DETERMINANTS OF DIVIDEND

Thesis submitted to:

Department of Management Sciences Superior University Lahore
In partial fulfillment of the Requirement for the degree of masters in Management Sciences

Supervisor:
Prof. Shahid Ghori

Submitted BY:
Imran Azeem Roll Number: MBP 10406 Session 2009-2011

Department of Management Sciences Superior University Lahore

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Thesis Title: Determinants of Dividend

Research By:
Imran Azeem

Research Supervisor:
Signature: _________________________ Date: __________________

Prof. Shahid Ghori

Submitted as the requirement of master of Business Administration

Department of Management Sciences Superior University Lahore

Our Parents, Teachers, Friends and those who inspired me and whom I will inspire.

Declaration of Originality
I hereby declare that this project is entirely my own work and that any additional sources of information have been duly cited. I hereby declare that any Internet sources published or unpublished works from which I have quoted or draw references fully in the text and in the content list. I understand that failure to prove this will result in failure of this project due to plagiarism. I understand I may be called for viva and if so must attend. I acknowledge that this is my responsibility to check whether I am required to attend and that I will be available during the viva periods.

Signed

Date. Name of Supervisor

Abstract
The purpose of this study is conduct a researcher on determinants of dividend that compares the independent variables namely return on equity , corporate taxes , liquidity to the dependent variable dividend . I had successfully researched various research articles and journals referenced comprehensively throughout the literature review and thus have established that theres positive evidence in support of my opinion that theres indeed a relationship established amongst the aforementioned independent and dependent variable respectively, as is evident in all other previous researches carried out so far. I used the quantitative approach for this research, which is based on positivism paradigm. The sample size of 15year data is taken. And SPSS software is exclusively used for the analysis and verification of data is confirmed through descriptive statistics, histogram, scatter plot, correlation and regression. Key words: return on equity, corporate taxes, liquidity and dividend

First of all I acknowledge ALMIGHTY ALLAH whose blessings lead us towards successes accomplishing in every sphere of life. All respects for HAZARAT MUHAMMAD (peace be upon him), who is forever a torch of knowledge and guidance to humanity and enable us to shape our lives according to the teachings of Islam. It is matter of great pleasure and honor for us to express our deep sense of gratitude for the continues guidance , indispensable advice and precious time devoted to us by our advisor and teacher SHAHID GHORI , superior university , Lahore. Finally, I extend my cordial and my special regards to my most respectful affectionate and loving parents, who have always prayed for my success and betterment.

Imran Azeem

TABLE OF CONTENTS
Dedication........................................................................................................................... Declaration of Originality................................................................................................. Abstract................................................................................................................................ 3 4 5

Acknowledgment................................................................................................................... 6 Chapter 1: Introduction....................................................................................................... 8

1.0 Introduction....................................................................................................... 8 1.1Back ground of the study................................................................................... 11 1.2 Purpose statement............................................................................................. 1.3Objectives......................................................................................................... 1.4Significance....................................................................................................... 13 13 14

1.5 Research questions and hypothesis................................................................... 14 Chapter 2: Literature Review.............................................................................................. 17 Chapter 3: Theoretical Foundations................................................................................. Chapter 4:Data/Methodology............................................................................................. 44 49

4.0Data................................................................................................................... 49 4.1Methodology..................................................................................................... 50 Chapter5: Analysis............................................................................................................... 5.1Data screening................................................................................................ 5.2DescriptiveStatistics......................................................................................... 5.3Histogram.......................................................................................................... 5.4 Scatter plot........................................................................................................ 51 51 52 53

54 5.5Correlations....................................................................................................... 55 5.6Regressions....................................................................................................... 57 60

Chapter 6: Summary/Conclusion and recommendation..................................................

