American Journal of Scientific Research ISSN 1450-223X Issue 49 (2012), pp. 21-26 EuroJournals Publishing, Inc. 2012 http://www.eurojournals.com/ajsr.

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Determinants of Dividend Payout in Pakistan

Zia Abassi Assistant Professor, Iqra University Abid Town, Block-2 Gulshan-e-Iqbal, Karachi, Pakistan Tel: +92214800670-4 ; Fax: +92214987806 Muhammad Muzammil Business Graduate, Iqra University Abid Town, Block-2 Gulshan-e-Iqbal, Karachi, Pakistan Tel: +92214800670-4; Fax: +92214987806 Fahim Qazi Assistant Professor, Iqra University Abid Town, Block-2 Gulshan-e-Iqbal, Karachi, Pakistan Tel: +92214800670-4 ; Fax: +92214987806 Abstract The Dividend policy explains the strategy in the organizations about the payments amount which they announce to investors as profit on shares, the procedures of dividend is method as well as arrangement which organizations build up plus affect on organize to pay dividend payouts to investors. Dividend payout is the base for attracting new the investors, the number of investors unaware about firm performance for making investment and to earn good dividends. This research base to find the impact of expenses, gross sales, cost of sales, taxes, net profit before tax, earning per share on dividend payout of all registered firms in KSE, Pakistan. Quantitative and numeric data base on cross sectional data used in this study. The six years (2004-2009) secondary yearly figures are compiled from 427 firms which are registered in Karachi Stock Exchange, from the annual reports extracted derived trustworthy supply i.e. SBP and KSE official sites. After collection the average of the six years data has been taken to make it cross-sectional data. Multiple Regression technique is used in E-View Statistical software with the 90% level of significance. The study found that the value of net profit, tax, earning per share and gross sales are significant and positively related to the dividend payout. The value of cost of sales is significant and expenses are insignificant but both values are negatively related to the dividend.

Keywords: Dividend, Karachi Stock Exchange

1. Introduction
The Dividend policy explains the strategy in the organizations about the payments amount which they announce to investors as profit on shares, the procedures of dividend is method as well as arrangement which organizations build up plus affect on organize to pay dividend payouts to investors. The making of correct dividend payout plan is advantageous mutually for the company as well as for investors. To

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insure strategy about the payout of dividend its same and exact in support of every one, the organization need in the direction to make sure that which policy they want to implement it is practicable policy or not, after selection of that particular policy they need to implement that policy in different scenarios to insure the weaknesses of overall plan and its effect on organization and for its investors. Number of organizations practice to clearly explain the necessities for dividend guiding principle, it is beneficial for the both company and the investors because both have clear picture of working procedure and its output, due to which strong trust and relations become more strong. It is simple to announce the shares incomes make from an era in transparency due to which the organization is facilitate to finish off the volume payout dividends. If the dividend policy is well define to the investors so it is easy to motivate the investors due to transparency in the define policy and the real dividend payout as per policy. It is necessary to make sure that these policies and feelings of those policies should be positive from its shareholders along with business markets for related organization which going to present their policies. The organizations policies are mirror of the organization with respect to their current and future of profits and progress. These policies can easily attract number of invertors towards the organization and to keep them in company account. There is number of others factors which effecting on dividend policy of the firms which includes taxes is a term which imposes a different charges and other taxes types. To get payout from the business functions, which become liability and if fail to in paying it so it punishable according to law, At other hand company internal and financial performance. Dividend payout is the base for attracting new the investors, most of the investors dont know about the firm performance to make investment and to earn good dividends (Ahmed, H. & Javid, A., 2009). Therefore its need to be work on important of dividend payouts because there are number of researchers do research on dividend payout or policy (Gill, A. et. al., 2010, DSouza, J., 1999, Kanwer, A., 2003, Nazir, M. S., et. al., 2010, Yiadom, E. M. & Agyei, S. K., 2011). With the single variables and other multiple difference variables, in different interval of time, in different sectors of the industry, and at different world places. This research base to find the impact of expenses, gross sales, cost of sales, taxes, net profit before tax, earning per share on dividend payout of all registered firms in KSE, Pakistan. In the second part of this study we will review the related literatures which are essential for this research, in the third part we will understand the modeling frame work of this research, where as in the fourth part of this research we will do empirical and result analysis of for this research and at the end of this research in fifth part we find conclude its recommendations according to the research.

