NABIL 817 979 685 750 1031 1139 1337 1696 1054 335.9
NIB 280 410 561 830 982 1422 1263 1039 848.6 405.9
SCB 662. 814. 1028.
757 692.1 1086 1120 1168 916.3 205.9
5 4 3
HBL 217 219 828 1050 1182 871.8 1411 958 842.3 426.8
SBI 219. 255.
217.1 394.5 337.6 400.5 458.4 4805 886.0 1586
8 1

53
 NBB 684.
76.1 457 576 1994 1327 -138 809.4 723.4 680.6
3
EBL 722.
275 380 300 624.1 831.8 931.3 1090 644.6 303.9
8
BOK 330. 367.
228.8 278.5 725.8 509.6 605.6 607.6 456.7 180.3
7 6
NCCB 495.
98.3 31.2 125 410.6 457 214.8 177.6 251.3 177.9
6
NICB 248.
193 148 232.1 357.1 447.4 498.4 392 314.7 126.7
9
LUBL 328.
267 210 225.9 391.8 297.7 399.9 193.4 289.4 79.55
7
MBL 146.
116 159 93 92.6 136.2 6.4 10.16 95.12 58.62
6
KBL 142. 292.
93.6 279.7 425.6 501.1 239.2 275.5 281.2 133.8
9 1
LBL 120.
49.6 63.8 65.5 186.2 326.2 380.4 359.0 193.9 141.0
8
SBL 100. 246.
42.7 157.5 348.8 255.2 303 329.9 222.9 111.5
1 3
CZBIL - 548.
0 0 1158. 193.5 198.3 224.7 288.4 397.0
15.42 4
BOAN 0 0 0 4.5 110.6 207.6 266 172.5 95.15 109.1
NMB 112.
0 0 0 117.4 101.2 154.8 357.4 105.4 119.2
5
Mean 250. 445.
207.3 304.5 639.1 584.0 536.1 814.8
8 5
Std. 256. 301.
232.8 262.8 503.0 422.0 473.0 1093
Dev 6 8
Source: Panel Data in Appendix B

In other hand, cumulative net profit of all commercial banks was highest in the year
2012 (Rs.814.8 million) and lowest in the year 2005 (Rs.207.3 million). The pattern of
cash flows of commercial banks is shown in Table 4.3.

Table 4.3: Pattern of Cash Flows of Commercial Banks

(Rs. in millions)
Std.
BANKS 2005 2006 2007 2008 2009 2010 2011 2012 Mean
Dev.
NABIL 450 678 770 1271 701 -197 1036 1835 818 467
NIB 114 996 105 1313 4163 -110 1324 3663 1446 1467
SCB -91 165 745 29 1087 -121 1046 3390 781 534
HBL 257 394 40 -309 1600 818 -91 3398 763 647
SBI 0 394 5 220 -167 2265 1437 631 598 909
NBB -51 293 -531 759 649 -513 279 2545 429 516
EBL 460 503 838 277 3496 1654 -1696 4240 1222 1566
BOK 22 12 587 125 742 383 120 1704 462 290
NCCB 23 21 26 720 291 1009 460 546 387 389
NICB 682 262 150 593 269 625 410 1078 509 208
LUBL 1 1 1 142 352 134 831 1111 322 302
MBL 320 83 470 304 1267 306 197 278 403 391
KBL 43 -54 282 262 842 948 -156 2554 590 431
LBL 90 -244 0 768 595 8 1015 1665 487 471
SBL 0 -15 401 -80 110 859 -51 2425 456 343
CZBIL 0 0 147 586 923 790 -109 2264 575 423
BOAN 0 0 0 721 771 -185 965 1220 436 473
54
NMB 0 0 0 2368 5416 2030 575 -236 1269 1999
Mean 129 194 224 559 1284 595 422 1906
Std. Dev 215 306 351 625 1512 789 736 1255
Source: Panel Data in Appendix B

Nepal Investment Bank limited has the cash flow of Rs.1446 million on an average
which is maximum than others. Nepal Merchant Bank has cash flows of Rs.1269
million and Everest Bank limited has average cash flow of Rs.1222 million. So, NMB
bank and Everest bank is the second and third bank in terms of cash flow. Last in terms
of cash flow are NCC bank and Lumbini bank with respective cash flows of Rs.387
million and Rs.322 million. Thus, the table shows that NIB, NMB and EBL are the
most liquid banks during study period. The higher standard deviation of cash flows also
shows that the liquidity positions of the commercial banks are highly fluctuating. The
sample banks have more cash flows in the year 2012 with mean cash flows of Rs.1906
million and least cash flows in the year 2005 with mean cash flows of Rs.129 million.

Table 4.4: Pattern of Total Assets (Size) of Commercial Banks

(Rs. in millions)
Std.
BANK 2005 2006 2007 2008 2009 2010 2011 2012 Mean
Dev.
NABIL 1861 2413 3847 4594 5461 6129
29660 63200 41991 17016
5 5 9 2 0 3
NIB 1663 2200 4020 5463 5955 6135
28573 65756 43590 19320
8 7 6 5 5 7
SCB 2275 2679 3431 4167 4152 4522
29937 41677 35489 8260
9 8 3 9 5 7
HBL 1061 1373 3752 4079 4476 4929
34646 54364 35718 15845
7 6 7 1 9 9
SBI 1061 1373 1859 3199 3938 4713
15397 58059 29362 17537
7 6 4 0 1 0
NBB 1554 1672 1558 1683 1602 1832
14282 20169 16684 1835
0 2 4 0 2 2
EBL 1506 1671 2856 3800 4205 4689
23335 55813 33305 14733
9 5 6 0 3 6
BOK 1024 1266 1815 2100 2405 2558
14998 28882 19449 6574
6 1 9 9 9 2
NCCB 1017 1165 1444 1503
8680 8640 8816 18595 12005 3675
6 7 3 6
NICB 4049 4922 1545 5212 2069 2256
58991 25580 35640 16595
1 1 1 4 6 8
LUBL 5383 6735 7134 7393 8445 8077 9125 9903.8 7775 1427
MBL 2025 1314 1858 2167 2022
9255 11197 20278 16827 4846
4 2 3 8 8
KBL 1561 1926 2150 2190
7695 9390 12324 25131 16603 6353
9 5 0 3
LBL 1302 1885 2162 2245
3936 5509 8800.5 25917 15015 8352
8 5 9 2
SBL 1214 1859 2327 2551
3193 4900 9441.8 29629 15836 9861
2 5 3 4
CZBIL 1316 1674 1750
0 0 3720.3 7355 20069 13093 6360
3 9 3
55
 BOAN 1177 1586 1832
0 0 0 4324 17871 13631 5811
1 4 7
NMB 1095 1661 1361
0 0 0 9037 16246 13293 3293
7 0 4
Mean 1398 1601 1894 2624 2791 3007
19453 33174
2 1 5 3 6 6
Std. 1136 1158 1539 1502 1683
9437 14176 18157
Dev 2 1 2 3 0
Source: Panel Data in Appendix B

This study has measured the size of the commercial banks by total assets of the banks.
The pattern of the bank size is shown in Table 4.4. In terms of total assets, Nepal
investment Bank limited is the largest bank with average total assets of Rs.43590
million in the study period. The standard deviation of its total assets is Rs.19320 million
which indicates that the average assets of the NIB increased and decreased by Rs.
19320 million during the study period. Nabil Bank limited is the second largest bank
with mean total assets of Rs.41991 million and Himalayan Bank limited is third largest
bank with mean total assets of Rs.35718 million. Lumbini Bank limited is the smallest
bank because of its least total assets of Rs.7775 million on an average during the study
period. The cumulative size of the sample commercial banks was largest in the year
2012 with total assets of Rs.33174 million and least in the year 2005 with total assets of
Rs.13982 million.

Market to book value pattern of the commercial banks is shown in Table 4.5. The table
indicates that Standard Chartered Bank Nepal has highest market to book value ratio on
average. Its mean MBV is 10.81 followed by the Nabil Bank with mean MBV of 9.01.
In contrast, NCC bank and NBB have least MBV ratio of 0.26 and 0.65 respectively
during the study period.

Table 4.5: Pattern of Market to Book Value Ratio of Commercial Banks

(in ratio)
Std.
BANKS 2005 2006 2007 2008 2009 2010 2011 2012 Mean
Dev.
NABIL 4.47 5.88 12.08 14.9 15.12 9 5.56 5.03 9.01 4.47
NIB 3.98 5.25 7.39 10.99 8.57 3.71 3.01 3.17 5.76 2.92
SCB 5.55 8.06 11.52 17.01 18.35 13.61 7.88 4.47 10.81 5.18
HBL 2.1 4.03 6.57 7.99 6.86 3.6 2.88 3.38 4.68 2.15
SBI 2.1 4.03 6.61 9.41 9.76 5.02 3.68 4.17 5.60 2.77
NBB 0 0 -1.51 -3.4 4.68 2.3 2.38 0.71 0.65 2.50
EBL 3.96 6.34 8.65 9.73 7.11 4.91 3.94 3.24 5.99 2.38
BOK 2.01 3.68 8.35 10.56 8.85 4.79 3.18 3.7 5.64 3.15
NCCB 0.305 -0.47 -0.231 0.107 0.234 0.394 0.77 0.97 0.26 0.48
NICB 3.02 3.88 6.83 9.3 7.71 4.64 3.42 3.32 5.27 2.37
LUBL 35.86 -1.19 -7.05 21.39 5 2.69 1.55 1.49 7.47 14.07
MBL 2.24 2.21 2.46 5.09 9.08 3.65 0.28 0.3 3.16 2.87
KBL 2.62 2.97 6.06 7.85 5.11 3.42 1.93 1.63 3.95 2.19
56
 LBL 2.88 3.46 5.97 8.87 8.69 4.81 2.6 2.37 4.96 2.65
SBL 0 2.98 5.88 8.45 7.45 3.03 2.13 2.56 4.06 2.90
CZBIL 0 0 5.12 5.45 5.82 3.75 2.04 2.11 4.05 1.68
BOAN 0 0 0 5.15 5.62 2.56 1.78 2.09 3.44 1.80
NMB 0 0 0 6.75 7.664 4.465 2.403 1.764 4.61 2.59
Mean 4.74 3.41 5.29 8.64 7.87 4.46 2.86 2.58
Std. Dev 8.76 2.54 4.86 5.64 3.95 2.86 1.74 1.33
Source: Panel Data in Appendix B
The year with highest mean MBV ratio was 2008 with mean MBV of 8.64 whereas the
ratio was least in the year 2012 when it was 2.58. It shows that the stocks of bank were
traded on higher price during 2008 while the stock price fell in 2012.

The pattern of leverage ratio for the sample commercial banks during the study period
is shown in Table 4.6. The leverage ratio for this study does not include deposits. Only,
long term and short term bonds, debentures and loan due to other banks are considered
as the debt for the banks. In terms of the debt to equity ratio, Nabil Bank and NIC banks
are highly leveraged than others. Mean debt to equity ratio of Nabil Bank and NIC is
0.50 or 50 percent. However, the standard deviation of leverage ratio is 0.25 or 25
percent and 0.21 or 21 percent which shows that the debt to equity ratio is highly
volatile for these banks.

Table 4.6: Pattern of Leverage Ratio (Debt to Equity) of Commercial Banks

(in percentage)
Std.
BANKS 2005 2006 2007 2008 2009 2010 2011 2012 Mean
Dev.
NABIL 65 66 67 66 63 10 43 11 50 25
NIB 30 39 43 39 24 23 25 26 30 8
SCB 20 22 19 17 10 12 14 17 20 4
HBL 33 29 28 37 16 15 13 11 20 10
SBI 11 12 12 12 12 18 18 19 10 3
NBB 13 14 16 55 16 13 11 16 20 15
EBL 36 31 34 3 28 26 25 24 30 4
BOK 10 89 87 15 17 24 20 14 30 33
NCCB 18 14 23 19 16 13 21 20 20 3
NICB 66 62 60 41 52 87 49 16 50 21
LUBL 16 19 65 19 11 11 16 15 20 18
MBL 13 14 18 19 10 13 14 17 10 3
KBL 24 30 35 37 43 46 48 17 40 11
LBL 41 43 45 51 59 24 17 16 40 16
SBL 19 18 43 21 32 57 29 31 30 13
CZBIL 0 0 65 79 24 49 36 17 50 24
BOAN 0 0 0 71 84 55 46 17 50 26
NMB 0 0 0 10 13 16 16 16 10 3
Mean 28 33 41 35 29 28 26 18
Std. Dev 18 23 22 21 22 21 13 5
Source: Panel Data in Appendix B

57
The banks with lower leverage are NMB, SBI and MBL with mean debt to equity ratio
of 10 percent for each. The commercial banks used high leverage during 2008 when
total leverage ratio for all commercial banks was 35 percent and in 2012 the leverage
ratio was just 18 percent.

Table 4.7 provides the pattern of the number of major shareholders of the commercial
banks. The number of major shareholders is calculated as the number of shareholders
holding more than 5 percent of the total share outstanding. So, from table it is observed
that Laxmi Bank limited is highly concentrated in terms of its shares with 7
shareholders each holding more than 5 percent of the total outstanding shares. After
Laxmi Bank, Himalayan Bank and Everest Bank have Maximum number of
shareholders holding more than 5 percent of total outstanding shares. These banks have
6 major shareholders each.

Among others, Bank of Kathmandu and Standard Chartered Banks have less number of
major shareholders. So, the share ownership is diffused i.e. distributed among large
number of shareholders in these banks.

Table 4.7: Pattern of Major Shareholder of Commercial Banks

(in number)
Std.
BANKS 2005 2006 2007 2008 2009 2010 2011 2012 Mean
Dev.
NABIL 3 3 3 3 3 3 3 3 3.0 0.00
NIB 6 6 6 6 6 6 6 6 6.0 0.00
SCB 2 2 2 2 2 2 2 2 2.0 0.00
HBL 6 6 6 6 6 6 6 6 6.0 0.00
SBI 2 2 2 2 2 2 2 2 2.0 0.00
NBB 4 4 4 4 4 4 4 4 4.0 0.00
EBL 6 6 6 6 6 6 6 6 6.0 0.00
BOK 1 1 1 1 1 1 1 1 1.0 0.00
NCCB 3 3 3 3 3 3 3 3 3.0 0.00
NICB 5 5 5 5 5 5 5 5 5.0 0.00
LUBL 4 4 4 4 4 4 4 4 4.0 0.00
MBL 5 5 5 5 5 5 5 5 5.0 0.00
KBL 3 3 3 3 3 3 3 3 3.0 0.00
LBL 7 7 7 7 7 7 7 7 7.0 0.00
SBL 1 1 1 1 1 2 2 2 1.4 0.52
CZBIL 0 0 3 3 4 3 4 4 3.5 0.55
BOAN 0 0 0 3 3 3 3 3 3.0 0.00
NMB 0 0 0 4 4 4 4 4 4.0 0.00
Mean 3.87 3.87 3.81 3.78 3.83 3.83 3.89 3.89
Std. Dev 1.92 1.92 1.87 1.77 1.76 1.69 1.68 1.68
Source: Panel Data in Appendix B

58
The mean MSH of all the banks stood at around 3.83 which indicate 4 major
shareholders approximately holding more than 5 percent shares during 8 years of study.

The slack represents the investment opportunities of the commercial banks. To invest in
viable projects, the banks need to have healthy base of its retained earnings. So, then
ratio of retained earnings to the total assets is computed as the slack of the banks. Table
4.8 illustrates the pattern of the slack or the investment opportunities of the commercial
banks during the period of the study. The mean value of slack is less for all the
commercial banks under the study. However, the slack of 0.08 or 8 percent is higher
which corresponds to NCC Bank. Similarly, slack value of 5 percent corresponds to the
banks like Standard Chartered, Lumbini Bank and Machhapuchre Bank. Least value of
the standard deviation of slack for these banks shows that there is no wide variation in
investment opportunities of these banks.