6.1Summary.......................................................................................................... 60 6.2Conclusion....................................................................................................... 62

6.3Recomendations............................................................................................... 62 References............................................................................................................................. 64

Chapter 1
1.0 Introduction
The word dividend comes from the Latin word dividendum meaning the thing which is to be divided. Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out stockholders when a corporation earns a profit or surplus that money can be put to two uses: it can either be re-invested in the business called retained earnings or it can be paid to the shareholders as a dividend. According to the Ross (2008) Westerfield and Jordan dividend can be defined as cash paid out from current or accumulated retained earnings rather than other sources. This payment of dividend to shareholders depends on the company managements willingness to distribute their surplus of cash from their net income to shareholders or to retain it for other re-investment opportunities. Many corporations retain a portion of their earnings and pay the remainder as a dividend. For a joint stock company, a dividend is allocated fast as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company paying dividends is not an expense rather it is the division of an asset among shareholders. Public companies usually pay dividends on a fixed schedule but may declare a dividend at any time, sometimes called a special dividend to distinguish it from a regular one. Cooperatives on the other hand, allocate dividends according to members activity so their dividends are often considered to be a pre-tax expense. Dividends are usually settled on a cash basis, as a payment from the company to the shareholder. They can take other forms such as store credits common among retail consumers cooperatives and shares in the company either newly-created shares or existing shares bought in the market. Further many
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public companies offer dividend reinvestment plans, which automatically use the cash dividend to purchase additional shares for the shareholder. An important part of your investment return is dividends. Usually a cash payment to shareholders, dividends are most often paid on a quarterly basis. When the performance of dividend-paying stocks is compared to non-dividend-paying stocks, the difference from total return perspective capital appreciation dividends can be quite surprising. But keep in mind that not all companies pay out dividends. Some keep all of their profit and reinvest it back into the company while others pay out a portion to shareholders.

Types of dividend
Special dividend Cash dividend Stock dividend Property dividend Special Dividend Normally public companies declare their dividend on a specific schedule. However, they also have a option to declare a dividend at anytime. This type of dividend is referred as special dividend. Cash Dividend Cash Dividend normally paid in checks; this is a basic form of dividend. Cash Dividend considered a type of investment earnings and is taxable.

Stock Dividend This type of dividend given in the form of bonus shares or stocks of the issuing company or a subsidiary company. In routine this type of dividend offered on the basis of prorates allocation. Property Dividend This type of dividend is distributed in the form of assets by the issuing company or a subsidiary company. Other dividends It can be used in structured finance. Financial assets with a known market value can be distributed as dividends; warrants are sometimes distributed in this way. For large companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A common technique for "spinning off" a company from its parent is to distribute shares in the new company to the old company's shareholders. The new shares can then be traded independently.

Importance and Benefits of Dividends:

It is important for investors to consider the benefits that dividends offer and how easy it is to include dividend-paying stocks in any portfolio. Dividend paying stocks offer numerous advantages, including:

Attractive Returns: Dividends paid are part of total return. Companies that pay dividends are usually historically stable.

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Less Volatility: Dividends help lessen the potential fall of a companys stock price thereby reducing volatility.

Increased Yield: Dividends provide income (however they are only a small part of an investments total return.

Favorable Tax Treatment: Canadian dividends receive more favorable tax treatment than interest incomes which is fully taxed like employment income.

Companies that manage their cash flow effectively tend to sustain and grow their dividend payouts over time. Successful growth of earnings usually pays off for investors in the form of higher share prices.

Dividend Timeline:
Dividends must be declared by a companys Board of Directors before they are paid out this is known as the declaration date or announcement date. A stock is said to trade cum dividend with dividend before the ex-dividend date, meaning investors will receive the dividend if they own the stock before this date. The ex-dividend date is usually set two days before the date of record; this allows all stock trades made on previous dates to be properly settled and the shareholder list on the date of record to accurately reflect the current owners. On the record date, a company determines its shareholders or "holders of record." The payment date is when the dividend chaque are mailed to the shareholders of a company or their brokers.