2. Literature Review
2.1. Theoretical Background According to the theory of accounting, the gross sales is the first sales which include return sales and sales discount it is treat as income, where as the cost of sales is the manufacturing and inventory holding cost during the business cycle it nature is to less from income, where as expenses out flow of money or cash which used for business support expenditures it nature is to less from income, the tax is financial charge which impose on business and on individuals on their income and business transactions its nature is to less from income, the net profit before tax is the profit from which taxes need to be less to make it net profit, where as earning per share is that in which company distribute its profit on outstanding or common stock shares, where as the dividends are the payouts from the firms to its shareholder, which is the part of profit for shareholder, I could be inform of cash or shares. (Accounting; The Basis for business decisions by Walter B. Meigs and Robert F. Meigs, Seventh Edition, International Edition).

23 2.2. Empirical Background

Zia Abassi, Muhammad Muzammil and Fahim Qazi

DSouza, J., (1999) examined the effects of agency cost, market risk, and investment opportunities on an international firms dividend policy. He used assets and previous sales growth and market to book value of stock with its investment chances use as the substitute for the agency cost, investment chances, market threat accordingly. He used the three hundred forty nine companies as a sample worldwide for find the relationship among dividend payout, agency costs, investment chances, market threat. He used past three years sales growth and market to book value of stock, as an alternative for the firms investment chances in the near future. The dividend payout variable used in his study, with 3 years straight average taken from 1995 to 1997, while the institutional holdings, beta value, growth, and market and book values all pertain to the year 1997. He obtained dividend payout, beta and growth data from Data Stream, while institutional ownership is obtained from World Scope Disclosure. Multiple regression analyses are used for explaining association among the dividend payout, agency costs, investment chances, market threat payout ratio, where as dividend is dependent variable while beta, past three years sales growth, percent age of assets, with market-to- book value are independent variables. Outcome of this research maintain the previous research outcome because it show agency cost and market threat is negatively effect on dividend payments, but it not maintain the outcome about negative impact of investment chance on dividend, according to this research investment chances has significant impact on dividend payout policy with respect to international point of view. Kanwer, A., (2003) according to his research the researcher find the relation for the dividend policy, for companies which are registered with KSE Pakistan, the researcher has find the what factor become a reason to impact on Dividend policy payouts. The researcher has used investment opportunities firm size, surplus, , quality of firms, on dividend payout, the researcher used Heckman procedure to over comes on this research limitation, as per the result of this research out of the above factors quality of firms and investment opportunity has significant effect on dividend policy or payout decisions. Amidu, M. and Abor, J., (2006 explain the determinants of dividend payouts of registered firms in Ghana, in this research they have used financial data from firm which are registered with Ghana SE for the period of six year, the OLS model is used to analyze the equation of regression in their research. They used Institutional holding Growth in sales; agency cost and market to book values are utilized as the alternative of investment chance. According to this research result there is optimistic association among the dividend payments, cash flow, taxes and profitability, at other hand the outcome show that pessimistic association among dividend payments, assets, risk, sales growth and market book value. The important variables in outcome are cash flow, sale growth, profitability, and market-to-book value. The main value of their study is the identification of the factors that influence the dividend payout policy decisions of listed firms in Ghana. Anil, K., and Kapoor, S., (2008) work on the determinants of the Dividend payment Ratio in the information technology sector of India. They define that profits of the firms are always matter and displayer of the good dividends, according to this research there is number of other factors which are involve into display the dividend decision possibility like corporate taxes, growth of sales, market to book value ratio and cash flow. With respect to this research it shows that the dividend payment ratio is optimistically associated with cash flow, profits but it is negatively associated with growth of sales, corporate taxes, and market to book value ratio. In this research the researcher used Indian sector from information technology to find the determinants of dividend payments, to study it empirically, by using correlation and regression methods to explore the association among the major factors. In this research they explore that if they reroll the earnings in the business so that sector can give better return to its investors, most of the firms working on that pattern and give good results to their investors with goo earnings. They also inform that the variables which are in literatures are not