Table 4.8: Pattern of Investment Opportunities (Slack) of Commercial Banks

(in percentage)
Std.
BANKS 2005 2006 2007 2008 2009 2010 2011 2012 Mean
Dev.
NABIL 3.8 3 3.8 4.7 3.8 3.5 4.4 4.8 4 1
NIB 3.7 3.9 4.2 4 3.9 3.8 3.7 3.5 4 0
SCB 5.5 5.3 5.5 5.6 5.2 4.9 4.7 5.4 5 0
HBL 3.2 4 3.9 4.1 3.9 3.4 3.4 2.9 4 0
SBI 1.3 1.4 1.5 1.6 1.6 1.5 1.7 1.5 2 0
NBB 17 1.8 1.9 1.7 2 1.8 1.7 4.7 3 7
EBL 2.7 2.8 2.8 3 3.2 3.6 3.7 4.3 3 1
BOK 3 3 3 1 3 3 3 4 3 1
NCCB 4 9 12 17 19 1 3 2 8 7
NICB 3 2 15 2 2 2 3 3 4 4
LUBL 1 1 6 1 5 2 5 18 5 6
MBL 2 2 1 12 18 2 1 2 5 6
KBL 1 1 1 2 2 2 3 3 2 1
LBL 1 1 1 1 1 1 2 2 1 0
SBL 2 2 2 5 1 1 1 2 2 1
CZBIL 0 0 6 1 5 1 1 1 3 2
BOAN 0 0 0 9 5 1 1 1 3 4
NMB 0 0 0 1 4 1 5 11 4 4
Mean 4 4 4 4 5 2 3 4
Std.
3.9 4.4 4 4.4 5.1 1.2 1.4 4.1
Dev
Source: Panel Data in Appendix B

The higher value of slack indicates the more accumulated retained earnings which
further indicate fewer investments. Laxmi Bank has the lowest mean slack of 0.01 or 1
59
percent and Nepal SBI Bank and Kumari Bank has slack of 2 percent each. It indicates
that Laxmi bank, Nepal SBI and Kumari Bank made more investments compared to
other banks during the study period.

4.2. Examination of Portfolio Properties Formed on Net Profit, Cash Flows, Size,
Market to Book Value, Debt to Equity, Number of Major Shareholder, and Slack
In an attempt to meet the second objective of this study, properties of dividend payout
ratios with respect to the determinants of the dividend payouts have been analyzed in
this subsection by forming four category portfolios based on one-way sorts of net profit,
cash flow, size, market to book value of equity, debt to equity ratio, number of major
shareholders and the slack. The characteristics of average dividend payout ratios and
standard deviations associated with each of these univariate sorts of portfolios are
described below. Standard deviations of the each portfolio have been reported in
parentheses.

a. Properties of Portfolio Sorted on Net Profit

Net profit after tax has been considered as the main variables affecting the dividend
payouts in case of Nepalese commercial banks. The portfolios sorted based on net profit
is divided into four categories based on the range value of the minimum and maximum
value of the net profit. The net profit of less than Rs.530 million has been regarded as
the lowest portfolio, the net profit of Rs.530 to Rs. 1060 million has been taken as the
medium low portfolio, the net profit of Rs.1060 to Rs.1600 million has been taken as
the medium high portfolio and finally net profit of more than Rs.1600 million has been
regarded as the highest portfolio so far.

Table 4.9: Properties of Portfolio Sorted on Net profit

Variables Low < 530 m 530 - 1060 m 1060 - 1600 m High >1600 m
Net Profit 236.05 802.23 1231.79 1845.24
(Rs. in million) (137.60) (152.35) (125.80) (210.66)
Dividend Payout Ratio 15.65 56.52 62.73 75.00
(in percentage) (10.50) (44.68) (9.32) (21.21)
Cash Flow 566.30 1123.32 1097.10 1242.03
(Rs. in million) (794.85) (1266.35) (1509.81) (839.28)
Size 16964.45 34064.76 47924.38 40015.10
(Rs. in million) (10463.60) (12585.45) (13263.15) (32788.82)
Market to Book 4.30 7.21 5.68 4.86
60
 (in Ratio) (4.71) (5.25) (3.43) (0.25)
Debt to Equity Ratio (in 0.28 0.27 0.19 0.11
percentage) (0.21) (0.22) (0.09) (0.1)
Major Shareholders 3.80 4 4.18 3.50
(in number) (1.70) (1.92) (1.83) (0.71)
Slack 0.04 0.04 0.04 0.03
(in percentage) (0.01) (0.01) (0.01) (0.02)
Source: Panel Data in Appendix B
(Note: The reported figures are mean value of the portfolios sorted on factors affecting
dividend payout and figures in parentheses are standard deviation of the portfolio.)

The properties of the DPR portfolio sorted on net profit have been shown in Table 4.9.
The portfolio indicates that as the net profit increases, the dividend payout ratio also
increases from the lowest portfolio to the highest portfolio. The dividend payout ratio
for the lowest portfolio is 15.65 percent that reaches to maximum of 75 percent on
highest portfolio. However, the properties of other portfolios other than DPR does not
show clear pattern with increasing net profit rather it shows the fluctuating patterns. The
movement of the DPR along with increasing net profit can also be depicted in Figure
4.1.

Figure 4.1: Movement in DPR across the Portfolios Sorted on Net Profit
80.00
Dividend Payout Ratio

70.00
60.00
50.00
40.00
30.00 DPR
20.00
10.00
0.00
236.05 802.23 1231.8 1845.24

Net Profit

The increasing slope of the DPR curve shows the positive association between the net
profit and the DPR. It implies that the DPR of the banks with larger net profit
is more than the banks with the lower amount of profit.

ii. Properties of Portfolio Sorted on Cash Flow

61
The cash flow is the measure of the liquidity position of the banks. The portfolio sorted
on the cash flows of the sample bank have been categorized into four portfolios based
on their range value.
Variables Low <1000 m 1000-2000 m 2000-3000 m High >3000 m
Cash Flow 293.38 1335.00 2350.16 3966.67
(Rs. in million) (350.20) (277.53) (183.80) (728.49)
Dividend payout Ratio 27.71 39.31 43.81 46.96
(in percentage) (30.72) (29.31) (22.60) (14.21)
Net Profit 386.50 741.32 321.99 854.15
(Rs. in million) (355.08) (449.36) (240.87) (367.74)
Size 19412.27 36417.91 23135.24 45611.72
(Rs. in million) (12542.96) (16132.85) (9301.99) (18614.48)
Market to Book 4.97 5.80 3.32 5.37
(in Ratio) (5.10) (4.68) (2.15) (2.33)
Debt to Equity Ratio 0.29 0.20 0.12 0.19
(in percentage) (0.22) (0.15) (0.10) (0.08)
Major Shareholders 3.73 4.21 3.29 5.14
(in number) (1.71) (1.90) (0.95) (1.57)
Slack 0.03 0.05 0.02 0.03
(in percentage) (0.04) (0.05) (0.01) (0.02)
Table 4.10: Properties of Portfolio Sorted on Cash Flow
Source: Panel Data in Appendix B, C and D
(Note: The reported figures are mean value of the portfolios sorted on factors affecting
dividend payout and figures in parentheses are standard deviation of the portfolio.)

The bank with increasing cash flow seems to distribute more of its earnings as the
dividends to the shareholders. Despite the increase in cash flows in significant way, the
DPR seems to increase with lesser amount which discards the linear relationship
between the DPR and cash flows. The cash flow of less than Rs.1000 million is
considered as the lowest portfolio while the cash flow of more than Rs.3000 million is
regarded as the highest portfolio. The movement of the DPR is in the same way of that
of cash flow as revealed by Table 4.10. The DPR increases from the lowest portfolio to
the highest portfolio from the ratio of 27.71 percent to 46.96 percent respectively. In
addition, the movement of other variables with respect to cash flow does not show the
clear trend. The univariate relationship between the cash flow and the DPR can be
viewed from Figure 4.2. The upward sloping DPR curve indicates the positive
association between the two variables.

Figure 4.2: Movement of DPR across the Portfolios Sorted on Cash Flow

62
 50
45

Dividend Payout Ratio

40
35
30
25
20 DPR
15
10
5
0
293.38 1335 2350.16 3966.67

Cash Flow

iii. Properties of Portfolio Sorted on Size

The bank size has been measure by the total assets of the bank for the particular year.
The bank with the total assets of less than Rs.1000 million has been considered as the
smallest bank and that with more than Rs.3000 million has been regarded as the largest
banks. The mean and the standard deviation of the four portfolios have been show in
Table 4.11 in order to investigate the movement of the DPR with respect to the size of
the commercial banks.

Table 4.11: Properties of Portfolio Sorted on Size

Variables Low < 1000 m 1000-2000 m 2000-3000 m High >3000 m
Size 7364.43 15122.54 23992.54 47464.74
(Rs. in million) (2068.00) (2689.92) (3211.22) (9482.60)
Dividend Payout 13.31 18.15 37.07 48.66
Ratio (in percentage) (4.72) (19.54) (41.08) (28.55)
Net Profit 148.79 326.42 451.50 898.22
(Rs. in million) (119.98) (332.90) (231.53) (379.92)
Cash Flows 445.79 461.53 782.97 1319.71
(Rs. in million) (1083.28) (532.23) (812.21) (1364.76)
Market to Book 4.78 4.08 4.51 7.10
(in Ratio) (8.12) (3.23) (3.15) (4.42)
Debt to Equity Ratio 0.25 0.26 0.28 0.26
(in percentage) (0.24) (0.22) (0.21) (0.19)
Major Shareholders 3.76 3.58 3.84 4.31
(in number) (1.61) (1.58) (1.95) (1.80)
Slack 0.03 0.04 0.03 0.04
(in percentage) (0.04) (0.05) (0.01) (0.02)
Source: Panel Data in Appendix B

63
(Note: The reported figures are mean value of the portfolios sorted on factors affecting
dividend payout and figures in parentheses are standard deviation of the portfolio.)

The portfolio sorted based on the size (total assets) of the banks clearly indicates that
bank with larger total assets pays more dividends compared to the banks with smaller
total assets.

Figure 4.3: Movement of DPR across the Portfolios Sorted on Size

60
Dividend Payout Ratio

50

40

30

20 DPR

10

0
7364.43 15122.54 23992.54 47464.74

Size

It implies that the bank size determines the DPR of the banks in positive way. The large
sized banks pay more dividends than smaller banks. In addition, the portfolio clearly
indicates that the bank with larger size tends to generate more net profits and the more
cash flows compared to smaller banks. As the bank size increases, both the net profit
and the cash flows increase. The movement of the dividend payout ratio along with the
size of the bank can also be analyzed with the help of Figure 4.3. The positive slope of
the DPR curve in Figure 4.3 confirms the positive link between the size and dividend
payouts. It is further revealed that how the DPR increases sharply after the second
portfolio (medium low). It implies larger the size, more the dividend payouts.

iv. Properties of Portfolio Sorted on Market to Book Value of Equity

The market to book value ratio of the equity has been used as the independent variables
and the portfolio has been sorted based on it. The market to book ratio portfolio has
been divided into 4 categories where the ratio of less than 5 has been taken as the
lowest portfolio and above 10 as the highest portfolio.

Table 4.12: Properties of Portfolio Sorted on Market to Book Value of Equity

64
 Variables Low < 5 5-8 8 - 10 High >10
Market to Book 2.28 6.24 8.91 16.49
(in Ratio) (1.95) (1.00) (0.51) (7.25)
Dividend Payout Ratio 19.97 31.19 34.62 78.26
(in percentage) (18.26) (27.42) (35.07) (46.74)
Net Profit 414.97 480.69 449.96 702.67
(Rs. in million) (391.07) (436.55) (333.32) (315.20)
Size 700.53 897.75 697.92 559.73
(Rs. in million) (974.68) (1174.26) (1082.54) (526.83)
Cash Flows 22044.34 23348.90 25185.24 30243.33
(Rs. in million) (15048.56) (17097.43) (13750.03) (14052.39)
Debt to Equity Ratio 0.23 0.33 0.30 0.26
(in percentage) (0.19) (0.21) (0.25) (0.27)
Major Shareholders 3.96 3.87 3.86 2.91
(in number) (1.67) (1.67) (2.35) (1.38)
Slack 0.04 0.03 0.04 0.04
(in percentage) (0.04) (0.03) (0.04) (0.02)
Source: Panel Data in Appendix B
(Note: The reported figures are mean value of the portfolios sorted on factors affecting
dividend payout and figures in parentheses are standard deviation of the portfolio.)

The descriptive characteristics of the portfolios sorted on the market to book value of
equity have been illustrated in Table 4.12. The table confirms the movement of both the
market to book value of equity and the dividend payouts are in same direction. The
dividend payout ratio for the lowest portfolio is 19.97 percent which increases to 31.19
percent and 34.62 percent before it reaches to maximum of 78.26 percent in the highest
portfolios. In addition, no clear pattern of movements can be seen in other variables
other than DPR except for the cash flows. It is seen that increasing market to book
value of equity is associated with increasing cash flows of the banks. The pattern of
movement of DPR across the four portfolios formed on the market to book value of
equity has also been depicted graphically in Figure 4.4.

Figure 4.4: Movement of DPR across the Portfolios Sorted on Market to Book
Value of Equity

65
 90.00

Dividend Payout Ratio

80.00
70.00
60.00
50.00
40.00
30.00 DPR

20.00
10.00
0.00
2.28 6.24 8.91 16.4899999999998

Market to Book Value of Equity

It is evident from the graph that higher the ratio of market to book values of equity
higher the dividend payouts of the banks. Moreover, the sharp increase in the DPR is
seen right after the medium high portfolio with mean market to book ratio of 8.91. So, it
reveals that higher market to book value of equity ratio is preferable for the
shareholders since it ensure the better dividends as indicated by the portfolio analysis.

v. Properties of Portfolio Sorted on Debt to Equity Ratio

Among others, leverage has also been identified as the major determinants of the
dividend payout ratio. The leverage ratio in this study has been measured as the ratio of
the debt to equity. Dividend payouts and the leverage tend to move in opposite
direction. The movement between these two variables in context of Nepalese
commercial banks has been summarized in Table 4.13. The table showing the statistics
for the debt to equity ratio and the DPR illustrates that no clear relationship between the
two variables as such as negative or positive; however, it can be said that the DPR
fluctuates in different level of financial leverage.

Table 4.13: Properties of Portfolio Sorted on Debt to Equity Ratio

Variables Low < 0.20 0.20 - 0.40 0.40 - 0.60 High > 0.60
Debt to Equity 0.10 0.29 0.47 0.72
(in percentage) (0.06) (0.06) (0.06) (0.11)
Dividend Payout Ratio 29.61 25.50 17.80 46.99
(in percentage) (34.18) (15.98) (13.41) (42.10)
Net Profit 475.73 502.84 318.64 424.28
(Rs. in million) (433.11) (371.02) (297.65) (362.60)
Cash Flows 775.85 851.01 486.97 545.80
(Rs. in million) (1052.05) (1253.22) (420.14) (324.33

66
 Size 22053.09 26949.65 18530.42 26377.74
(Rs. in million) (14555.47) (166638.57) (12570) (17762.06)
Market to Book Ratio 4.68 4.86 5.04 7.04
(in Ratio) (6.14) (2.68) (2.49) (4.07)
Major Shareholders 3.47 4.47 4.44 3.29
(in number) (1.50) (1.92) (2.01) (1.33)
Slack 0.04 0.03 0.02 0.04
(in percentage) (0.05) (0.02) (0.01) (0.04)
Source: Panel Data in Appendix B
(Note: The reported figures are mean value of the portfolios sorted on factors affecting
dividend payout and figures in parentheses are standard deviation of the portfolio.)

The mean DPR at lowest portfolio is 29.61 percent which decreases to 25.50 percent
and 17.80 percent respectively in second and third portfolio.

Figure 4.5: Movement of DPR across the Portfolios Sorted on Debt to Equity Ratio

50
Dividend Payout Ratio

45
40
35
30
25
20 DPR
15
10
5
0
0.1 0.29 0.47 0.720000000000001

Debt to Equity Ratio

However, the DPR touches as high as 46.99 percent at highest portfolio sorted on
leverage. The diagrammatic presentation of the movement in DPR with respect to
movement in the debt to equity ratio has been done in Figure 4.5. The X axis represents
mean value of debt to equity ratio for four different portfolios while Y axis represents
the dividend payout ratios. The figure shows that the dividend payout ratio decreases till
the certain i.e. third level of portfolio before it sharply increases to reach at the ratio of
46.99 percent as the level of debt or leverage increases. The use of high leverage by
banks indicates the increased dividends.

vi. Properties of Portfolio Sorted on Number of Major Shareholders

67
The portfolios sorted on the number of major shareholders have been divided into four
categories namely the low, medium low, medium high and high portfolio. The cut off
number of the shareholders for each of the portfolios formed is less than 3, 3 to 5, 5 to 6
and more than 6 numbers of shareholders respectively.