1.1Background of the study

I will discuss the different researchers studies in my thesis about the dividend. The earliest major attempt to explain dividend behavior of companies has been credited to John Linter
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(1956) who conducted his study on American Companies in the middle of 1950. Black (1976) finds no convincing explanation of why companies pay cash dividends to their shareholders. Since that introduction of the dividend puzzle (1996) Gomes (1998) Fluck (1984) Myers and Majluf recognize that dividend policies address agency problems between corporate insiders and shareholders Grossman and Hart (1980) point out that the dividend payouts mitigate agency conflicts by reducing the amount of free cash flow available to managers, who do not necessarily act in the best interests of shareholders. In line with that, Jensen (1986) argues that a company with substantial free cash flows is inclined to adopt investment projects with negative net present values. Jensen (1986) and Chariot and Vafeas (1998). hypothesize that the relationship between the traditional determinants and dividend behaviour of Nigerian firms depend on growth prospects, level of gearing and firms size. Rozeff (1982) presents evidence that the dividend payout level for unregulated firms is negatively related to its level of insider holdings. Ho (2003) presented a comparative study of dividend policies in Australia and Japan. Aivazian et al. (2003) are considered to be the leading scholars in investigating the dividend policy in developing markets. Goaied (2002) conducted a study on the relationship between dividend policy, financial structure, profitability and firm value. AnilKapoor (2008) conducted a study on the determinants of dividend pay-out ratios. Pruitt and Gitman (1991) asked 1000 U.S financial managers and concluded that current and paet years profits are important factors influencing dividend payments. Baker and Powell (2000) survey of NYSElisted firms. DSouza (1990) also finds statistically significant and negative relationship between beta and dividend payout. Alli et.al (1993) reveal that dividend payments more on cash flows. (2007) Kowalewski, Stetsyuk and Talavera conducted a study on the the Corporate Governance and Dividend Policy in Poland. Gomes (1996) Fluck (1998) Myers

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and Majluf (1984) recognize that dividend policies address agency problems between corporate insiders and shareholders. (1980) Grossman and Hart point out that the dividend payouts mitigate agency conflicts by reducing the amount of free cash flow available to managers who do not necessarily act in the best interests of shareholders. Collins Saxena and Wansley (1996) conducted a study on the role of insiders & dividend policy. Erioris (2005) conducted a study on the effect of distributed earnings and size of the firms to its dividend policy. Naceur and Belanes (2006) conducted a study on the determinants and dynamic of dividend policy. Ferris Noronha and Unlu (2007) conducted a study on The More the Merrier an International Analysis of the Frequency of Dividend Payment.

1.2 Purpose Statement (Aim of investigation)

The main purpose of the study will be to find out what factors determine the dividend in the banking sectors of Pakistan. This study will also investigate what factors considered more important for the determination of dividend polices. Therefore purpose of this study will be take the data of the related variables which is already exist and quantify findings in the context of Pakistan.

1.3 Objectives of the Study

Our main objective of this study will be determining the determinants of dividend in banking sector of Pakistan. 1. To determine the relationship between (D) dividend (ROE) return on equity (CT) corporate taxes and (L) liquidity in the banking sector of Pakistan.

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2.

To facilitate the policymaking bodies to evolve a comprehensive view determinants of dividend and thus undertake necessary administrative adjustments.

1.4 Significance of the Study

This study is very important as its subject matter shows that it is addressing extremely fundamental factor of determinants of dividend. This study is providing a way to know what factors is much influence on the determinants of dividend. Further more this study needs more consideration because this study is more significant to the Pakistan banking sector to improve the dividend policies .this study will provide the information concerning factor effect positively and negatively to dividend polices. Lastly this study is significant in a way thats its gives a conceptual understanding of the relationship of corporate taxes, return on equity, liquidity and dividend in banking sector of Pakistan.

1.5 Research Question and Hypotheses: 1.4.1 Main Question

What factors determine the dividend in the banking sector of Pakistan? 1.4.2 Sub Questions

1. What is the impact of return on equity, corporate taxes, and liquidity position on
determinations of dividend?

2. Is return on equity, corporate taxes, liquidity and dividend are mutually correlated?

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HYPOTHESIS:
Hypothesis I Ho: H1: There is no association between dividend payout and return on equity. There is an association between dividend payout and return on equity.