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enough to explain the pattern of dividend payments of this sector. They also indicate that IT firm of India has goods capability to give good dividends. Ahmed, H. & Javid, A., (2009) in his research they have explain dynamic and determinants of dividend policy in Pakistan, by using KSE non financial firms, the sample size used is three hundred twenty companies during 2001 to 2006 six years. With respect to this research firms are base on previous payouts and become more sensitive for current payouts, for finding this relation they have applied regression analysis, with profits of firms, leverage, net earnings, concentration, market liquidity and free cash flow on dividend payouts, concentration and liquidity of market has optimistic effect on dividend, whereas leverage has negative impact on dividend payouts at other hand market capitalization and firm size has negative impact on dividend, which show that firms are interested in to reinvest in their assets instead of pay dividends. The firm dividend policy is normally varies from geographical region due to the differences in different dealing with capital market. Further it indicates unresolved issues for the dividend, there is a list of dividends as advance corporate finance is one of the top most essential unresolved issues of this area or segment. their hand theory, in which they conclude that in general most of the investors to keep cash in hand as compare to capital gain as a future promise the aim is to lowering risk or minimizing risk. The result of that research confirmed that the unconstructively association among the agency cost and market threats for the dividend payments but it not show negative association between investment chance and dividends payments, for international it negative association. Ahmed, H. & Javid, A., (2009) in his study they explain determinants of dividend payout policy; they have used three hundred twenty firms which are from non financial sectors of KSE. They have used six years period data from 2001 to 2003 for research analysis, the outcome of this research show that the KSE listed non financial sectors note their previous dividend outs and earnings per share before announcing final dividends. Non-financial firms having different adjustments and low payout ratio represents the fluctuation in their dividend payouts. They have used regression analysis to find out results, in the result show that the firms which are enjoying stable profit maintain smooth cash flow due to which they pay good dividends, at same time association awareness and market worth has positive impact on dividend payments but investment chances and leverage have negative impact on dividend payments. Nazir, M. S., et. al., (2010) explain and further investigate the dividend policy to contribute in the field of finance, they present their work on the role of corporate policy for dividend and volatility in stock share prices with respect to Pakistan. They have use 73 firms from Karachi stock exchange, Pakistan, for five year data, from 2003 to 2008 and they applied fixed effect with arbitrary effect model. Outcome of that research show that dividend policy for payouts has a major effect on stock worth instability in KSE, so they suggest that volatility can be reduce if firms announce positive dividend payouts policy. Yiadom, E. M. & Agyei, S. K., (2011) explain the concept of the dividend policy in banks of Ghana, they use five year data from nineteen ninety nine to two thousand three, where they use random and fixed different techniques. The outcome of this research shows that the Debt, profitability, vary in dividend and its undertaking ability are significant variables which are definitely control dividend policy in banks of Ghana, at the other hand they have found that the growth and the age impact on dividend policy really negatively and it has significantly present its impact, whereas cash has a reverse relationship with the dividend policy but not significantly, they confirm that the major factor in determinant of dividend policy are leverage, profitability, vary in dividend, undertaking ability, age and growth, and they have also support for the agency cost theory and profitability theory with limited favor for life cycle theory, but n support endorse for the free cash flow theory.

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Zia Abassi, Muhammad Muzammil and Fahim Qazi

3. Modeling Framework
On the basis of the literature review for this research the regression analysis has used because the previous researcher also use same analysis for that type of research, the researchers are Ahmed, H. & Javid, A., (2009), Kanwer, A., (2003), Nazir, M. S., et. al., (2010) and Yiadom, E. M. & Agyei, S. K., (2011) so the model will examine the impact of expenses, gross sales, cost of sales, taxes, net profit before tax, earning per share on dividend payout. D = F (COS, NPBT, EXP, TAX, EPS, GS) For empirical Estimation following equation has used.

Y = 1CO S1 + 2 NPBT2 + 3 EXP3 + 4TAX 4 + 5 EPS 5 + 6 GS 6 +

In the above equation is the error term, is the term for constant, whereas 1 is coefficient of cost of sales, 2 is coefficient of net profit before tax, 3 is coefficient of expenses, 4 is coefficient of taxes, 5 is coefficient of earning per share and 6 is coefficient of gross sales. Whereas we have use the log data value of cost of sales, taxes, expenses and gross sales, The six years (2004-2009) secondary yearly figures are compiled from 427 firms which are registered in Karachi Stock Exchange, from the annual reports.