Table 4.14: Properties of Portfolio Sorted on Number of Major Shareholders

Variables Low < 3 3-5 5-6 High > 6
Major Shareholders 1.59 3.43 5.60 7
(in number) (0.50) (0.50) (0.50) (3.61)
Dividend Payout Ratio 41.86 23.21 20.78 15.11
(in percentage) (40.72) (30.45) (15.32) (6.11)
Net Profit 485.37 409.18 553.25 193.94
(Rs. in million) (305.24) (433.59) (411.83) (473.91)
Cash Flows 570.63 693.49 953.25 571.90
(Rs. in million) (859.26) (963.71) (1198.23) (940.36)
Size 25034.47 17286.75 31943.64 15015.86
(Rs. in million) (13398.13) (12728.10) (16979.20) (9625.11)
Market to Book Ratio 6.53 4.20 4.97 4.96
(in ratio) (4.32) (6.26) (2.63) (2.98)
Debt to Equity 0.21 0.25 0.30 0.37
(n percentage) (0.22) (0.23) (0.17) (3.43)
Slack 0.03 0.04 0.04 0.01
(n percentage) (0.02) (0.05) (0.03) (8.80)
Source: Panel Data in Appendix B
(Note: The reported figures are mean value of the portfolios sorted on factors affecting
dividend payout and figures in parentheses are standard deviation of the portfolio.)

The number of major shareholder seems to have negative relationship with dividend
payout ratio as shown by the mean values of DPR with respect to increasing number of
major shareholders. It implies that when the number of major controlling or large
shareholder increases, the dividend payout ratio decreases. The DPR at lowest portfolio
is 41.86 percent which decreased to 23.21 percent and 20.78 percent before it reached at
lowest of 15.11 percent at the highest portfolio. No other clear pattern of movements is
seen in other variables with respect to movement in the number of major shareholders.

Figure 4.6: Movements on DPR across the Portfolios Sorted on Number of Major
Shareholders

68
 45

Dividend Payout Ratios

40
35
30
25
20
DPR
15
10
5
0
1.59 3.43 5.6 7

Number of Major Shareholders

The graphical depiction has been made in Figure 4.6 showing the negative link between
the number of major shareholders and the dividend payout ratios of the Nepalese
commercial banks. The negative slope of the DPR curve confirms the opposite
movements between the number of major shareholders and the dividend payouts.
However, it can be observed that the DPR falls sharply for first two portfolios while the
intensity of fall in DPR in next to portfolio is lesser as compared to earlier falls.

vii. Properties of Portfolio Sorted on Slack

This section provides the findings of the univariate portfolio analysis sorted on the base
of the slack, a proxy for investment opportunities. The portfolio analysis sorted on slack
has failed to establish the decisive relationship between the slack and dividend payout
ratios as such as positive or negative relationship. The dividend payout ratios seem to
rise and fall with increasing slack. The slack has been categorized into four portfolios
with lower portfolio less than 0.02 or 2 percent and higher portfolio of greater than 0.06
or 6 percent. Table 4.15 shows the univariate relationship between the slack and the
dividend payout ratios.

Table 4.15: Properties of Portfolio Sorted on Slack

Variables Low < 0.02 0.02 - 0.04 0.04 - 0.06 High > 0.06
Slack 0.01 0.03 0.05 0.15
(in percentage) (0.01) (0.006) (0.01) (0.03)
Dividend Payout Ratio 14.63 34.59 59.44 12.46
(in percentage) (12.93) (26.71) (44.36) (7.37)
Net Profit 250.45 607.76 752.81 238.05
(Rs. in million) (213.49) (422.90) (438.23) (164.75)

69
 Cash Flows 629.81 869.18 888.44 354.06
(Rs. in million) (950.31) (1039.53) (1199.92) (481.82)
Size 17345.36 27917.24 31372.36 17128.98
(Rs. in million) (10865.70) (16218.24) (17167.67) (14302.30)
Market to Book Ratio 4.77 4.835 7.46 2.17
(in ratio) (5.85) (3.045) (5.11) (3.30)
Debt to Equity Ratio 0.25 0.324 0.22 0.16
(in percentage) (0.20) (0.225) (0.19) (0.16)
Major Shareholders 3.76 4.15 3.36 3.91
(in number) (1.62) (2.01) (1.65) (0.83)
Source: Panel Data in Appendix B
(Note: The reported figures are mean value of the portfolios sorted on factors affecting
dividend payout and figures in parentheses are standard deviation of the portfolio.)

The mean DPR increases to 59.44 percent from 14.63 percent in the lowest portfolio
and decrease back to level of 12.46 percent at the highest portfolio. The portfolio sorted
on the slack does not clearly indicate its relationship with other variables other than
DPR. However, all other variables increase up to second and third portfolio before all
decrease in the fourth portfolio.

Figure 4.7: Movements on DPR across the Portfolios Sorted on Slack

70
Dividend Payout Ratio

60

50

40

30
DPR
20

10

0
0.01 0.03 0.05 0.15

Slack

The graphical analysis has also been made in Figure 4.7 for the portfolio sorted on the
slack, a proxy for the investment opportunities. The inverse U shaped slope of the DPR
curve depicts that the DPR increases up to certain level of slack and finally slumps
down as the slack booms. The graph also reveals the sharp increase and sharp decrease
in DPR as the slack changes.

70
4.3. Analysis of the Factors Affecting Dividend Payout
This section fulfills the third objective of this study i.e. the analysis of the trend and
relationship between the dividend payouts and factors influencing it for total sample of
the study. Thus, this section analyzes the trends and relationship DPR and its
determinants using descriptive, correlation and regression analysis for overall
commercial banks including both domestic private and foreign joint venture banks.

4.3.1. Descriptive Analysis

Table 4.16 reveals the descriptive statistics of the dividend payout ratios and factors
influencing it for total sample of both DPB and JVB. So, the table indicates the
descriptive statistics of the Nepalese commercial banks. The study shows that the
average dividend payout ratios for the Nepalese commercial banks is 26.58 percent with
standard deviation of 28.39 percent which shows the highly fluctuating and unstable
nature of the dividends distributed by the commercial banks to its shareholders.
Likewise, the net profit of the commercial banks seems to be volatile as revealed by the
higher standard deviation of Rs.543.77 million as against mean net profit of Rs.500.64
million.

Table 4.16: Descriptive Statistics of Dividend Payout Ratios and its Determinants
Variables Minimum Maximum Mean Std. Dev. N
Dividend Payout Ratio (in %) 0.00 140 26.5 28.39 136
Net Profit (Rs. in million) -138.16 4805.50 500.6 543.77 136
Cash Flows (Rs. in million) -1695.95 5416.15 703.1 1023.64 136
Size (Rs. in million) 3193.20 65756.00 23643.7 15495.51 136
Market to Book Ratio (in ratio) -7.05 35.86 5.01 4.84 136
Debt to Equity (in percentage) 0.10 0.89 0.30 0.20 136
Major Shareholders (in
1 7 3.84 1.73 136
number)
Slack (in percentage) 0.01 0.19 0.038 0.034 136
Source: Panel Data in Appendix B

In addition, the minimum and maximum value of the cash flows is negative value of
Rs.1695.95 million to Rs.5416 million with mean cash flow of Rs.703.14 million and
standard deviation of Rs.1023.64 million. Likewise, the size of the commercial banks in
Nepal ranges from Rs.3193.20 million to Rs.65756 million which illustrates the gap
between the base of total assets among the commercial banks even though they occupy
same grade (A class) from central bank. In other hand, the average leverage ratio of the
Nepalese commercial banks is 30 percent which is higher than JVB and lower than
71
DPB in case of individual sample. However, there are no significant differences in
number of major shareholder and slack in total sample and individual sample analysis.

4.3.2. Correlation Analysis

The correlation analysis has been carried out to investigate the direction and magnitude
of the relationship between the dividend payout ratios and the factors affecting it. The
correlation coefficient for the total sample of the study has been presented in Table 4.17
along with the test of significance. The dividend payout ratio is positively related with
the net profit and the coefficient is significant at 1 percent level of significance.

Table 4.17: Correlation Analysis of Dividend Payouts and its Determinants

Variabl LnDP
e R NP CF SZ MBV DE MSH SLC
LnDPR 1.00 0.89** 0.74* 0.57** 0.44** 0.07 -0.69* 0.05
NP 0.89** 1.00 0.15 0.61** 0.13 -0.12 -0.02 -0.03
CF 0.74* 0.15 1.00 0.34** 0.02 -0.11 0.12 -0.01
SZ 0.57** 0.61** 0.34** 1.00 0.17* -0.04 0.17 -0.03
MBV 0.44** 0.13 0.02 0.17 1.00 0.05 -0.06 -0.11
DE 0.07 -0.12 -0.11 -0.04 0.05 1.00 0.04 -0.11
MSH -0.69* -0.02 0.12 0.17* -0.06 0.04 1.00 -0.01
SLC 0.05 -0.03 -0.01 -0.03 -0.11 -0.11 -0.01 1.00
Source: Panel Data in Appendix B
(Note: The variables abbreviated as DPR is dividend Payout ratio, NP is net profit, CF is cash
Flows, SZ is size, MBV is market to book value ratio, DE is debt to equity ratio, MSH is number
of major shareholders and SLC is slack NP, CF and SZ are expressed in terms of million Rs.
DPR, DE and SLC are percentage figures. MBV is simple ratio between two prices while MBV
is the number).

The observed relationship is strong since the correlation coefficient is 0.89. Likewise,
cash slows, size, market to book value of equity, debt to equity and slack is positively
associated with dividend payout ratios with respective correlation coefficient of 0.74,
0.57, 0.44, 0.07 and 0.05. So, cash flow has strong positive correlation with DPR while
size is moderately correlated. However, the correlation of debt to equity and slack with
DPR is very weak. In other hand, Number of major shareholders is negatively
correlated with DPR and has coefficient of -0.69. The observed correlation coefficients
are all significant except for the debt to equity ratio. Among the observed correlations,
the degree of correlation of net profit, cash flows, number of major shareholders and
size is most strong in order of their importance which means these variables better
explain the dividend payouts in case of commercial banks in Nepal.

72
4.3.3. Regression Analysis
The regression analyses have been carried out in order to investigate the empirical
validity of the multiple regression model described in the previous chapter. The full
version model including the sample observations of both DPB and JVB provides the
complete view of the dividend payouts for commercial banks of Nepal in Table 4.18.
The model is highly significant as indicated by P-value of 0.000 and F-ratio of 9.965. In
addition, this model reveals that almost 56.3 percent of the variations in the dividend
payouts of the commercial banks of Nepal are explained by the factors like net profit,
cash flows, size, market to book ratio and number of major shareholders.

Table 4.18: Regression Analysis of Dividend Payouts and its Determinants

Unstandardized Collinearity
Coefficients t- Sig. Statistics
Model
Std. Error Statistics P-value
B Tolerance VIF
Beta
(Constant) 7.448 7.123 1.046 0.298
Net Profit 19.43* 6.781 2.865 0.032 0.597 1.674
Cash Flows 10.32* 3.869 2.667 0.038 0.868 1.153
Size 2.210** 0.656 3.366 0.001 0.529 1.891
Market to Book 2.162** 0.432 5.007 0.000 0.946 1.057
Debt to Equity 11.445 10.575 1.082 0.281 0.957 1.044
Major Shareholders -3.187** 1.213 -2.628 0.010 0.935 1.069
Slack 72.855 54.199 1.344 0.181 0.976 1.025
Adjusted R-Square 0.563
F- Ratio 9.965
Sig. (P-value) 0.000
Durbin Watson (DW) 1.853
Source: Panel Data in Appendix B and E

The coefficients for the net profit is computed to be 19.43 which tells that the banks
have tendency to increase its dividend payout ratio approximately by 19.43 percent if its
net profit rise by Rs. 1. This tendency is correct for the 95 percent of the time when Rs.
1 is added to the bank’s net profit. Similarly, cash flow of the banks also have
propensity to increase the dividend payout ratio by 10.32 percent for every Rs. 1
increase in cash flow on an average. And, it is likely that banks follow such dividend
behavior since the regression coefficient is significant at 5 percent level.

In addition, 99 percent of the time, boom of 2.21 percent can be observed in dividend
payout ratio when the banks expand its total assets by Rs. 1. Moreover, market to book
73
ratio has recorded the coefficient of 2.16 which is significant at below 1 percent level.
The result hints that both market to book ratio and dividend payout ratio moves in same
direction i.e. increase and decrease in market to book ratio increase and decrease the
dividend payout ratio respectively which holds true for 99 percent of the cases. In
contrast, banks are likely to decrease its dividend payout ratio if the number of major
shareholder increases and vice versa. This result is confirmed by negative coefficient of
3.187 which is significant at 1 percent level. It further indicates that increase in number
of major shareholder decreases the dividend payout ratio and vice versa is true for 99
percent of the time. Finally, the debt to equity ratio and slack shows no empirical
relationship with dividend payouts. Even though debt to equity and slack reports
positive coefficient suggesting the positive relationship with dividend payout ratio, the
results are insignificant hence cannot be generalized. Thus, net profit, cash flows,
number of major shareholders and size are the most dominant predictor of dividend
payout ratio of commercial banks. Market to book value ratio is least important as
revealed by the regression coefficients.

4.4. Analysis of Determinants of Dividend Payouts in Domestic Private Banks

Fourth objective of this study has been discussed in this section. This section attempts
to analyze the secondary data associated with firm specific variables that determines the
dividend payout ratios of domestic private banks. Descriptive, correlation and
regression analysis have been conducted in order to analyze the panel data of domestic
private banks.

4.4.1. Descriptive Analysis

Descriptive analysis has been made to analyze the aggregate level of characteristics of
dividend payout ratios and the factors influencing it for the study period for the sample
banks. The descriptive analysis among others, consist of minimum and maximum
values, mean and standard deviation and the total number of observations for the period
of 2005 to 2012. Table 4.19 illustrates the descriptive statistics for the domestic private
banks the study period. Dividend payout ratio for the domestic private banks ranges
from minimum of 5 percent to maximum of 48 percent during the study period. The
mean dividend payout ratio of the sample bank is 15.64 percent while standard
deviation of the ratio stood 8.91 percent. The high value of the standard deviation

74
suggests that the dividend payout ratio for DPB fluctuates far and wide from its mean
value implying the high volatility of the dividend payout ratios.

Table 4.19: Descriptive Statistics of Dividend Payouts and its Determinants for
Domestic Private Banks
Variables Minimum Maximum Mean Std. N
Dev.
Dividend Payout Ratio (in %) 5 48 15.6 8.9 88
Net Profit (Rs. in million) -15.42 1158.09 259.4 186.6 88
Cash Flows (Rs. in million) - 244.42 5416.15 589.6 836.2 88
Size (Rs. in million) 3193.20 58991.20 16580.0 10244.4 88
Market to Book Ratio (in ratio) -7.05 35.86 4.30 5.03 88
Debt to Equity (in percentage) 0.10 0.89 0.32 0.22 88
Major Shareholders (in number) 1 7 3.64 1.70 88
Slack (in percentage) 0.01 0.19 0.037 0.043 88
Source: Panel Data in Appendix B

In addition, the net profit of the DPB showed varying trend illustrated by the wider
range of minimum negative value of Rs.15.42 million to maximum of Rs.1158 million
with mean net profit of Rs.259.45 million. Similarly, the cash flows differs significantly
among the DPB as indicated by range of minimum cash flow of negative value of
Rs.244.42 million to maximum of Rs.5416.15 million with average per bank cash flows
of Rs.589.62 million per year. It shows weak liquidity position of some banks included
in the sample. Moreover, size of the DPB measured by the total assets showed that
mean size of the DPB is Rs.16580.03 million with standard deviation of Rs.10244.40
which indicates the variability in the bank size and base of total assets for the DPB.
Furthermore, the average market to book ratio, debt to equity ratio, number of major
shareholders and slack are 4.30, 32 percent, 3.46, and 3.7 percent respectively. The
study shows that the banks differ significantly in market to book value ratio as indicated
by standard deviation of 5.30 while the minimum and maximum value of leverage
ranging from 10 percent to 89 percent portrays the variability in degree of financial
leverage used by sample DPB.
4.4.2. Correlation Analysis
The correlation analysis has been carried out to investigate the direction and magnitude
of the relationship between the dividend payout ratios and the factors affecting it. The
correlation coefficient for domestic private banks has been presented in Table 4.20
along with the test of significance. The correlation coefficient ranges from -1 to +1. The
correlation of -1 indicates perfect negative correlation while +1 indicates the perfect
75
positive correlation. One asterisk in superscript of the coefficient indicates it
significance at 5 percent level while two asterisks indicates significance at 1 percent.