Hypothesis II Ho: H1: There is no association between dividend payout and corporate taxes. There is an association between dividend payout and corporate taxes

Hypothesis III Ho: H1: There is no association between dividend payout and liquidity. There is association between dividend payout and liquidity.

Key terms Defined

Dividend (D) A portion of a publicly-traded company or fund's earnings that is distributed to shareholders. The amount of earnings distributed as dividends is usually determined by the board of directors and divided by the number of shares, but preferred stock often has guaranteed dividends. Dividends exist in order to encourage investment in the company and to allow shareholders who are really co-owners to participate in the profits. A rapidly expanding company often pays little or nothing in dividends, as most of its earnings are reinvested in the company. On the other hand, a wellestablished company with solid profits likely pays relatively high dividends. Return on equity (ROE) The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company
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generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as: Return on Equity Net Income/Shareholder's Equity Net income is for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock. Shareholder's equity does not include preferred shares. Also known as "return on net worth (RONW). The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. Corporate taxes (CT) A tax that must be paid by a corporation based on the amount of profit generated. The amount of tax, and how it is calculated, varies depending upon the region where the company is located. Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. Liquidity (L) The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. The ability to convert an asset to cash quickly Also known as "marketability". It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her money out of the investment. . Examples of assets that are easily converted into cash include blue chip and money market securities.

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Chapter 2 Literature Review

Investment and dividend decisions are the basic components of corporate financial management policy. The basic research related to the determination of the dividend policy is related to the linter model (1956) after that the work was refined by the Fama and Babiak (1968). It has been observed that during last 52 years the series of empirical and theoretical studies have been done. The summarize form of those empirical studies conclude three important things. Firstly when the dividend payout increases that affect positively to the market value of the firm. Secondly, when the dividend decreases then it affects the firms value. Finally the third suggest that dividend policy of the firm does not effect the firm value. According to the old Linter Model (1956) the level of current and expected future earnings and the pattern of the last dividends are the most important factors influencing the dividend decision. It should be noted that John Linter developed this model based on two vital things that he accounted in dividend policy. Firstly he said that firms go for long term dividend to earning ratios with the positive NPV available to them. Secondly the dividend policy is not changed unless the manager finds that the new earnings are sustainable as increase in earnings can not be assumed to be sustainable always. Mahapatra and Sahu (1993) also finds the determinants of dividend policy by using the different model linter (1956) darling (1957) and Brittain (1966). For the study they took sample of 90 Indian companies for the period (1988-89). Conclude in their studies that cash flow is the biggest determinant of the dividend policy after net earning. Further their research shows that past dividend is an important factor in decision making about dividend than the
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past earning of a firm 23. The other empirical work has been done by DeAngelo and Skinner (1992) Baker Powell (2000) they also support the Linter thoughts and give the same conclusion. Later in the( 2001) Baker Veit and Powell also study the factors influencing the dividend policy and gave the conclusion that there are none but four factors which effect the dividend policy those factors can be sum up as the linter proven factor known as earning stability, future expected and current level of earnings, the pattern of past dividends. There are many other studies done on the dividend topic one of the famous research was done by Rozeff (1982) in which he found out that the determinants of dividend policy are Growth, Agency Cost and Beta. Rozeff (1982) Lloyd et al. (1985) and Collins et al. (1996) used beta value of a firm as an indicator of its market risk. They found statistically significant and negative relationship between beta and the dividend payout. Their findings suggest that firms having a higher level of market risk will pay out dividends at lower rate. DSouza (1999) also finds statistically significant and negative relationship between beta and dividend payout. Rozeff (1982) presents evidence that dividend payout level is negatively related to its level of insider holdings. Jensen et al. (1992) and Collins et al. (1996) confirm that the relationship between dividend payout and insider holding is negatively related. Xinlei Zhao and Kai Li (2006) found out the firms information environment calculated by analyst is the important factor in dividend policy. They said that firms with the greater analyst coverage are recurring with a less proclivity to create dividend payments and initiate it. It was observed that the amount of dividend was negatively related to the greater analyst coverage in the profitable and non-profitable companies. This occurred to be negative after the controlling

