Impact of financial leverage on dividend policy at Tehran Stock Exchange: A case study of food

industry
Problem statement:
Dividend policy became one of the main component of financial leverage. Number of researches are
conducted on dividend repayment and capital structure. Most of these researches are based upon the
current theories of dividend payment, but these theories are fail to define about how much dividend is
paid and what extent of dividend is retained by the organizations. Dividend payment scenarios are solely
dependent upon manager decisions. For stance, if the organization pays a large amount of dividend to
shareholders, the lesser will be the retained earnings of the company for repayment of debt and vice
versa.
Among different researches, much of the work is done on relationship between dividend policy and
leverage is in developed countries. There is not considerable study that can study the relationship
between dividend policy and financial leverage in Iranian stock.
Research Gap:
This study defines the relationship between the dividend structure and the financial leverage in Iranian
food sector, because of consideration of dividend as an important determinant of calculation of financial
risk and capital structure of the organization. This study derives the behavior of organizations as
dividend policy and link it with the financial leverage to study the dynamic of relationship between
them.
Theoretical background to justify the relationship:
This research uses the linter model (1956) to derive the relationship, in which dividend per share is
taken as a proxy of dividend policy of a firm and dividend yield, debt ratios and changes in earnings as a
proxy of financial leverage for independent variables. The change in earning are taken on the basis of
fama and babaik study (1968), which shows that the linter model is improved by introducing an
additional term like retained earnings of previous year of the organization. The dividend payment
practice from the current year profits constitutes the most related and important variable which causes
the change in the dividend while dividend payment practices and policies of the companies are also
influenced by the previous dividend paying period
Financial leverage is considered as independent variable, because it has a main role in reduction of
agency problems between management and ownership. However, the determinants for financial
leverage are condensed from the study of attiya (2009) adopting extended linter model in Pakistan non-
financial listed organizations.
This study replicates the model of asif et al (2011) study conducted on stock exchange in Pakistan, which
is on the determinants of dividend policy in Pakistan, and uses the same model and same variables for
deriving the relationship in context of Pakistan.
Model:
The study uses the research model devised by linter in (1956), but in its extended form as defined by
fama and babaik (1968). However the conceptual framework of this study is as following:
Variables of the study includes dividend yield, debt ratio, while changes in earnings is included as a
dummy variable in this study.




Operationalization of variables:
Dividends per share (DPS) = Total amount of dividends No. of shares of the firm i at time t.
Debt ratio (DR) /Leverage = Total debt Total assets of the firm i at time t.
Dividend yield (DY) = Dividend per share Price of the share (The chosen price, applied as
denominator, corresponds to the share price at the end of financial year, when all the dividend
announcements for corporate dividend have been made).
Changes in earnings (E) = Earnings it Earnings i, t-1 Earnings i, t-1
and it is the error term.
Along with descriptive statistics Regression and correlation techniques are used in this research to
define the relationship.



Some of the results of this study are matched with the similar study on broader context is studied by asif
at el (2011) in Pakistan like debt ratio and dividend are significantly related in case of Pakistan, but in
this study, they are insignificant.
This study results also correlates with the jelling (2007) study here is no significant relationship
between companies profits that meet to financial leverage rather than profits that have high
financial leverage in same times. Other results in research explain if comparison is performed by
other factors such as free cash flow and companys growth and development, difference in profit will be
significant, that is accordance with our results. That means, there are other factors that have high
effect on dividend policy