Table 4.20: Correlation Analysis of Dividend Payouts and its Determinants of Domestic
Private Banks
Variabl LnDP
NP CF SZ MBV DE MSH SLC
e R
LnDPR 1.00 0.78** 0.65* 0.48** 0.13* 0.04 -0.45* 0.03
NP 0.78** 1.00 0.25* 0.62* 0.107 -0.060 0.11 0.02
CF 0.65* 0.25* 1.00 0.32 0.05 -0.17 0.13 -0.01
SZ 0.48** 0.62* 0.32* 1.00 0.02 0.08 0.30* -0.01
MBV 0.13* 0.11 0.05 0.02 1.00 0.04 0.06 -0.13
DE 0.04 -0.06 -0.17 0.08 0.04 1.00 0.01 -0.11
MSH -0.45* 0.11 0.13 0.30* 0.06 0.01 1.00 -0.02
SLC 0.03 0.02 -0.01 -0.01 -0.13 -0.11 -0.02 1.00
Source: Panel Data in Appendix B
(Note: The variables abbreviated as DPR is dividend Payout ratio, NP is net profit, CF is cash
Flows, SZ is size, MBV is market to book value ratio, DE is debt to equity ratio, MSH is number
of major shareholders and SLC is slack NP, CF and SZ are expressed in terms of million Rs.
DPR, DE and SLC are percentage figures. MBV is simple ratio between two price while MBV is
the number).

The dividend payout ratio is strongly positively related with the net profit and the
coefficient of 0.78 is significant at 1 percent level of significance. Likewise, cash flows,
size, market to book value of equity, debt to equity and slack is positively associated
with dividend payout ratios while number of major shareholders is negatively related
with dividend payout ratios. The correlation coefficient of cash flow and size is 0.65
and 0.48 respectively which can be considered as the moderate degree of positive
correlation and the coefficient is significant at 1 percent level. Similarly, number of
major shareholders is negatively related with dividend payouts with the moderate
negative coefficient of 0.45. In contrast, correlation coefficient of market to book value,
debt to equity and slack with dividend payout ratio is positive but very weak. The
observed correlation coefficients are all significant except for the debt to equity ratio
and slack. Thus, from correlation analysis, net profit, cash flows, number of major
shareholders and size of the banks are revealed as the major factors affecting the
dividend payout ratios of domestic private banks.

4.4.3. Regression Analysis

76
The regression analysis for domestic private banks has been reported in Table 4.21. The
regression analysis aims to analyze the relationship between the dividend payout and its
determinants for domestic private banks. The reported values are the un-standardized
regression coefficients and the figures in parentheses are the t-value statistics. In
addition, the model summary and overall significance of the models have been
presented in lower part of Table 4.21. One asterisk in the superscript of the regression
coefficient refers to the significance of the results at 5 percent level and two asterisks in
the superscript represent the significance at 1 percent level.

Table 4.21: Regression Analysis of Dividend Payout and its Determinants for
Domestic Private Banks
Unstandardized
Collinearity
Coefficients
Statistics
t- Sig.
Model
Std. Statistics P-value
B Error Tolerance VIF

(Constant) 14.78* 3.622 4.081 0.000

Net Profit 13.46* 6.54 2.086 0.048 0.864 1.157
Cash Flows 7.71* 2.65 2.909 0.039 0.947 1.056
Size 6.336* 1.676 3.78 0.019 0.873 1.146
Market to Book 0.166* 0.076 2.184 0.041 0.962 1.04
Debt to Equity -0.898 4.695 -0.191 0.849 0.917 1.09
Major Shareholders -0.865* 0.294 -2.942 0.033 0.912 1.097
Slack -7.999 22.749 -0.352 0.726 0.969 1.032
Adjusted R-Square 0.533
F- Ratio 8.895
Sig. (P-value) 0.029
Durbin Watson (DW) 1.716
Source: Panel Data in Appendix B and D

The model specification is significant at 5 percent level with F-ratio of 8.895 and P-
value of 0.029. The adjusted R square of the model was found to be 0.533 or 53.30
percent which tells that about 53.30 percent of changes or variation in dividend payout
ratios of the domestic private banks (DPB) are explained by the independent variables
used in this model specification. As revealed by Table 4.21 net profit of DPB is
positively related with dividend payout ratio with coefficient of 13.46.

The result is significant at 5 percent level of significance indicating that 95 percent of

the time when dividend increases by Rs.1, the dividend payout ratio increases
approximately by 13.46 percent. Likewise, Cash flows and size of the bank are also
77
positively related with DPR with respective regression coefficients of 7.71 and 6.336
both of which are significant at 5 percent level. The regression results confirm that
banks tend to increase the dividend payout ratio by 7.71 percent and 6.36 percent
respectively if the cash flows and total assets of the banks are increased by Rs. 1. In
addition, market to book value and numbers of major shareholders have respective
positive and negative relationship with dividend payout ratios. The coefficient for MBV
is 0.166 and for MSH is -0.865 both of which are significant at 5 percent level. So, it
can be generalized that increase in MBV of the banks causes bank to increase its
dividend payout ratio while more number of controlling shareholders decreases the
payout ratio. In contrast, the leverage ratio and the slack were found to have
insignificant negative relationship with the dividend payouts of the domestic private
banks. So, it cannot be concluded that increases in debt to equity ratio and slack
decreases the dividend payout ratio and vice versa. The strongest predictors of dividend
payouts of domestic private banks are net profit, cash flows, size and number of major
shareholders. Among others, market to book ratio have nominal effect and debt to
equity and slack has no effect.

4.5. Analysis of the Determinants of Dividend Payouts of Joint Venture Banks

In attempt to accomplish the fifth objective, the analysis of trends and relationship of
dividend payout ratio and its determinants of foreign joint venture banks have been
dealt in this section. In analyzing the trend and relationship between the dividend
payouts and its determinants, this study has used descriptive, correlation and regression
analysis.

4.5.1. Descriptive Analysis

Descriptive analysis of the dividend payout and factors affecting it has been carried out
in order to analyze the trends of joint venture banks. Further, it has been employed to
find the facts regarding the variables of interests. Minimum value, maximum value,
mean value and standard deviation have been reported in Table 4.22 along with total
number of observations for the JVB. The scenario for the foreign joint venture banks is
different as compared to domestic private banks. Table 4.22 depicts that the dividend
payout ratios (DPR) for JVB ranges from minimum of 0 percent to maximum of 140
percent with mean DPR of 42.22 percent which is significantly higher compared to the
payout ratio of DPB.
78
 Table 4.22: Descriptive Statistics of Dividend Payout Ratios and its Determinants
for Foreign Joint Venture Banks
Variables Minimum Maximum Mean Std. Dev. N
Dividend Payout Ratio (in %) 0.00 140 42.22 37.98 48
Net Profit (Rs. in million) -138.16 4805.50 845.20 685.74 48
Cash Flows (Rs. in million) -1695.95 4240.45 865.32 1233.74 48
Size (Rs. in million) 10616.60 65756.00 33734.67 16197.71 48
Market to Book Ratio (in ratio) -3.40 18.35 6.07 4.39 48
Debt to Equity (in percentage) 0.10 0.67 0.26 0.16 48
Major Shareholders (in
2 6 4.14 1.74 48
number)
Slack (in percentage) 0.01 0.18 0.04 0.03 48
Source: Panel Data in Appendix B

In addition, the figure of net profit shows average net profit of Rs.845.20 million which
is in better half as compared to DPB; however, high standard deviation of Rs.685.74
million shows high volatility associated with net profits of JVB. In contrast, the
minimum and maximum value of cash flows is satisfactory for DPB irrespective of
higher mean cash flow of Rs.865 million for JVB. Likewise, the study indicates that
JVB are larger in size as compared to DPB as depicted by maximum value of total
assets of Rs.65756 million. Moreover, the market to book value ratio of JVB has mean
value of 6.07 and means debt to equity ratio is 26 percent. Furthermore, DPB are highly
leveraged than the JVB and number of major shareholder is lesser in JVB as indicated
by maximum shareholder of 6. However, the mean slack the proxy for investment
opportunity is 4 percent which is higher than DPB.

4.5.2. Correlation Analysis

The correlation analysis of foreign joint venture banks reveals that net profit, cash flows
and size has strong positive correlation with dividend payout ratios with respective
coefficients of 0.88, 0.82 and 0.72 in Table 4.23

Table 4.23: Correlation Analysis of Dividend Payouts and its Determinants of Foreign
Joint Venture Banks.

Variable LnDPR NP CF SZ MBV DE MSH SLC

LnDPR 1.00 0.88* 0.82 0.72* 0.17* 0.12 -0.37* 0.11
NP 0.88* 1.00 0.09 0.54** 0.05 -0.03 -0.12 -0.12
CF 0.82 0.09 1.00 0.38** -0.05 0.01 0.10 -0.03
SZ 0.72* 0.54** 0.38** 1.00 0.29* -0.07 -0.01 -0.05

79
 MBV 0.17* 0.05 -0.05 0.29* 1.00 0.17 -0.31* -0.07
DE 0.12 -0.03 0.01 -0.07 0.17 1.00 0.11 -0.08
MSH -0.37* -0.12 0.10 -0.01 -0.31* 0.11 1.00 0.00
SLC 0.11 -0.12 -0.03 -0.05 -0.07 -0.08 0.00 1.00
Source: Panel Data in Appendix B

(Note: The variables abbreviated as DPR is dividend Payout ratio, NP is net profit, CF is cash
Flows, SZ is size, MBV is market to book value ratio, DE is debt to equity ratio, MSH is number
of major shareholders and SLC is slack NP, CF and SZ are expressed in terms of million Rs.
DPR, DE and SLC are percentage figures. MBV is simple ratio between two prices while MBV
is the number).

Likewise, leverage ratio or debt to equity ratio and slack have also positive but weak
correlation with dividend payouts. In contrast, number of major shareholder has
negative correlation with DPR; however, the correlation is moderate with negative
coefficient value of 0.37. All of these observed correlation coefficients are significant at
5 percent level of significance except for debt to equity ratio and slack.

4.5.3. Regression Analysis

In line with the previous regression results, net profit, cash flows, size and number of
major shareholders are the most important factor affecting the dividend payout ratio of
the foreign joint venture banks. Dividend payout is negatively related with MSH with
significant negative coefficients of 6.014 portraying that increase in number of major or
controlling shareholders tend to decrease the payout ratio of the foreign joint venture
banks. To be more specific, the net profit has positive relationship with payout ratio
with regression coefficient of 16.22 which indicates that increase in net profit of the
foreign joint venture banks tend to raise the DPR. Likewise, the coefficient for cash
flow indicates an increase of 9.16 percent of DPR for every Rs. 1 additional cash flows
illustrating the positive relationship. Moreover, market to book ratio and size has
significant positive effect on dividends payout ratio implying that increase in both of
these variables causes to increase the DPR. The reported coefficient for MBV and size
are 4.563 and 5.423 both of which are significant in explaining the changes in DPR
with respect to change in MBV and size. All these regression coefficients are significant
at 5 percent level.

Table 4.24: Regression Analysis of Dividend Payout and its Determinants for Foreign
Joint Venture Banks

80
 Unstandardized Collinearity
Coefficients t- Sig. Statistics
Model
Std. Error Statistic P-value
B Tolerance VIF

(Constant) 5.811 14.977 0.388 0.700

Net Profit 16.22* 5.17 3.143 0.031 0.624 1.603
Cash Flows 9.16* 2.856 3.207 0.030 0.750 1.333
Size 5.423* 1.896 2.860 0.043 0.468 2.139
Market to Book 4.563** 0.937 4.869 0.000 0.746 1.341
Debt to Equity 43.788 23.624 1.853 0.073 0.881 1.135
Major Shareholders -6.014** 2.302 -2.613 0.012 0.784 1.275
Slack 210.701 123.786 1.702 0.095 0.974 1.027
Adjusted R-Square 0.519
F- Ratio 9.488
Sig. (P-value) 0.000
Durbin Watson (DW) 1.828
Source: Panel Data in Appendix B and C

However, similar to the results of DPB, debt to equity ratio and slack have insignificant
but positive impact on payout ratio that makes these variables less important or
irrelevant in explaining the dividend payout ratio. The overall model was highly
significant as shown by P-value of 0.000 and F-ratio of 9.488 and adjusted R-square is
0.519. It indicates the 51.9 percent changes in DPR are explained by the independent
variables used.

4.6. Assessment of Management Views

This section is directed towards presenting and analyzing the primary data obtained
from the questionnaire survey made on determinants of dividend policy among
managers of the commercial banks which fulfills the sixth and the last objective of this
study. The primary data obtained from the survey has been divided into two categories
namely the response from domestic private banks (DPB) and response from foreign
joint venture banks (JVB). The results obtained from the respondents profile have been
presented and analyzed at aggregate level while other data regarding the dividend
practices and opinions have been presented differently and separately to indicate the
results for both group of banks separately. Frequency, percentage, cross tabulation,
Pearson chi-square etc has been used for the analysis of the primary data. It has also
been assessed whether or not the opinion regarding dividend practices between two
groups of bank differs significantly. Chi-square value and probability value (P-value)
approach have been used to find out such differences between the samples.
81
4.6.1. Priority of Corporate Decisions
Mangers face the priority confusion whenever they have to make the corporate
decision. Financing, investment and the dividend decisions are the most crucial
decisions that have to be made in corporate world. This study asked the respondents
with which priority they or their banks make the corporate decisions. The results of this
survey along with the mean value, standard deviation, overall rank, chi-square value
and the p-value have been reported in Table 4.25.

Table 4.25: Response on Priority of Corporate Decision Making

Rank Scores Chi- Sig
Decisions Samples Mean Rank square
1 2 3
DPB 24 8 4 1.44
Financing I 9.242 0.010
JVB 32 0 5 1.27
DPB 5 24 7 2.05
Investment II 6.602 0.049
JVB 2 26 9 2.18
DPB 7 5 24 2.47
Dividend III 7.858 0.014
JVB 3 11 23 2.54
Source: Response in Survey Questionnaires in Appendix A

It indicates that both groups of sample banks subscribe to the view that considers the
financing decisions is the most important followed by investment decision and dividend
decisions. This implies that a dividend decision comes under the last priority of the
corporate decision making. The mean for the financing decisions for DPB and JVB is
1.44 and 1.27 respectively. Based on these facts, the mean for dividend decisions is
comparatively higher than other i.e. 2.47 and 2.54 respectively for DPB and JVB
respectively. So, the dividend decisions are less prioritized. These findings are also
illustrated with the column marking the overall rank of the corporate decisions.
Furthermore, these findings from two groups of sample banks are statistically
significant since all the reported p-values are less than the level of significance of 5
percent.
4.6.2. Relevancy of Dividends
It has been argued by various studies that dividend still remains as the puzzle in the
field of corporate finance.

Table 4.26: Response on Dividend Relevance and Irrelevance Theory

Opinions DPB (%) JVB (%) Total Sample (%)

82
 Relevance Theory (Affects firm 88.89 56.75 72.60
value and share price)
Irrelevance Theory (Does not 11.11 43.25 27.40
affects the firm value and share
price)
Pearson Chi-square 9.471
Asymptotic Sig. (P-value) 0.002
Source: Response in Survey Questionnaires in Appendix A

The relevance theory asserts that dividend affects the value of the firm while
irrelevance theory suggests that dividend has nothing to do with the value of the firm.
Despite of the huge body of supportive literatures on irrelevance theory, the survey
among Nepalese commercial banks shows that dividend affects the value and share
price of the firms or the banks. Table 4.26 illustrates that 88.89 percent and 56.75
percent of the respondents from DPB and JVB respectively support the relevance theory
of dividend which makes 72.60 percent in total sample. In other hand, 11.11 percent of
respondents from DPB and 43.25 percent of JVB still subscribe to the view that
dividends are irrelevant for the value of the bank. The observed differences in the
opinions regarding the relevance and irrelevance theory are statistically significant
between two independent samples of the banks at chi-square value of 9.471 and p-value
of 0.002.

4.6.3. Opinions on Dividend as Residual Decisions

The dividend as the residual decision plays important role in determining what to
payout as the dividend to the shareholders. For instance, if the bank take dividend as the
residual decision, the shareholders are likely to receive lesser amount as the dividend.
The bank meets all the profitable investment before deciding the amount of dividend.
Table 4.27 shows the opinions regarding dividend as the residual decision among the
commercial banks in Nepal.