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for share repurchases, institutional shareholdings, firm risk, across sample sub-periods and size sub-samples. Frankel and Li (2004) conclude in their research that increased analyst relates to the reduction of profitability of insider trades. Xinlei Zhao and Kai Li (2006) conclude that firms choose their dividend policy while taking the presence of asymmetric information into account. Luciana et al. (2006) study the relationship between the dividend and ownership structure of the company. Their research reveals the firms opt for the lower payout as ownership structure of largest shareholder increases. Moreover they also explain that the presence of agreement among large shareholder may also limit the monitoring power of strong non-controlling shareholders. Luciana et al. (2006) study the relationship between the dividend and ownership structure of the company. Their research reveals the firms opt for the lower payout as ownership structure of largest shareholder increases. Moreover they also explain that the presence of agreement among large shareholder may also limit the monitoring power of strong non-controlling shareholders. According to Mougoue and Rao (2003) the small companies can face greater information asymmetry as compare to the big companies. As these companies use dividends as the conveyor mechanism. Further more dividend policy for small companies can be amenable signaling tool as compare to other alternative methods. Ooi, (2001) believe that during the same time small companies can face sever condition to raise the capital from external sources thus like to purse such dividend retention strategy in which they face higher growth. It is another factor which can influence the dividend policy decision in a company. A company with high profit, expected to have high payout of

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dividends. Han et al. (1999) and Jensen et al. (1992) find positive relation between profitability and dividend payout. Stock Exchange Status: The stock market status of a firm may influence corporate dividend decisions to the extent that firms listed on the AIM tend to be newer and younger firms, and consequently more likely to suffer from high information asymmetry and agency problems. Moreover AIM firms may also be inclined to favor the residual dividend strategy since raising funds on the AIM for future investment is more expensive than on the LSE (Clatworthy and Peel 1997). It is another factor which can influence the dividend policy decision in a company. A company with high profit expected to have high payout of dividends. Han et al. (1999) and Jensen et al. (1992) find positive relation between profitability and dividend payout. Baker and Powell (1999) conducted a survey on dividend policy. Most respondents think dividend policy affects firm value. Kumar and Lee (2001) examined the determinants of dividend smoothing. Dividend smoothing is the method of maneuvering the time profile of earnings or earnings reports to make the reported income stream less variable. They found that by making the stream of dividend payments constant shareholders are not disappointed or upset by changes in dividend payout. The earliest major attempt to explain dividend behavior of companies has been credited to John Linter (1956) who conducted his study on American Companies in the middle of (1950). Brittain (1964) Modigliani and Miller (1961) Pettit (1972) Black and Scholes(1973) Michael Thaler and Womack (1995) Dhillon and Johnson (1994)Amibud

and Murgia (1997) Charitou and Vafeas (1998) Naceur (2002) conducted a study on the relationship between dividend policy financial structure profitability and firm value. The topic investigates the value creation process in the Tunisia stock exchange. There are many reforms
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since 1889 such as privatization of the stock exchange creation of a Tunisian SEC and a cleaning house introduction of new financial instruments etc. The value creation process in the Tunisia stock exchange is measured by a dichotomous response; the econometric procedure uses probity models estimated on unbalanced panel data. The data was extracted from the annual reports of 28 listed companies covering the period (1990-1997) the variables of interest Incorporated in the analysis of market book ratio dividend policy factors Debt, profitability and its size. All the variables of interest are positively correlated with MBR, with a correlation exceeding 40% for profitability 40.9%. There is also a high correlation between debt & size 82.8%.The value creation is also affected by nature of property. This finding suggests that the progressive reforms of the Tunisian stock exchange have attracted new investors, who have contributed by their purchase to the appreciation of the value of listed shares. Bhat and Pandey (1994) examined the managers perception about the dividend decision for the company in the period of (1986-87 to 1990-91). The research concludes the study of the 425 Indian companies, the result reflect that on an average the profitable Indian companies have distributed one-third of their net earnings which has an average dividend payout ratio comes to be 43.6%. Mishra and Narender (1996) analyze the dividend policies of 39 state-owned enterprises in India for the period (1984-85 to 1993-94.) Concluded that earning per share is the important determinant of dividend policy. Lazo's survey (1999) revealed that 87% of dividend paying companies believe that dividends do signal information regarding future earnings of the company. 110 senior financial officers