4. Empirical Result and Analysis

The analysis of data is way to use the raw form of data in to the meaning full information, after that analysis the new form of output show the realistic picture which fives main information about the respective area. As the data analyze in the different way with different approaches it show the true values than on the basis of that values conclusion and result interpreted. So after this analysis the final conclusion and decision makes, so its most important part of the thesis and research so here is the Output of Regression Analysis.
Table 4.1: Output of Regression Analysis
Variable C LOG(CS) NP LOG(EXPN) LOG(TAX) EPS LOG(GS) R-squared F-statistic Prob(F-statistic) Coefficient -4.027731 -2.732713 4.65E-05 -1.090078 0.34802 0.021156 4.462827 t-Statistic -5.570122 -3.13513 1.704789 -0.827793 3.634991 3.427053 4.498723 0.754711 122.0475 0.000000 Prob. 0.0000 0.0019 0.0895 0.4086 0.0003 0.0007 0.0000

Table 4.1 shows the value of R-square is 0.755 that represents the independent variable i.e. dividend payout can predict 75.5%. The value of net profit, tax, earning per share and gross sales are significant and positively related to the dividend payout. The value of cost of sales is significant and expenses are insignificant but both values are negatively related to the dividend.

5. Conclusion and Recommendations

The Dividend policy explains the strategy in the organizations about the payments amount which they announce to investors as profit on shares, the procedures of dividend is method as well as arrangement which organizations build up plus affect on organize to pay dividend payouts to investors. The making of correct dividend payout plan is advantageous mutually for the company as well as for investors. To facilitate strategy of dividend payout accurately for every organization, the organization need that

Determinants of Dividend Payout in Pakistan

26

which policy they want to implement it is practicable policy or not, after selection of that particular policy they need to implement that policy in different scenarios to insure the weaknesses of overall plan and its effect on organization and for its investors. Dividend payout is the base for attracting new the investors, number of investors doesnt know about firm performance for make investment and to earn good dividends. This research base to find the impact of expenses, gross sales, cost of sales, taxes, net profit before tax, earning per share on dividend payout of all registered firms in KSE, Pakistan. Quantitative and numeric data base on cross sectional data used in this study. The six years (2004-2009) secondary yearly figures are compiled from 427 firms which are registered in Karachi Stock Exchange, from the annual reports extracted derived trustworthy supply i.e. SBP and KSE official sites. After collection the average of the six years data has been taken to make it cross-sectional data. Multiple Regression technique is used in E-View Statistical software with the 90% level of significance. After collection the average of the six years data has been taken to make it cross-sectional data. Dividend Payout is used as a Dependent Variable while Independent Variables are Expenses, Gross Sales, Cost of Sales, Taxes, Net Profit Before Tax, and Earning Per Share. Multiple Regression technique is used in E-View Statistical software with the 90% level of significance. The value of R-square is 0.755 that represents the independent variable i.e. dividend payout can predict 75.5%. The value of net profit, tax, earning per share and gross sales are significant and positively related to the dividend payout. The value of cost of sales is significant and expenses are insignificant but both values are negatively related to the dividend. After this research there is a need for more research in this area to explorer the more factors which are still hide, the finding of remaining factor play important role for this area.

References
[1] Ahmed, H. & Javid, A., (2009). Dynamics and Determinants of Dividend Policy in Pakistan (Evidence from Karachi Stock Exchange Non-Financial Listed Firms), International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 25 (2009) EuroJournals Publishing, Inc. 2009 Ahmed, H. & Javid, A., (2009), The Determinants of Dividend Policy in Pakistan, International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 29 (2009), EuroJournals Publishing, Inc. 2009 Amidu, M. and Abor, J., (2006), Determinants of dividend payout ratios in Ghana, The Journal of Risk Finance, Vol. 7 No. 2, pp. 136-145, Emerald Group Publishing Limited. Anil, K., and Kapoor, S., (2008), Determinants of Dividend Payout Ratios-A Study of Indian Information Technology Sector, International Research Journal of Finance and Economics, EuroJournals Publishing, Inc. DSouza, J.,(1999), Agency Cost, Market Risk, Investment Opportunities and Dividend Policy - An International Perspective, Managerial Finance, Volume 25 Number 6 1999 35 Gill, A., Biger, N., & Tibrewala, R., (2010), Determinants of Dividend Payour Ratios: Evidence from United States, The Open Business Journal Kanwer, A., (2003) The Determinants Of Corporate Dividend Policies In Pakistan: An Empirical Analysis, Foundation for Business and Economic Research Nazir, M. S., Nawaz, M. M., Anwar, W., & Ahmed, F., (2010). Determinants of Stock Price Volatility in Karachi Stock Exchange: The Mediating Role of Corporate Dividend Policy, International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 55 (2010), EuroJournals Publishing, Inc. 2010 Yiadom, E. M. & Agyei, S. K., (2011). Determinants of Dividend Policy of Banks in Ghana, International Research Journal of Finance and Economic, ISSN 1450-2887 Issue 61 (2011), EuroJournals Publishing, Inc. 2011

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