Table 4.27: Response on Dividend as Residual Decision

Opinions DPB (%) JVB (%) Total Sample (%)
Yes 41.67 29.73 35.62
No 52.78 48.65 50.68
Don’t Know 5.55 21.62 13.70
Pearson Chi-square 4.230
Asymptotic Sig. (P-value) 0.121
83
Source: Response in Survey Questionnaires in Appendix A

Table 4.27 reveals that 41.67 percent of the respondents from the domestic private
banks (DPB) subscribe to the idea that the dividend should be the residual decisions
while 52.78 percent contend that it is not. Same results for the foreign joint venture
banks are 29.73 percent and 48.65 percent respectively. In contrast, 5.55 percent of
DPB and 21.62 percent respondents from JVB recorded that they are not sure about the
fact. In total sample that combines both DPB and JVB, majority i.e. 50.68 percent said
that dividend are not the residual decisions while 35.62 percent believed it as the
residual decisions. However, the difference in opinions between the DPB and JVB is
not statistically significant because of higher P-value of 0.121.

4.6.4. Preference on Dividend Policy

The factors shaping the dividend policy still remains puzzling for different reasons. The
dividend payments in banking sector are even more difficult to predict with regards to
its dividend policy whether they follow stable policy, regular policy or the irregular
policy.

Table 4.28: Response on Preference on Dividend Policy

Opinions DPB (%) JVB (%) Total Sample (%)
Stable Dividend Policy 19.44 0.00 19.44
Regular Dividend Policy 33.33 35.14 34.25
Irregular Dividend Policy 47.23 64.86 56.16
Pearson Chi-square 8.223
Asymptotic Sig. (P-value) 0.016
Source: Response in Survey Questionnaires in Appendix A

Further, the regulatory authorities take deeper look in banks business that also affects
the dividend policy. Thus, it is very essential to know what policies are being adopted
by the commercial banks in Nepal. Table 4.28 reveals the same. The survey indicates
that 56.16 percent of the banks prefer the irregular dividend policy in total sample while
the responses from DPB are 47.23 percent and 64.86 percent from JVB asserts the same
preference of the respective banks. However, a notable response also shows that 34.25
percent banks prefer the regular dividend policy in total sample. 33.33 percent of the
DPB favor the regular dividend policy while 35.14 percent of JVB prefers the same.
Interestingly, it was observed that none of the respondent from JVB has opinion that the
stable dividend policy is preferred by their banks. In contrast, 19.44 percent respondents
84
opined the stable dividend policy as the preference of their banks. The observed
differences in opinion towards preference of dividend policy among the DPB and JVB
are statistically significant at 5 % level of significance since the reported p-value is
0.016.

4.6.5. Preference towards Dividend Type

Bird in hand theory asserts that shareholders are better off when they receive the cash
dividend at present because the future dividends are uncertain. In same way, most of the
shareholders and investors prefer the cash dividend. But, the preference from other way
round i.e. from bank’s perspective is also very crucial. Banks mostly want to conserve
the cash to invest in profitable projects. Thus, the dividend practices and the dividend
types as adopted by the Nepalese commercial banks are reported in Table 4.29. It
depicts that majority of the respondents from both samples DPB (83.33 %) and JVB
(56.75 %) confirmed that the banks favor the cash dividend compared to other type of
the dividend while 16.67 percent and 43.25 percent prefers the stock dividend or the
bonus share. In total sample, almost 69.86 percent commercial banks distribute the cash
dividend whereas 30.14 percent goes for the stock dividend.

Table 4.29: Response on Preference towards Dividend Types

Opinions DPB (%) JVB (%) Total Sample (%)
Cash Dividend 83.33 56.75 69.86
Stock Dividend or Bonus Share 16.67 43.25 30.14
Stock Splits 0.00 0.00 0.00
Stock Repurchase 0.00 0.00 0.00
Pearson Chi-square 6.121
Asymptotic Sig. (P-value) 0.013
Source: Response in Survey Questionnaires in Appendix A

Stock splits and the stock repurchase does not come under the preference of the
Nepalese commercial banks which can be seen from the null responses for these types
of dividends. The preference in the types of dividends preferred by the both sample
banks are significantly different at 5 % which is indicated by the chi-square statistics of
6.121 and p-value of 0.013.

4.6.6. Reasons for Adopting Certain Dividend Policy

Why bank adopt the dividend policy in a way they do is very crucial to understand. It
can have important implications for the investors. Some of those factors that act as the
85
reasons to adopt certain dividend policy identified by this study are easy
implementation, to avoid changes, flexibility and expectation of shareholders. The
results regarding the reasons for dividend policy are shown in Table 4.30. It has already
been revealed that the commercial banks in Nepal prefer cash dividend the most
followed by the stock dividend or bonus share. So, the reason for their choice of paying
cash and stock dividend is important to know.

Table 4.30: Response on Reasons Regarding Certain Dividend Policy

Opinions DPB (%) JVB (%) Total Sample (%)
Easy Implementation 19.44 8.10 13.69
Flexibility 22.22 13.52 17.80
Avoid Changes 11.11 10.81 10.95
Expectation of Shareholders 47.23 67.57 57.53
Pearson Chi-square 3.803
Asymptotic Sig. (P-value) 0.284
Source: Response in Survey Questionnaires in Appendix A

Table 4.30 indicates that the major reason behind paying cash dividend by DPB and
stock dividend by JVB is because of the expectation of the shareholders. The preference
of the shareholder and the investors differs which causes such varying expectations in
term of dividends as well. Out of 73 surveyed respondents, 57.53 percent confirmed
that they adopt the dividend policy in way they do is because of the expectation of their
shareholders. In independent sample, the response for this reason is 47.23 and 67.57
percent for DPB and JVB respectively. In contrast, 22.22 percent of DPB and 13.52
percent JVB contends that it is flexible to execute the dividend type they provide which
makes 17.80 percent to support for this reason in total sample. In addition, few
respondents also said that it is easy to implement and avoid changes with their current
dividend policy. Altogether, 13.69 percent and 10.95 percent subscribed to this view.
Even though the opinions between the two groups of sample differ, this difference is
statistically insignificant because the reported p-value is 0.284 which is greater than 5
% level of significance.
4.6.7. Studies on Shareholder’s Dividend Preference
Previous finding suggest that the commercial banks seeks to fulfill the expectation of
their shareholders before deciding the types of the dividends. So, the expectation of
shareholders can be known by studying their investment objective and their preference.
The banks should know whether the shareholders prefer capital gains or dividends. If
dividends are preferred what type of the dividends they want is essential for the
86
commercial banks. Such information regarding dividend preference can be collected
through the studies or survey. Following sections provide the evidence on exactly what
percentage of the commercial banks make such studies.

Table 4.31: Response of Studies on Shareholder’s Dividend Preference

Opinions DPB (%) JVB (%) Total Sample (%)
Yes 5.56 13.51 9.59
No 47.22 45.94 46.58
Don’t Know 47.22 40.55 43.83
Pearson Chi-square 2.563
Asymptotic Sig. (P-value) 0.464
Source: Response in Survey Questionnaires in Appendix A

Majority of the respondents from both group of the sample bank contends that the
commercial banks do not perform studies or survey regarding the shareholder’s
dividend choice. 47.22 percent of DPB and 45.94 percent of the JVB do not conduct
such studies while 47.22 percent and 40.55 percent of DPB and JVB respectively said
that they are not sure about such studies conducted by the commercial banks. Out of
total combined sample, 46.58 percent confirmed that the banks do not make studies of
dividend preference while 9.59 percent said that bank make such studies. However, the
difference in such dividend practices between the DPB and JVB are not statistically
significant since the reported p-value of 0.464 is greater than 5 percent level of
significance.

4.6.8. Determinants of Dividend Payouts

The questionnaire survey revealed that the both group of sample banks considers the net
profit as the most important determinants of the current dividend payouts. Table 4.32
presents the responses regarding the determinants of dividend payouts in context of
Nepalese commercial banks. The table provides response of both sample groups of the
bank. The analysis of the most important factors influencing the dividend decisions and
the payouts is carried out by computing the weighted mean and the standard deviation.
Detail discussions of the results have been made in respective sections.

Table 4.32: Response on Determinants of the Dividend Payouts

Rank Scores
Determinants Sample Mean
1 2 3 4 5 6 7
DPB 24 5 3 2 1 1 0 1.720
Net Profit
JVB 25 7 2 1 3 0 0 1.567
87
 Market to Book DPB 2 1 3 1 28 1 1 4.594
Value JVB 0 3 2 3 14 6 9 5.216
Major DPB 14 3 0 17 1 1 2 3.138
Shareholders JVB 11 4 19 0 2 1 0 2.486
DPB 5 3 2 1 1 23 1 4.583
Debt to Equity
JVB 7 5 5 3 1 14 2 3.972
Size (Total DPB 9 4 18 3 1 0 1 2.638
Assets JVB 4 3 7 19 2 1 1 3.513
DPB 4 25 3 0 2 1 0 2.194
Cash Flow
JVB 6 21 3 1 3 2 1 2.638
DPB 2 0 4 3 0 2 25 5.916
Slack
JVB 1 2 1 2 6 2 23 5.918
Source: Response in Survey Questionnaires in Appendix A

The mean rank scores for the net profit is 1.720 and 1.567 respectively for DPB and
JVB indicating the net profit as the most important factor influencing the dividend
payouts. In addition, DPB identified the cash flows as the second most important factor
affecting the dividend decisions and payouts as indicated by the mean rank scores of
2.194 while JVB takes number of major shareholders as the second most important
factor affecting dividend payouts with mean rank score of 2.486. Likewise, size of the
bank follows the net profit and the cash flows to become third most important
determinant of the dividend payouts with mean rank scores of 2.638 for DPB while
cash flow is the third most important determinant of the dividends in case of JVB which
is shown by the mean rank score of 2.638. Furthermore, DPB reported number of major
shareholders, leverage, market to book ratio and slack as the important factors
influencing dividend payouts respectively. In other hand, size, leverage, market to book
ratio and the slack are considered as the important factors affecting dividends by JVB
after net profit, shareholders and cash flows respectively. The lower standard small
figures of the standard deviation in all of the cases above indicated the less problem of
the inconsistencies in mean rank scores which are helpful in establishing the valid
findings.

Table 4.33 is devoted in presenting the total sample means, standard deviations and the
chi-square test statistics and the p-value to check for the significance of the observed
results. Though the results in two sample groups of the banks showed some variations
in their responses, the total sample analysis confirms that net profit is the fore most
important factor affecting the dividend payouts.

88
 Table 4.33: Total Sample Mean, Standard Deviation and Test Statistics
Total Total
Overall Chi-square Sig.
Determinants Sample Sample
Rank Statistics P-value
Mean Std. Dev.
Net Profit 1.642 0.108 I 13.858 0.014
Market to Book Ratio 4.909 0.949 VI 27.658 0.000
Major Shareholders 2.896 0.641 III 14.472 0.019
Debt to Equity Ratio 4.273 0.525 V 3.708 0.145
Size 3.081 0.481 IV 27.992 0.000
Cash Flows 2.419 0.221 II 21.001 0.031
Slack 5.917 1.165 VII 2.602 0.317
Source: Response in Survey Questionnaires in Appendix A

The mean score for net profit in total sample is 1.642. Second ranked factor influencing
the dividend payouts in Nepalese commercial bank is cash flows followed by the
number of major shareholders with respective mean scores of 2.419 and 2.896. Thus, it
is confirmed that profitability, liquidity and the ownership structure is the most
prominent factors that influences the dividend decisions and the payout ratio of the
commercial banks in Nepal. Similarly, Size, leverage ratio (debt to equity), signal
(market to book value) and investment opportunities (slack) are the fourth, fifth, sixth
and seventh important factors affecting the dividend payouts. The mean rank score for
these variables are 3.081, 4.273, 4.909 and 5.917 respectively. The observed results
regarding the important determinants of dividends are statistically significant except for
number of major shareholders and slack. All other variables are significant in
explaining the dividend payouts since reported p-value is less than 5 percent level of
significance.

4.6.9. Sufficiency of Current Dividend Payouts

The opinion of the respondents towards sufficiency of current dividend payouts has
been presented in Table 4.34. The survey revealed that the current dividend payments in
view of respondents of the DPB are insufficient because majority of the respondents i.e.
63.88 percent thinks that current dividend paid by their banks is insufficient. In contrast,
the respondents from JVB had opposite idea that current dividends are sufficient as
59.46 supported this opinion. It further reveals that the dividend payment is less in DPB
compared to JVB.

Table 4.34: Response on Sufficiency of Dividend Payouts

89
 Opinions DPB (%) JVB (%) Total Sample (%)
Sufficient 19.45 59.46 39.73
Insufficient 63.88 27.03 45.21
Cannot Say 16.67 13.51 15.07
Pearson Chi-square 0.629
Asymptotic Sig. (P-value) 0.730
Source: Response in Survey Questionnaires in Appendix A

However, the total sample indicates that the current dividend payouts made by the
commercial banks are insufficient. Almost 45.21 percent subscribe to this idea
while39.73 percent believed that the dividends are sufficient and 15.07 percent
remained undecided in this issue. The observed differences in opinions of the DPB and
JVB however, are not statistically significant. The chi-square test statistics reported the
low value of 0.629 and high p-value of 0.730. So, this issue further needs deeper
insights.

4.6.10. Current Dividend Practices of Banks

The dividend behavior and current practices are among the most watched feature of the
banks by investors before making the investment decisions. One of the major objectives
of this study is to analyze the dividend practices of the Nepalese commercial banks. In
achieving its objective, this study surveyed the sample commercial banks using the
likert questionnaires in which the respondents provided their responses and opinions
regarding the dividend practices of their banks. The questionnaire contained affirmative
statements concerning the dividend practices and the responses were recorded in a scale
of strong agreement to strong disagreement. The results of the questionnaire survey
have been presented in Table 4.35. Majority of the respondents i.e. 62.20 percent
disagree that the banks should satisfy the shareholder’s preference rather than firm’s
preference. Though it cannot be asserted; however, it shows that banks tend to strike the
balance between the interests of both shareholders and banks before deciding what to
pay as dividends. Likewise, 65 percentages of the respondents disagreed to the
statement that banks pay dividend from whatever remained. It depicts that the banks
does not regard dividend as the residual decisions. Similarly, 59.80 percent of the
respondents subscribe to the idea that banks should not reduce the dividends to its
shareholders in the name of offsetting the risks. But, considerable respondents i.e. 40.20
percent do agree that possible risks need to be minimized by reducing dividends.

Table 4.35: Responses on Current Dividend Practices and Payouts

90
 Strongly Strongly
Statements on Determinants of N % %
Agree Disagree Mean
Dividend Payouts DisAg Ag
1 2 3 4 5
Satisfy shareholders' preference
4 15 31 15 8 3.11 62.20 37.80
rather than the firm’s preference.
Pays dividends from whatever
4 12 26 24 7 3.25 65.00 35.00
remained.
Reduce the dividends to offset the
10 10 27 23 3 2.99 59.80 40.20
possible risks.
More dividends when it earns
61 11 1 0 0 1.18 23.60 76.40
sufficient net profit.
Dividends convey positive
24 22 16 8 3 2.23 44.60 55.40
information to the market.
Higher dividends at present ensure
6 12 29 19 7 3.12 62.40 37.60
better future.
High ratio of market to book value
10 10 32 18 3 2.92 58.40 41.60
is likely to pay more dividends.
Major large shareholders make the
27 25 15 5 1 2.01 40.20 59.80
bank to pay good dividends.
High financial leverage reduces 0
10 37 24 2 2.27 45.40 54.60
the dividends.
Huge total asset ensures good
5 45 19 4 0 2.30 46.00 54.00
dividend regularly.
Considers the cash flows in paying
23 28 17 4 1 2.07 41.40 58.60
dividends.
Adequate cash flows ensure more
44 13 13 0 3 1.70 34.00 66.00
dividends.
Paying dividends indicates low
10 12 25 19 7 3.01 60.20 39.80
profitable investments.
Dividend prevents surplus cash
flows from being used in profitable 17 40 11 5 0 2.05 41.00 59.00
investments.
Invest if there are profitable
investments instead of paying 12 40 5 16 0 2.34 46.80 53.20
dividends.
Source: Response in Survey Questionnaires in Appendix A

The likert questionnaires, among others have tried to establish the direction and
magnitude of the relationship between the determinants of dividend payouts. For
instance, in a statement of more net profit increases the dividend payouts, minority of
the respondents i.e. 23.60 percent disagrees to the statement while majority of 76.40
percent agrees to it illustrating the positive relationship between the net profit and the
dividend payouts. However, it cannot be generalized that increased profit always pushes
the dividends upwards. Similarly, 44.60 percent disagrees that dividends convey
positive information about banks in the market while majority i.e. 55.40 believes other
way round. In addition, higher dividends at present do not signal the better future of the
banks in words of 62.40 percent of the respondents.