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from S&P 500 companies responded to the survey, representing a response rate of 22%. Results show that of corporations having a buyback program in place in the last two years, 72% increased their dividend payout. 25% used cash flow to fund repurchase programs, rather than to increase dividend payments. 93% of the responding officers felt that initiating a stockbuyback program is believed to be more effective than raising dividends in providing downside stock-price protection in a falling market. 79% of respondents stated that stock repurchase programs do not receive a higher priority use of corporate cash flow than dividends, even if corporate profitability were to come under pressure. Carlson (2001) discusses the factors that affect the dividend decision. He concludes that stock repurchases explain a small part of the decline in dividend yield. Anil Kapoor (2008) conducted a study on the determinants of dividend pay-out ratios-A study of Indian Information Technology sector. The harder we look at the dividend the more it seems to likes puzzle with pieces that just dont fit together. Black (1976) concluded with this question. What should the corporation do about dividend policy? We dont know. Among theories some factors are identified in previous empirical studies that influence dividend policy such as profitability risk cash flows, agency cost, growth, taxes, price earning ratio etc. Linton (1965) conducted a classic study on U.S managers dividend decision. He develops compact mathematical model & survey 28 well established industries. According to him the dividend payment pattern of a firm is influenced by the current year earnings & previous year dividends. Baker Farrelly and Edelman (1986) surveyed 318 New York Exchange firms and concluded that major determinants of dividend payments are anticipated level of future earnings and pattern of past dividends.

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Pruitt and Gitman (1991) asked 1000 U.S financial managers and concluded that current and peat years profits are important factors influencing dividend payments. Baker and Powell (2000) survey of NYSE-listed firms & concluded that determinants are industry specific and anticipated level of future earnings is major determinant. Pruitt and Gitman (1991) find that risk also determinant of dividend policy. Rozeff (1982) used beta value as an indicator of market risk and found statistically significant and negative relationship between beta and dividend payout. They suggest that firms having higher level of market risk will payout dividends al lower rate. D Souza (1990) also finds statistically significant and negative relationship between beta and dividend payout. Alli (1993) reveal that dividend payments more on cash flows. They claim current earnings do not really reflect the firm s ability to pay dividends. DSouza (1990) however shows a positive but insignificant relationship in the case of growth and negative but insignificant relationship in the case of market to book value. The data of Indian IT sector (2000-2006) had chosen it has been source from Prowess database of CMIE. Hinduja TMT Ltd and I-Gate Global Solutions Ltd. Have been excluded from aalysis due to non-availability of data. The following variables are identified which are: dividend payout ratio. EBIT total assets, cash from operations, annual sales growth, corporate tax profit before tax, Market to book value ratio. The statistical techniques of correlations & regression were used to explore the relationship between these variables. The dividend payout was used as dependent variables and other variables were used as independent. The result of study show positive and significant association between dividend payout and cash flows. There is insignificant relationship with corporate taxes, sales growth and MTBV ratio. So these are not important factors that influence the dividend payment behavior of firms in IT sector. The existing
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variables explain just 27 % of Indian IT dividend behavior future research can be focused on discovering variables that explain the remaining 70 % of the behavior. jayesh Kumar review that there is a relationship between ownership structure, corporate governance and firms dividend payout policy in the emerging market India. For this research he examines the Indian corporate firms over the period 1994-2000 for payout behavior of dividends and the association of ownership structure. Explain the analysis with the help of well established dividend models of Linter (1956) Waud (1966) and Fama and Babiak (1968). Narasimhan and Vijayalakshmi (2002) observe the effect of ownership structure of 186 manufacturing firms on dividend payout. The empirical research (regression analysis) shows that the promoters holding of 2001 has no effect on average dividend payout for the period of (1997-2001) S.Dhatt conducted a study on the financial leverage, ownership concentration and the dividend payout ratio. There are many studies that focused on investigating the relationship between investment financing and dividend policy decisions of firms and found conflicting evidence. This study uses regression analysis to estimate the relationship. The estimates of regression coefficients indicates that there is a relationship between debt and equity and payout ratio in air transport, chemicals, drugs, paper & forest products and the semiconductor industries. The relationship positive up to a certain level of debt and equity ratio and after it becomes negative. It indicates that at higher level of the debt and equity ratio the management is concerned about their financial risk. The industries with higher business risk have lower tolerance level of debt and equity ratio.