91
Likewise, statement citing the positive relationship between the market to book value
and dividend payouts confirms that 58.40 percent disagrees while 41.60 percent agreed
that higher market to book value ratio boot up the dividend payouts. In contrast, the
positive role of the number of major shareholder with dividend payouts was confirmed
because 59.80 percent respondents agree that more number of major shareholder
increases the dividends. Furthermore, majority of the responses i.e. 54.60 shows the
negative relationship between the leverage (debt to equity ratio) and the dividend
payouts by agreeing to the statement that high financial leverage reduces the dividends.
Same is the case for the size and dividends. The mean value of 2.30 for the statement
that the bank with huge total assets pays more dividends depicts the positive association
between the size of the bank and its dividends. 54 percent of the respondents from DPB
and JVB think that the banks with higher total assets tend to pay more dividends. The
considerations of the cash flows gained confirmation by majority of the respondents and
unleashed the positive link between the cash flows in certain year and the dividend
payouts of that year. Almost 66.00 percent of the total respondents agree that the cash
flows positively affect the dividends. In other hand, the investment opportunities or the
slack value illustrates the negative relationship with the dividend payouts. 53.20 percent
of the respondents agree that the available investment opportunities should be reaped
before paying dividends. It implies that all the profitable investment should be made in
expense of the dividends.

4.7. Concluding Remarks

The analysis of primary and secondary data shows consistent findings with regard to the
factors influencing the dividend payouts in Nepalese commercial banks. Among others,
the regression analysis of commercial banks shows that net profit, cash flows, number
of major shareholders and size as the most prominent factors affecting the dividend
payouts of commercial banks in Nepal. Even though market to book value is significant
in explaining, the power of prediction is lower. In contrast, the debt to equity ratio and
investment opportunities or slack is identified as the insignificant variables in
explaining the dividend decisions and payouts among commercial banks. In congruence
to the findings of total sample of this study, secondary data depicts net profit and cash
flows as the first two most valued factor in predicting the dividend payouts of domestic
private banks. However, there is contradiction in third most important factor which
according to total sample is number of major shareholders but regression of DPB
92
reported size as the third important factor affecting dividends. Moreover, net profit,
cash flows, number of major shareholders and size are important determinants of
dividend payout of foreign joint venture banks. The regression results are also
supported by the univariate properties of portfolio sorted on independent variables. The
portfolio analysis shows positive relationship of net profit, cash flow, size and market to
book value ratio with dividend payouts while number of shareholders records negative
relationship as shown by regression analysis. Thus, the portfolio analysis seems to
support the findings generated from the regression analysis. Despite the mixed findings,
the regression analysis confirms that the independent variables used explain almost 56
percent variations in the dividend payouts of Nepalese commercial banks.

The analysis of primary data reveals net profit as the most influencing factor of
dividends in line with the findings of secondary data. The questionnaire survey depicts
the opinions of the respondents from the domestic private banks and foreign joint
venture banks. Net profit, cash flows, numbers of major shareholders are first, second
and third most important factors influencing the dividend decisions and the payouts.
Likewise, size of the banks gains fourth priority and leverage ratio is fifth most
influencing determinants. Market to book ratio and slack are given very little attention
by the respondents.

With regard to the hypotheses stated for this study, the 1st null hypothesis that there is
no difference on pattern of dividend payouts and its determinants between DPB and
JVB is rejected. The study shows that the pattern and nature of the dividend payout and
its determinants are different among these two groups of banks. In addition, the study
found significant relationship between the dividend payouts and net profit, cash flows,
size, market to book ratio and number of major shareholders. So, the 2nd null hypothesis
that there is no relationship between the dividend payout and its determinants is rejected
at 1 percent and 5 percent level. Moreover, the factors affecting the dividend payouts
of DPB and JVB are not different. The factors affecting the dividend payout of DPB
also seems to affect the dividend payout of JVB. So, the 3 rd null hypothesis that
determinants of dividend payout of DPB and JVB are not different is accepted. Finally,
the 4th null hypothesis that there is no difference in management views on dividend
practices and issues between DPB and JVB is rejected since the primary survey
revealed significant differences in such practices and issues in context of DPB and JVB.

93
So, the study is able to address the major research questions and the issues of this topic.
However, the results derived from this study present both the similarities and the
dissimilarities in comparison with the previous studies made in developed and emerging
economies.

CHAPTER V
SUMMARY, CONCLUSION AND RECOMMENDATIONS

This chapter provides the brief summary of the entire study and highlights the major
findings of the study. In addition, the major conclusions arrived at form the findings are
discussed in separate section of this chapter which is followed by some implications

94
and the recommendations regarding the dividend decisions and payout policies. Finally,
the chapter ends with the short paragraph on the scope of the future research in same
topic.

5.1. Summary
Dividend policy and its determinants has drawn adequate amount of attention in
corporate world. Again, among others, the dividend policy and payout decisions of
banks are even more crucial. One of the most famous studies in this respect is Lintner
(1956), which found that firms in the United States adjust their dividends smoothly to
maintain a target long run payout ratio. The findings of Lintner (1956) regarding the
dividend smoothing have also been confirmed by numerous studies since its
publications. The hypothesis that the cash dividend policy is not important because it
has no effect on a company‘s value and thus does not affect a company owner‘s wealth
was confirmed by Miller and Modigliani‘s (1961). The study argued that it happens due
to the fact that companies follow a residual dividend policy which is based on
reinvestment of corporate profits in the available investment opportunities with a
positive net present value and then the distribution of the surplus cash as a cash
dividend to shareholders. Several studies like Holder et al., (1998), Amidu and Abor
(2006) and Malik et al., (2013) have made efforts to investigate the major determinants
of the dividend decisions and payouts in context of developed and emerging markets.
Among others, the these studies have found net profit, cash flows, leverage, ownership
structure, investment opportunities etc. as the major factors influencing the dividend
payouts of firms.

It has been evident that the banking sector of Nepal has been flourishing in rapid
manner. So, the banking sector has provided good opportunities for the investors to
invest in their shares. Investors have the primary objective of obtaining profit from
investing in shares in two ways either through dividend income or from capital gains.
Thus, an empirical investigation of determinants of dividend payout is of great
significance for them. Not just for investors instead the banks could gain deeper insights
about the dividend phenomena of their own bank and their principal competitors.
Pradhan and Adhikari (2004) documented the net profit, cash flows and past dividends
as the top priority elements that determine the dividend payouts of enterprises in Nepal.
However, the empirical analysis of this topic in Nepal and mainly in context of banking

95
sector is still lagging far behind. Therefore, this study is an attempt to meet such gaps of
empirical investigation among commercial banks of Nepal.

The major objective of the study is to assess dividend payout behavior of Nepalese
commercial banks and examine the relationship between the dividend decisions and
their determinants. The study considered net profit, market to book value ratio, cash
flows, number of major shareholders, leverage ratio, size of the banks and the
investment opportunities as the factors influencing the dividend payouts and tested
empirically to detect the magnitude and direction of relationship with dividend payout
ratio of commercial banks. In addition, the managerial views on dividend payout
decisions and its determinants is also assessed to analyze the real world practice. The
study employed secondary data regarding the variables of interest of 18 commercial
banks which includes 6 foreign joint venture banks and 12 domestic private banks. The
study used panel data for the period of 8 years from the year 2005 to 2012. Stratified
sampling technique was used to select the sample of 18 commercial banks from the
population of 27 listed commercial banks. The study made the use of both primary and
secondary data in order to meet the objectives. The questionnaire survey was conducted
to analyze the opinions of the bank managers on dividend payout decisions while the
secondary data were collected from the sources like financial statements of sample
banks and data banks of NRB, NEPSE and SEBON. The study employed number of
statistical and econometric tools such as multivariate regression analysis, correlation
analysis, descriptive analysis, chi-square tests, t- tests, univariate portfolio analysis to
analyze the collected data to establish the relationship pattern between dividend payout
ratios and its determinants.

5.1.1. Major Findings

The study obtained several results and findings about the relationship between the
dividend payouts and its determinants. Further, the primary data analysis unleashed the
perceptions and opinions regarding the dividend payouts in commercial banks of Nepal.
The major findings and observations of this study have been summarized in points
below:

96
a. The correlation analysis depicted the significant positive relationship of net profit,
cash flow, size and market to book value ratio with dividend payout ratios. Further,
the correlation coefficients recorded the net profit and cash flows as the most
influencing factor of dividend followed by number of major shareholders and size of
the banks. Correlation analysis indicated significant negative relationship of MSH
with dividends while the coefficients of the debt to equity and slack were
insignificant.
b. The regression model used to analyze the cause and effect relation of the variables of
interest was highly significant as indicated by P-value of 0.000 and F-ratio of 9.965.
In addition, this model reveals that almost 56.3 percent of the variations in the
dividend payouts of total sample or the commercial banks of Nepal are explained by
the factors like net profit, cash flows, size, market to book ratio and number of major
shareholders.
c. Among others, net profit, cash flows, number of major shareholders and size of the
banks is the strong predictor of the dividend payouts which is indicated by the
respective regression coefficients of 19.43, 10.32, -3.187 and 2.210.
d. In case of regression specification of DPB, the analysis documented net profit, cash
flows, size and number of major shareholders as the most important determinant of
dividends for DPB with regression coefficients of 13.46, 7.71, 6.36 and -0.865
respectively. All these coefficients were significant at 5 percent level of significance.
The overall model was significant at 5 percent level and explained about 53.3
percent changes in dividends.
e. In other hand, the regression model for JVB showed net profit, cash flows, number
of major shareholders and size as the strongest predictor of dividends with
coefficient of 16.22, 9.16, -6.015 and 5.423 respectively. Apart from these factors,
MBV also affects the dividends but with low intensity. The overall model was highly
significant at 1 percent level and explained 51.9 percent of variations in dividend
payouts.
f. All three regressions analysis shows that net profit, cash flows, number of major
shareholders and size of the banks are most valued and influencing determinants of
the dividend payout ratio in commercial banks. Moreover, the debt to equity ratio or
the leverage ratio and the investment opportunities measured by slack was found to
be insignificant factors influencing dividend payouts.

97
g. Univariate portfolio analysis sorted on various independent variables showed that net
profit, cash flows, size and market to book value of equity has positive impact on the
dividend payouts. In contrast, the portfolio analysis revealed negative relationship
between the numbers of major shareholders. At the mean time, the portfolio analysis
failed to document the definite pattern of dividend payout ratio with respect to debt
to equity ratio and the slack.
h. Primary survey asserted net profit, cash flows, major shareholders, size, debt to
equity, market to book ratio and slack as the important factors affecting dividends in
order of their respective rank from most important to least important. The findings of
the primary and secondary data are consistent.
i. Moreover, the primary survey revealed that net profit, cash flows, size has positive
impact on dividends while number of major shareholders and debt to equity ratio has
negative impact on dividends. Whereas the respondents were neutral about the
market to book value ratio and slack with respect to dividend payout ratios.

5.2. Conclusions
The major conclusion of this study is that net profit, cash flows, number of major
shareholders and size of the banks among the most dominant variables that affect the
dividend payout ratios of commercial banks in Nepal. Net profit, cash flows and size
documented the significant positive impact while number of major shareholders was
found to have significant negative effect on dividend payouts. Positive association of
net profit was also documented by some previous studies Fama and Babiak (1968),
Baker et al., (1985) Pradhan and Adhikari (2004) and Kanwal and Kapoor (2008).
However, the finding that net profit has significant positive impact is contradictory with
Malik et al., (2013) which assumed profitability as insignificant variables in explaining
the dividends. Similarly, the study revealed significant positive link between the cash
flows and the DPR as argued by the studies like Baker et al., (1985) and Holder et al.,
(1998). The result affirms that the bank with adequate cash flows in certain year has the
tendency to distribute its more earnings as the dividends. This reveals the positive
relationship of dividends with the liquidity. However, Al-Deehani (2003) found
significant negative impact between the cash flows and the dividend payouts making
the results somewhat contradictory. Furthermore, The notion that more number of
controlling shareholders make the bank to pay more dividends have been rejected by
the study indicating the negative relationship of number of major shareholders with the
98
dividend payouts of the banks. This finding is congruent with the previous studies such
as Dsounza (1999) and Amidu and Abor (2006) whereas the finding is not in line with
the studies made by Rozeff (1985) and Mehar (2003) which found positive association.
Most of the previous studies have found positive association of size with dividends. In
line with Lloyd and William (1985), Fama and French (2001), Al-Malkawi (2007) and
Malik et al., (2013), this study documented positive relationship between the size of the
bank and the dividend payouts implying that the larger bank pays more dividends.

The findings of this study that market to book value has positive relationship with
dividends are consistent with Essa et al., (2012) while contradicts with Bhattacharya et
al., (1979) and Amidu and Abor (2006) both of which found negative relationship
between MBV and DPR. In contrast, the leverage ratio measured by the debt to equity
ratio and the investment opportunities measured as the slack was identified as the
insignificant in explaining the dividend payout ratios of the commercial banks. This
result was in contradiction with Swamy and Rao (1975) which found positive
relationship of investment opportunities and negative relationship of leverage with
dividends respectively. These results were confirmed by all three model specifications.
Moreover, the positive association between the market to book value ratio, size, net
profit and cash flows with dividends and negative relationship of number of major
shareholders with dividend payout ratio was also supported by the correlation and
portfolio analysis and in some extent by findings of primary survey as well.

5.3. Recommendations
Though the study is purely academic, some of its findings can be regarded as highly
useful for the investors and the banks itself. Likewise, it can provide some policy
implications for the regulator of the financial institutions. Based on the major findings
of the study, it has provided some useful recommendations which are listed below:

a. The investors, stock analysts and other professional working in the field of the
stock market should not just base their prediction of dividends by mere
consideration of the net profit and cash flows. Instead they should highly take
account of the number of major shareholders and the size of the banks which was
found to be most strong predictor of dividends.

99
b. As this study confirmed the bank with larger size pays more dividends, the
investors are suggested to make investment on the banks with larger base of total
assets.
c. Ownership pattern also deserves special attention by the investors since the bank
with more number of controlling shareholders tend to pay less of their earnings as
the dividends. So, investors are recommended to invest in the bank with diffused
ownership structure.
d. Although, the study found the significant positive impact of net profit and cash
flows with dividends, investors are suggested not to confine their investment
decision based on net profit and cash flows.
e. Investors should account for other factors like past dividends, taxes etc. In addition,
macro economic variables like gross domestic product, inflation, credit growth etc.
may also explain the dividend payouts.
f. It is recommended that the banks should emphasize more on dividend decisions as
well since the dividend decisions was less thought of than financing and investment
decisions. Dividend decisions should be prioritized because it can build the
shareholders loyalty toward the banks.
g. Commercial banks are suggested to adopt the mix of dividend policies in such a
way which serves the interest of all stakeholders rather than adopting the irregular
policy the most.
h. The primary survey revealed that banks do not conduct the studies on shareholder’s
dividend preference. So, the banks are recommended to carry out such studies in
order to better understand the preference of shareholders as well.
i. It is observed that more number of controlling shareholders reduces dividend for
future growth of banks at expense of dividend distribution to minority
shareholders. Thus, banks need to check such happenings to protect the minority
shareholders.
j. The bank should increase dividend payout ratio since majority of the respondents
believe that current dividends are not sufficient enough.
k. The banks are advised to increase its slack i.e. the ratio of its retained earnings to
the total assets. Increase in slack helps bank in investing in profitable projects and
also provides safety cushion against possible losses and risks.
l. The net profit and the cash flows of the sample banks showed negative trend and
even slumped to negative figures which unveil the excessive risk taking which

100
 should be mitigated with more prudent regulations and provisions from the
regulators.