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Adelegan conducted a study to examine the impact of growth prospect, leverage and firm size on dividend behavior of corporate firms in Nigeria. John linter (1956) make earliest attempt to explain dividend behavior of companies, who conducted his study on American companies in middle of 1950s. Oyejida (1876) empirically tested for company dividend policy in Nigeria using linters model as modified by brittain. He concluded that the available evidence provides a strong and unequivocal support for the conventional devices for explaining the dividend behavior of Nigeria limited liability business organization. Odife (1977) criticized Oyejidas study for failing to adjust for stock dividend. He empirically analyzing the determinants of dividend policy on a sample of 63 quoted firms in Nigeria over a period from 1984-1997 and also introduced dummy variables to capture economic policy changes. Dividend behavior was tested using the linter-brittain model and its variants on the pooled cross sectional time series data for the full sample of observations from 19841994.The models are estimated using the Ordinary Least Square (OLS) method. The result shows that there are no significant interactions between the conventional Linter and Brittain model and dividend decisions of Nigeria firms. Jensen (1986) and Chariot and Vafeas (1998) hypothesize that the relationship between the traditional determinants and dividend behavior of Nigerian firms depends on growth prospects, level of gearing and firms size. The empirical results revealed that the dividend policies of Nigerian companies are influenced by after tax earnings, economic policy changes, growth potentials and long term debt. However, the validity of the model and its variants on dividend policy of Nigerian firms which is somehow remote, party depends on the growth prospect firm size and level of gearing of corporate firms. Kowalewski, Stetsyuk and Talavera (2007) conducted a study on the

Corporate Governance and Dividend Policy in Poland and explore the determinants of the
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dividend policy in.& test whether corporate governance practices determine the dividend policy in the non-financial companies listed on Warsaw Stock Exchange. Black (1976) finds no convincing explanation of why companies pay cash dividends to their shareholders. Since that introduction of the dividend puzzle a voluminous amount of research offers alternative and appealing approaches to solve it. Gmes (1996) Fluck (1998) Myers and Majluf (1984) recognize that dividend policies address agency problems between corporate insiders and shareholders. Grossman and Hart (1980) point out that the dividend payouts mitigate agency conflicts by reducing the amount of free cash flow available to managers, who do not necessarily act in the best interests of shareholders. Jensen (1986) argues that a company with substantial free cash flows is inclined to adopt investment projects with negative net present values. LLSV (2000) argue that differences among countries in the structure of laws and their enforcement may explain the prevailing differences in financial markets and also show that financial market development is promoted by better protection of investors The financial data comes from Euro money ISI Emerging Market and NotoriaS data bases as well as from the annual reports of the companies listed on the WSE. Our sample consists of 110 non-financial publicly traded firms with 760 observations over a seven-year period. It is divided into three sub-samples (19982001) and (2002-2004).In order to analyze the determinants, they estimate pooled Tobit regression model similar to the study of Bebczuk (2005) our results suggest that large and more profitable companies have a higher dividend payout ratio. Further more riskier and more indebted firms prefer to pay lower dividends. The findings based on the period (1998-2004) demonstrate that an increase in the sub-indices that represent corporate governance practices brings about a statistically significant increase in the dividend-to-cash-flow ratio. Moreover
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the estimates prove to be significant after the inclusion of standard additional controls Saxena and Wansley (1996) conducted a study on the role of insiders & dividend policy. The purpose of this study is to examine the role of insiders in determining dividend policy for unregulated firms, utilities, and financial-services firms. (1982) Rozeff presents evidence that the