5.4. Scope for Future Research

This study can be regarded as the preliminary steps in investigating the determinants of
the dividend payouts in case of banking sector in Nepal. There remains enough ground
of scope in terms of data and methodology for studies in day to come. First and
foremost, the future studies can select other financial institutions like development
banks and finance companies to grasp the wider view of dividend decisions and the
payouts among financial institutions. In addition, to observe the clear trend and more
valid findings, the future study can lengthen the study period and also use some
advanced statistical tools. For example the studies in future can use non-linear statistical
tools and bidirectional causality tools to assess the determinants in more clear way.
Moreover, some variables like past dividends, corporate and personal taxes and some
macro economic variables can be incorporated in the study as the explanatory variables.
Furthermore, future studies can conduct the opinion survey of the shareholders and
investors in addition to the survey of the bank managers.

References

Abu, S. T. (2012). Determinants of dividend payout policy: evidence from Bangladesh.

International Journal of Economic Practices and Theories, 2(3), 118-125.

101
Adhikari, N. (2010). Dividend clientele effect and ex-dividend date effect in Nepal.
SEBON Journal, 4, 1-17.

Ahmed, H., & Javid, A. (2009). Dynamics and determinants of dividend policy in
Pakistan: an evidence from Karachi Stock Exchange non-financial listed firms.
International Research Journal of Finance and Economics, 4(25), 149-171.

Akinyomi, J. O. (2013). Managers' perception of factors influencing dividends decision

in Nigeria. International Journal of Advances in Management and Economics,
2(2), 135-140.

Al-Deehani, T. M. (2003). Determinants of Dividend policy: the case of Kuwait.

Journal of Economics and Administrative Science, 19(2), 59-76.

Al-Kuwari, D. (2009). Determinants of the dividend policy in emerging stock

exchanges: The case of GCC countries. Global Economy & Finance Journal,
2(2), 38-63.

Al-Malkawi, H. A. (2007). Determinants of corporate dividend policy in Jordan: an

application of Tobit Model. Journal of Economic and Administrative Sciences,
23(2), 44-70.

Amidu, M., & Abor, J. (2006). Determinants of dividend payout ratios in Ghana.
Journal of Risk Finance, 7(2), 136-145.

Baker, H. K., Gail, E. F., & Edelman, B. R. (1985). A survey of management's views on
dividend policy. Financial Management, 14(1), 78-84.

Baker, H., & Powell, G. (2002). Determinants of corporate dividend policy: a survey of
NYSE firms. Financial Practice & Education, 10(1), 29-40.

Bank and Financial Institutions Regulation Department. (2010). Unified Directives.

Nepal Rastra Bank, Kathmandu.

Bank and Financial Institutions Act. (2006). Ministry of Finance, Kathmandu.

Bhandari, B., & Pokharel, T. (2012). Corporate dividend policy: a study of commercial
banks of Nepal. Administrative and Management Review, 24(2), 24-44.

102
Bhattacharya, S. (1979). Imperfect information, dividend policy and "The bird in the
hand" fallacy. The Bell Journal of Economics, 10(1), 259-270.

Black, F., & Scholes, M. (1976). The dividend puzzle. Journal of Portfolio
Management, 2, 5.

Brealey, R. A., Myers, S. C., & Allen, F. (2008). Principles of corporate finance (9th
ed.). New York: McGraw-Hill Education.

Chay, J. B., & Suh, J. (2005). Cross sectional determinants of dividend payments:
International evidence. An Unpublished Dessertation. Sungkyungkwan
University and Ewha Womans University.

Chen, C., & Steiner, J. (2009). Managerial ownership and agency conflicts: a nonlinear
simultaneous equation analysis of managerial ownership, risk taking, debt
policy, and dividend policy. Financial Review, 34(1), 119-136.

Dsouza, J. (1999). Agency cost, market risk, investment opportunities and dividend
policy: an international perspective. Managerial Finance, 25(1), 35-43.

Eriotis, N. (2005). The effect of distributed earnings and size of the firm to its dividend
policy: some Greek data. International Business and Economic Journal, 4(167),
45-78.

Essa M. S., Hameedat M. M., Altaraireh J. A., & Nofal M. A. (2012). A worthy factors
affecting dividends policy decisions: an empirical study on industrial
corporation listed in Amman Stock Exchange. Interdisciplinary Journal of
Contemporary Research in Business, 4(5), 614-622.

Fama, E. F., & Babiak, H. (1968). Dividend policy: an empirical analysis. Journal of
the American Statistical Association, 4(1), 1132-1161.

Fama, E. F., & French, K. R. (2001). Disappearing dividends: changing firm

characteristics or lower propensity to pay? Journal of Financial Economics,
60(1), 3-43.

Feldstein, M., & Green, J. (1983). Why do companies pay dividends? American
Economic Review, 7(3), 7-38.

103
Foong, S. S., Zakaria, N. B., & Tan, H. B. (2007). Firm performance and dividend
related factors: the case of Malaysia. Labuan Bulletin of International Business
and Finance, 5(3), 97-111.

Ghimire, G. (2005). Dividend behavior of Nepalese commercial banks. An Unpublished

Master Degree's Dissertation. Faculty of Management, Tribhuvan University.

Gill, A., Biger, N., & Tibrewala, R. (2010). Determinants of dividend payouts ratios:
evidence from United States. The Open Business Journal, 4(3), 8-14.

Gilsenan, J. D. (1994). Determinants of corporate capital structure and dividend policy:

theory and evidence. An Unpublished Honours Dissertation. Department of
Commerce, The University of Queensland.

Ho, H. (2003). Dividend policies in Australia and Japan. International Advances in

Economic Research, 9(2), 91-100.

Holder, M. E., Langrehr, F. W., & Hexter, J. L. (1998). Dividend policy determinants:
an investigation of the influences of stakeholder theory. Financial Management,
27(3), 73-82.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm managerial behavior,
agency costs and ownership structure. Journal of Financial Economics, 3(1),
305-360.

Jose, M. L. (2001). Capital market valuation of dividend policy. Journal of Business,

Finance and Account, 16(5), 59-65.

Joshi, R. (2011). Effects of dividends on stock prices in Nepal. NRB Economic Review,
61-75.

Kanwal, A., & Kapoor, S. (2008). Determinants of dividend payout ratios: a study of
Indian information technology sector. International Research Journal of
Finance and Economics, 5(1), 63-71.

Knife, T. (2011). Determinants of dividend payout: an empirical study on banking

sector in Ethiopia. An Unpublished Master Degree's Dissertation. Addis Ababa
University.

104
Lasfer, M. A. (1996). Taxes and dividends: the UK evidence. Journal of Banking and
Finance, 20(1), 455-472.9

Lee, S. W. (2009). Determinants of dividend policy in Korean banking industry. Banks

and Bank Systems, 4(1), 65-71.

Lintner, J. (1956). Distribution of income and dividends among corporations retained

earnings and taxes. American Economic Review, 46(2), 97-13.

Liu, S., & Hu, Y. (2005). Empirical analysis of cash dividend payment in Chinese listed
companies. Nature and Science, 3(1), 65-70.

Lloyd, J. S., & William, P. (1985). Agency costs and dividend payout ratios. Quaterly
Journal of Business and Economics, 24(3), 19-29.

Malik, F., Muhammad, S. G., Khan, T., & Khan, R. M. (2013). Factors influencing
corporate dividend payout decisions of financial and non-financial firms.
Research Journal of Finance and Accounting, 4(1), 35-47.

Malla, B. B. (2009). Dividend policy and its impact on share price. An Unpublished
Master Dissertation. Faculty of Management, Pokhara University.

Mehar, A. (2003). Determinants of dividend policy and payouts. International Research

Journal of Finance and Economics, 4(20), 158-186.

Miller, M. H., & Modigiliani, F. (1961). Dividend policy, growth and the valuation of
shares. Journal of Business, 34(4), 411.

Naser, K., Nuseibeh, R., & Rashed, W. (2013). Managers' perception of dividend
policy: evidence from companies listed on Abu Dhabi Securities Exchange.
Issues in Business Management and Economics, 1(1), 1-12.

Partington, G. (1985). Dividend policy and its relationship to investment and financing
policies: empirical evidence. Journal of Business, Finance and Accounting,
12(6), 531-542.

Paudyal, T. B. (2005). A comparative study on dividend policy of banks and insurance

companies in Nepal. An Unpublished Master Degree's Dissertation. Faculty of
Management, Tribhuvan University.

105
Pradhan, R. S., & Adhikari, N. (2004). A survey of dividend policy and practices of
Nepalese Enterprises. In R. S. Pradhan, Research in Nepalese Finance (pp. 220-
250). Kathmandu: Buddha Academic Publishers and Distributors Pvt. Ltd.

Pruitt, S. W., & Gitman, L. W. (1991). The interactions between the investment,
financing and dividend decisions of major US firms. Financial Review, 26(33),
409-430.

Rao, G. N., & Sarma, Y. S. (1971). Dividend and retained earnings of public and
private limited companies in India. An Econometric Analysis, Reserve Bank of
Indian Bulletin, 54(1), 17-34.

Redding, L. (1997). Firm size and dividend payouts. Journal of Financial

Intermediation, 6(1), 224-248.

Rozeff, M. S. (1982). Growth, beta and agency costs as determinants of dividend

payout ratios. Journal of Financial Research, 5(1), 249-259.

Swamy, D. S., & Rao, V. G. (1975). The flow of funds in Indian manufacturing sector.
Sankhya, 37(1), 2-8.

Yiadom, E. M., & Agyei, S. K. (2011). Determinants of dividend policy of banks in

Ghana. International Research Journal of Finance and Economics, 5(61), 99-
109.

106
 APPENDICES

Appendix A
Survey Questionnaire

Dear Sir/Madam

107
 I would like to inform you that I am undertaking a Graduate Research Project on
“Determinants of Dividend Policy: A Focus on Banking Sector in Nepal” to meet the partial
fulfillment of the requirements for the Master’s Degree in Business Administration (MBA)
from Uniglobe College, Pokhara University. I would also like to assure you that all information
contained in this questionnaire will be kept confidential and used only at the aggregate level.
Your kind cooperation will be highly appreciated.

Thanking You.

A. Respondent’s Information

Demographic Characteristics
1. Name (optional): ……………………………...
2. Gender Female [ ] Male [ ]
3. Age in Years Completed: Below 25 [ ] 25 - 35 [ ] 35 – 45 [ ]
Above 45 [ ]
4. Academic qualification:
PhD [ ] MS/M. Phil [ ] Masters [ ] Bachelors [ ]
6. Department worked: .....................................................................
7. Years of experience:
Less than 1[ ] 1-5[ ] 6-10[ ] 11-15[ ] 15-above [ ]

B. Information on Dividend Decision

1. Which of the following financial decision do you think is the most important? Please rank in
order of their importance. ( 1= Very important, 2=important, 3= little important)
a. Financing Decision [ ]
b. Investment Decision [ ]
c. Dividend Decision [ ]
d. Others (Please Specify)………………………..

2. Which dividend theory do you think is the correct one? Please tick.
a. Relevance Theory (Dividend Affects Firm value and share price) [ ]
b. Irrelevance Theory (No effect in firm value and share price) [ ]
c. Others (Please specify) ……………………………………………………..

3. Do you think that dividend as a residual decision which means firm pays dividend from the
sum remained after all investment made?
a. Yes [ ]
b. No [ ]
c. Don’t Know [ ]

4. Which dividend policy do you think your bank prefers?

a. Stable Dividend Policy [ ]
b. Regular Dividend Policy [ ]
c. Irregular Dividend Policy [ ]
d. Others (Please specify) …………………………………

108
5. Which of the dividend type do you think your bank prefers?
a. Cash Dividend [ ]
b. Stock Dividend/ Bonus Share [ ]
c. Stock Split [ ]
d. Stock Repurchase [ ]
e. Others (Please specify)……………………………………

6. Why do you think the bank prefers above dividend type?

a. Easy to implement [ ]
b. More flexible [ ]
c. Avoid changing previous method [ ]
d. Requirement of main shareholders [ ]
e. Others (Please specify) ………………………………………

7. Does your bank conduct any studies about shareholder’s dividend preferences?
a. Yes [ ]
b. No [ ]
c. Don’t know [ ]

8. Please rank the factors affecting dividend policy in order of their importance. (1= very
important and 7 = very unimportant).
a. Current earnings or Net Profit [ ]
b. Signal or Market to book value [ ]
c. Cash flow or liquidity [ ]
d. Leverage (Debt/Equity) [ ]
e. Size of the firm [ ]
f. Major shareholders [ ]
g. Investment opportunities or Slack [ ]

9. What do you think about the current dividend payouts of your bank?
a. Sufficient [ ]
b. Insufficient [ ]
c. Cannot Say [ ]

10. Please make a tick mark in appropriate box provided for the following statements as
per the given Scheme. [1=Strongly Disagree, 2=Disagree, 3=Don’t Know, 4=Agree,
5=Strongly Agree].
S.N. Statements 1 2 3 4 5
Dividend payments should satisfy shareholders' dividend
i. preference rather than the firm’s preference.

109
 Your bank pays dividends from whatever remained after all
ii. the investments made.
The bank should reduce the dividends since retained earning
iii. helps in offsetting the possible risks.
Your bank pays dividend when it earns sufficient net profit
iv. after tax.
Payout policy decisions convey positive information to the
v. market.
vi. The bank paying higher dividends will do better in future.
The bank with higher ratio of market to book value of equity
vii. is likely to pay more dividends.
Ownership concentration (Major Large Shareholders) makes
viii. the bank to pay good dividends.
There exists inverse relationship between debt (leverage) and
dividend payouts i.e. Firms with high financial leverage tend
ix. to have low payouts ratios.
x. The bank with huge total asset pays good dividend regularly.
Your bank considers the cash flows in certain year before
xi. paying dividends.
xii. The banks with adequate cash flows pay more dividends.
Paying dividends indicates to investor those banks are
xiii. running low on profitable investments.
Dividend payments prevent surplus cash flows from being
xiv. used in profitable investments.
The bank should invest if there are profitable investments
xv. instead of paying dividends.

11. Do you have any comments regarding dividend payout and practices in Nepalese banking
sector?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

THANKYOU FOR YOUR RESPONSE

Appendix B
Panel Data for Sample Commercial Banks from 2005 to 2012
BANK YEA NP CF SZ MBV DE MSH SLC DPR
S R
2005 817.9 450 18614.9 4.47 0.65 3 0.038 70.0
2006 979.1 678 24134.6 5.88 0.66 3 0.030 85.0
110
 2007 685.6 769.59 29660.4 12.08 0.67 3 0.038 140.0
NABL 2008 750.4 1271.32 38478.6 14.90 0.66 3 0.047 100.0
2009 1031.9 701.37 45941.6 15.12 0.63 3 0.038 85.0
2010 1139.7 -197.4 54609.8 9.00 0.10 3 0.035 70.0
2011 1337.7 1036.45 61292.6 5.56 0.43 3 0.044 30.0
2012 1696.2 1835.49 63200.2 5.03 0.11 3 0.048 60.0
8 9
2005 280.3 113.56 16637.9 3.98 0.30 6 0.037 12.5
2006 410 996.04 22007.2 5.25 0.39 6 0.039 55.5
2007 561.7 104.99 28572.8 7.39 0.43 6 0.042 30.0
NIBL 2008 830.7 1313.43 40205.5 10.99 0.39 6 0.040 40.8
2009 982 4163.06 54634.5 8.57 0.24 6 0.039 20.0
2010 1422.5 -110.21 59554.7 3.71 0.23 6 0.038 25.0
2011 1263.2 1324.48 61357 3.01 0.25 6 0.037 50.0
2012 1039 3663.00 65756 3.17 0.26 6 0.035 30.0

2005 757.9 -91.25 22758.8 5.55 0.20 2 0.055 120.0

2006 662.5 165.12 26797.8 8.06 0.22 2 0.053 140.0
2007 692.1 744.78 29937.4 11.52 0.19 2 0.055 130.0
2008 814.4 29.22 34312.9 17.01 0.17 2 0.056 130.0
SCBNL 2009 1028.3 1086.92 41678.8 18.35 0.10 2 0.052 100.0
2010 1086.8 -120.76 41525.2 13.61 0.12 2 0.049 70.0
2011 1120.5 1046.49 45227.2 7.88 0.14 2 0.047 50.0
2012 1168 3390 41677.0 4.47 0.17 2 0.054 60.0
0
2005 217.1 256.75 10616.6 2.10 0.33 6 0.032 31.6
2006 219.8 394.41 13735.6 4.03 0.29 6 0.040 35.0
HBL 2007 828.5 39.99 34645.5 6.57 0.28 6 0.039 40.0
2008 1050.8 -309.2 37526.8 7.99 0.37 6 0.041 45.0
2009 1182.1 1600.38 40790.7 6.86 0.16 6 0.039 43.6
2010 871.8 817.96 44768.8 3.60 0.15 6 0.034 36.8
2011 1411 -90.84 49298.5 2.88 0.13 6 0.034 36.8
2012 958 3397.65 54364.0 3.38 0.11 6 0.029 28.4
2005 217.1 0 10616.6 2.10 0.11 2 0.013 0.0
2006 219.8 394.41 13735.6 4.03 0.12 2 0.014 5.0
2007 394.5 4.53 15397.2 6.61 0.12 2 0.015 47.6
NSBI 2008 255.1 220.27 18594 9.41 0.12 2 0.016 0.0
2009 337.6 -166.52 31989.8 9.76 0.12 2 0.016 42.1
2010 400.5 2264.82 39381.3 5.02 0.18 2 0.015 17.5
2011 458.4 1436.56 47129.9 3.68 0.18 2 0.017 17.5
2012 4805.5 630.56 58059 4.17 0.19 2 0.015 17.5
2005 76.1 -51.3 15540 0.00 0.13 4 0.170 0.0
2006 457 292.92 16721.8 0.00 0.14 4 0.180 10.0
2007 576.9 -530.63 14282.3 -1.51 0.16 4 0.019 1.0
NBBL 2008 684.3 758.79 15584.2 -3.40 0.55 4 0.017 1.0
2009 1994.2 648.57 16829.9 4.68 0.16 4 0.020 1.0
2010 1327.7 -513.12 16022.3 2.30 0.13 4 0.018 1.0
2011 -138.16 278.96 18322.1 2.38 0.11 4 0.017 1.0
2012 809.48 2545.00 20169.0 0.71 0.16 4 0.047 1.0
0
2005 275.8 459.98 15069 3.96 0.36 6 0.027 20.0
2006 380.5 502.98 16714.5 6.34 0.31 6 0.028 20.0
EBL 2007 300.6 838.45 23335.3 8.65 0.34 6 0.028 30.0
111
 2008 722.8 276.55 28565.9 9.73 0.30 6 0.030 30.0
2009 624.1 3496.4 38000.3 7.11 0.28 6 0.032 30.0
2010 831.8 1654.44 42053 4.91 0.26 6 0.036 30.0
2011 931.3 -1695.9 46895.6 3.94 0.25 6 0.037 10.0
2012 1090.5 4240.44 55813.1 3.24 0.24 6 0.043 30.0
6 3
2005 228.8 22.25 10246 2.01 0.10 1.00 0.03 15
2006 330.7 11.82 12660.8 3.68 0.89 1.00 0.03 48
2007 278.5 587.21 14997.5 8.35 0.87 1.00 0.03 20
2008 367.6 124.56 18159.1 10.56 0.15 1.00 0.01 42.11
BOK 2009 725.8 741.64 21009.3 8.85 0.17 1.00 0.03 47.37
2010 509.6 383.34 24058.8 4.79 0.24 1.00 0.03 30
2011 605.6 120 25582.1 3.18 0.20 1.00 0.03 34.75
2012 607.67 1703.77 28881.9 3.7 0.14 1.00 0.04 26.32
9
2005 98.3 23 8680.3 0.305 0.18 3.00 0.04 5
2006 31.2 21 8640.8 - 0.14 3.00 0.09 13
0.470
NCC 2007 125.89 25.79 8816.7 - 0.23 3.00 0.12 8
0.231
2008 495.6 719.67 10175.9 0.107 0.19 3.00 0.17 14
2009 410.6 291 11657 0.234 0.16 3.00 0.19 9
2010 457 1009.34 14442.5 0.394 0.13 3.00 0.01 15
2011 214.8 460 15035.6 0.770 0.21 3.00 0.03 12
2012 177.6 546.36 18594.6 0.97 0.20 3.00 0.02 5
2005 193.6 681.77 40490.7 3.02 0.66 5.00 0.03 30
2006 148.8 262 49221.4 3.88 0.62 5.00 0.02 10.53
2007 232.1 150 58991.2 6.83 0.60 5.00 0.15 21.05
2008 248.9 592.59 15451.4 9.30 0.41 5.00 0.02 21.05
NIC 2009 357.1 268.8 52123.8 7.71 0.52 5.00 0.02 15.71
2010 447.4 624.98 20696.2 4.64 0.87 5.00 0.02 26.32
2011 498.4 410 22567.6 3.42 0.49 5.00 0.03 20
2012 391.78 1078.33 25579.5 3.32 0.16 5.00 0.03 25
2005 267.8 1 5383.3 35.86 0.16 4.00 0.01 11
2006 210.09 1 6735.2 -1.19 0.19 4.00 0.01 15
2007 225.9 1 7134.9 -7.05 0.65 4.00 0.06 10
2008 328.7 141.79 7393.8 21.39 0.19 4.00 0.01 12
LBL 2009 391.8 352.26 8445.9 5.00 0.11 4.00 0.05 15
2010 297.7 134 8077.4 2.69 0.11 4.00 0.02 16
2011 399.9 830.51 9125.5 1.55 0.16 4.00 0.05 10
2012 193.46 1110.5 9903.8 1.49 0.15 4.00 0.18 12
2005 116.3 320.39 20254.2 2.24 0.13 5.00 0.02 5.75
2006 159.7 82.79 9255.8 2.21 0.14 5.00 0.02 15.79
2007 93 470.16 11197.1 2.46 0.18 5.00 0.01 6.25
MBL 2008 146.6 304.48 13142.3 5.09 0.19 5.00 0.12 21.05
2009 92.6 1266.59 18583.1 9.08 0.10 5.00 0.18 22
2010 136.2 306 21677.5 3.65 0.13 5.00 0.02 10
2011 6.4 197 20228.2 0.28 0.14 5.00 0.01 25
2012 10.16 278 20278 0.3 0.17 5.00 0.02 30
2005 93.6 42.78 7695.5 2.62 0.24 3.00 0.01 21.05
2006 142.9 -53.74 9390.6 2.97 0.30 3.00 0.01 21.05
2007 279.7 282.48 12324.4 6.06 0.35 3.00 0.01 21.05
KBL 2008 292.1 261.73 15619 7.85 0.37 3.00 0.02 10.53
112
 2009 425.6 842.46 19265.1 5.11 0.43 3.00 0.02 10.58
2010 501.1 947.53 21499.7 3.42 0.46 3.00 0.02 12
2011 239.2 -155.53 21902.7 1.93 0.48 3.00 0.03 8.44
2012 275.5 2554.1 25131.4 1.63 0.17 3.00 0.03 10
2005 49.6 90.08 3936.2 2.88 0.41 7.00 0.01 15
2006 63.8 -244.42 5509.1 3.46 0.43 7.00 0.01 25
2007 65.5 0 8800.5 5.97 0.45 7.00 0.01 15
LAXBL 2008 120.8 768.44 13027.6 8.87 0.51 7.00 0.01 21.05
2009 186.2 594.62 18855.1 8.69 0.59 7.00 0.01 5.26
2010 326.2 7.93 21629.3 4.81 0.24 7.00 0.01 13
2011 380.4 1014.56 22452.2 2.60 0.17 7.00 0.02 15.79
2012 359.05 1665.1 25916.9 2.37 0.16 7.00 0.02 10
2005 42.7 0 3193.2 0.00 0.19 1.00 0.02 15
2006 100.1 -14.78 4900.6 2.98 0.18 1.00 0.02 12
2007 157.5 401.28 9441.8 5.88 0.43 1.00 0.02 15.79
SBL 2008 246.3 -79.8 12142.3 8.45 0.21 1.00 0.05 15.79
2009 348.8 110.26 18595.2 7.45 0.32 1.00 0.01 15.79
2010 255.2 858.93 23272.7 3.03 0.57 2.00 0.01 10.03
2011 303 -50.93 25514.1 2.13 0.29 2.00 0.01 15.79
2012 329.9 2425.2 29628.7 2.56 0.31 2.00 0.02 8.42
2007 -15.42 146.82 3720.3 5.12 0.65 3.00 0.06 7
2008 548.44 585.66 7355.4 5.45 0.79 3.00 0.01 8
2009 1158.0 922.87 13162.9 5.82 0.24 4.00 0.05 10
CTZ 9
2010 193.56 790.26 16749.4 3.75 0.49 3.00 0.01 12.63
2011 198.35 - 17503 2.04 0.36 4.00 0.01 10.53
109.408
2012 224.79 2264.34 20068.5 2.11 0.17 4.00 0.01 8.42
2008 4.5 720.67 4324.7 5.15 0.71 3.00 0.09 7
2009 110.6 770.67 11770.6 5.62 0.84 3.00 0.05 5
BOA 2010 207.6 -184.58 15864.3 2.56 0.55 3.00 0.01 10.53
2011 266 964.66 18326.5 1.78 0.46 3.00 0.01 7.37
2012 172.5 1219.9 17871.0 2.09 0.17 3.00 0.01 7.5
2
2008 112.54 2367.76 10957.3 6.750 0.10 4.00 0.01 10.5
NMB 5
2009 117.4 5,416.1 9037.1 7.664 0.13 4.00 0.04 12.3
5
2010 101.2 2,029.9 16610.4 4.465 0.16 4.00 0.01 12.1
3
2011 154.8 575.05 13614.1 2.403 0.16 4.00 0.05 13
2012 357.4 -235.95 16246.2 1.764 0.16 4.00 0.11 15

113
 Appendix C
A SPSS Output on Descriptive, Correlation and Regression Statistics for Foreign
Joint Venture Banks

Model Summary

Std. Change Statistics

Adj.
Model R Error of R
R R F Sig. F DW
Square the Square df1 df2
Square Change Change
Estimate Change
1 0.762 0.580 0.519 26.32962 0.580 9.488 7 48 0.000 1.828

ANOVA

Model Sum of Squares df Mean Square F Sig.

1 Regression 46041.205 7 6577.315 9.488 .000(a)
Residual 33275.957 48 693.249
Total 79317.162 55
a Predictors: (Constant), SLC, MSH, SZ, DE, MBV, CF, NP
b Dependent Variable: LnDPR

Coefficients

Unstandardized Standardized Collinearity

Coefficients Coefficients Statistics
Model B Std. Error Beta t Sig. Tolerance VIF
(Constant) 5.811 14.977 0.388 0.700
1 16.22 5.17 0.041 3.143 0.031 0.624 1.603
NP
CF 9.16 2.856 0.033 3.207 0.030 0.750 1.333
SZ 5.423 1.896 0.146 2.860 0.043 0.468 2.139
MBV 4.563 0.937 0.527 4.869 0.000 0.746 1.341

114
 DE 43.788 23.624 0.269 1.853 0.073 0.881 1.135
MSH -6.014 2.302 -0.276 -2.613 0.012 0.784 1.275
SLC 210.701 123.786 0.161 1.702 0.095 0.974 1.027
a Dependent Variable: LnDPR

Appendix D
A SPSS Output on Descriptive, Correlation and Regression Statistics for Domestic
Private Banks

Model Summary

Std. Change Statistics

R Adj.
Model Error of R
R Squar R F Sig. F DW
the Square df1 df2
e Square Change Change
Estimate Change
2 0.785 0.638 0.533 18.6174 0.638 8.895 7 72 0.029 1.716
a. Predictors: (Constant), SLC, CF, MSH, MBV, SZ, DE, NP
b. Dependent Variable: DPR

ANOVA

Model Sum of Squares df Mean Square F Sig.

2 Regression 2925.570 7 417.93 8.895 .029
Residual 3348.876 72 46.51
Total 6273.576 79
c. Predictors: (Constant), SLC, CF, MSH, MBV, SZ, DE, NP
d. Dependent Variable: LnDPR

Coefficients

Unstandardized Collinearity
Coefficients Standardized Statistics
Coefficients Toleranc
Model B Std. Error Beta t Sig. e VIF
2 (Constant) 14.783 3.622 4.081 0.000
1.15
13.46 6.54 0.176 2.086 0.048 0.864
NP 7
1.05
7.71 2.65 0.177 2.909 0.039 0.947
CF 6
1.14
6.336 1.676 0.195 3.780 0.019 0.873
SZ 6
MBV 0.166 0.076 0.094 2.184 0.041 0.962 1.04

115
 0
1.09
-0.898 4.695 -0.022 -0.191 0.849 0.917
DE 0
1.09
-0.865 0.294 -0.166 -2.942 0.033 0.912
MSH 7
1.03
-7.999 22.749 -0.039 -0.352 0.726 0.969
SLC 2
a Dependent Variable:Ln DPR

Appendix E
A SPSS Output on Descriptive, Correlation and Regression Statistics for Total
Sample Banks

Model Summary

Std. Change Statistics

Adj.
Model R Error of R F
R R Sig. F DW
Square the Square Chang df1 df2
Square Change
Estimate Change e
3 0.765 0.578 0.563 23.61674 0.578 9.965 7 128 0.000 1.853
a. Predictors: (Constant), SLC, CF, MSH, MBV, SZ, DE, NP
b. Dependent Variable: LnDPR

ANOVA

Sum of
Model Squares df Mean Square F Sig.
3 Regression 37399.187 7 5342.741 9.570 .000
Residual 71457.430 128 558.261
Total 108856.617 135
a. Predictors: (Constant), SLC, SZ, DE, MSH, MBV, CF, NP
b. Dependent Variable: LnDPR

Coefficients

Unstandardized Collinearity
Coefficients Standardized Statistics
Coefficients Toleranc
Model B Std. Error Beta t Sig. e VIF

116
 (Constant) 7.448 7.123 1.046 0.298
3 NP 19.43 6.781 0.060 2.865 0.032 0.597 1.674
CF 10.32 3.869 0.079 2.667 0.038 0.868 1.153
SZ 2.210 0.656 0.331 3.366 0.001 0.529 1.891
MBV 2.162 0.432 0.369 5.007 0.000 0.946 1.057
DE 11.445 10.575 0.079 1.082 0.281 0.957 1.044
MSH -3.187 1.213 -0.195 -2.628 0.010 0.935 1.069
SLC 72.855 54.199 0.097 1.344 0.181 0.976 1.025

Appendix F
Respondent’s Profile

The profile of the respondents of the questionnaire survey conducted among bank
managers have been made in this section. The table presented below illustrates the
personal characteristics of the respondents based on their gender, age, academic
qualification, job position and the years of experience.

Respondent’s Profile Number Percentage

Gender of Respondent:
Male 48 65.75
Female 25 34.25
Total 73 100.0
Age Group (in years) of Respondent:
Below 25 years 13 17.80
25 to 34 years 18 24.65
35 to 44 years 34 46.60
45 years and above 7 10.95
Total 73 100.0
Academic Qualification of Respondent:
Bachelors 9 12.33
Masters 55 75.34
M.Phil 9 12.33
P.hd 0 0
Total 73 100.0
Job Position of Respondents
Senior Assistant 4 5.48
Officer 7 9.59
Senior Officer 9 12.33
Assistant Manager 13 17.80
Manager 28 38.35
Department Chief (Corporate Level) 12 16.45
Total 73 100.0
117
 Experience (in Years) of Respondents
Below 1 Years 0 0.00
1 to 5 Years 13 17.80
6 to 10 Years 30 41.10
11 to 15 Years 23 31.50
Above 15 Years 7 9.60
Total 73 100

Out of the total respondents, 65.75 percent were male and 34.25 percent were female.
Similarly, majority of the respondents i.e. 46.60 percent belonged to age group of
between 35 to 44 years. 17.80 percent were under the age of 25 years while 10.95
percent of the respondents were above 45 years of age. This study categorized the
academic qualification into 4 different level namely bachelors, masters, M.Phil and PhD
level. Significant number of the respondents (75.34 percent) reported that they have
completed their masters while 12.33 percent of the respondents each confirmed that
they have completed their bachelors and M.Phil level. None of the respondents were
PhD graduate. In terms of the job positions held by the respondents, majority of the
respondents belonged to the managerial level (38.35 %) whereas 16.45 percent of the
respondents were the corporate level chief managers. In addition, 17.80 percent of the
respondents were working as an assistant manager. The percent of the respondents
belonging to the position of senior assistant, officer and senior officer was 5.48 percent,
9.59 percent and 12.33 percent respectively. Furthermore, the study categorized the
years of experience of respondents into 5 different strata which showed that 41.10
percent of the respondents had experience of about 6 to 10 years. Similarly, the
respondents with more than 15 years of experience were 9.60 percent while 17.80 and
31.50 percent had experience of 1 to 5 years and 11 to 15 years respectively.

118
119