dividend payout level for unregulated firms is negatively related to its level of insider holdings & result is that firms with higher levels of insider holdings have less need to signal firm value through dividends. Myers and Majluf (1984) show that the level of insider holdings is itself a signal oSf firm value. Other studies reveal that dividend policy is significantly intertwined with other corporate policy choices .Most recently Hansen Kumar and Shome (1994) find that payout ratios of electric utilities respond in much the same fashion as unregulated firms when the concentration of ownership changes. Their findings suggest that as the concentration of ownership increases, the level of monitoring increases and the need for a higher dividend payout decreases. Our sample consists of observations on 500 firms drawn randomly. The unregulated firms cover 21 different industries where the number of firms representing a particular industry ranges from 8 to 50. Of the 45 utilities, there are 29 electric utilities and 16 natural gas firms. Of the 53 financial-services firms, there are 38 commercial banks BHCs and 15 insurance companies. Rozeff (1982) a regression model is developed that relates the firm average payout ratio to its past and expected future growth rate, its level of systematic risk, the number of shares outstanding as a proxy for firm size and its level of insider holdings. Results indicate that the payout ratio is negatively related to the firms past and expected future growth rates in earnings its level of systematic risk and its insider holdings. Payout levels are positively related to the number of shareholders. The regression model is
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expanded to include binary variables for whether or not the firm under consideration is a financial-services firm or a utility. Under the Smith (1986) hypothesis utilities will possess larger payouts than unregulated firms. For financial-services firms, no such difference is anticipated. The regression model also captures any differences in the behavior of these two regulated groups based on insider holdings. If fixed-rate deposit insurance increases equity risk, then financial firms will have dividend policies that respond more drastically to changes in insider holdings. If regulatory commissions act as low-cost monitors for utility shareholders, then changes in insider holdings will not produce significant changes in dividend policy for these firms. Erioris (2005) conducted a study on "the effect of distributed earnings and size of the firms to its dividend policy. The objective of this paper is to examine the corporate dividend policy for the Greek market. John Lintner (1956) conducted a series of interviews with corporate managers about dividend policies of their companies. The total number of companies that he used was 600 from which he finally has chosen only 28 to survey and interview. One of the most important conclusions is that companies have a long-run target dividend payout ratio. That meant that companies aim to distribute, in the long run, a constant portion of their earnings each year. Another interesting remark of Lintners study concerns the managers that proved to be more interested on changes on dividend than on absolute levels. Fama and Babiak (1968) undertook a more comprehensive study of Lintner models performance. Their starting point was the work of Lintner (1956). Their sample consists of 392 industrial firms over the period (1946) through (1964). Fama and Babiak tested the Lintner s model with their data and methodology and found that it performed well but it can be improved by introducing, as an additional explanatory variable, the earnings from the previous year without the
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constant term. This paper is based on the work of Vasiliou and Eriotis (2003) and Eriotis & Vasiliou (2003). Vasiliou and Eriotis (2003) test the model of Lintner and suggest two different versions that improve the original model introduced by Lintner. In their first version of the Lintners model they consider as dependent variable the change in dividend between time t and as independent variables the change in the earnings of the firm between time and the change in dividend between time and the findings of Vasiliou and Eriotis (2003) suggest that the Greek firms follow a discrete dividend policy. That is the dividend payout of a firm depends upon the firms long-run target dividend that is adjusted according to the net earnings of the firm. The empirical investigation conducted for a large sample of the companies listed in the Athens Stock Exchange market during the period (1996 2001). For a firm to be included in the sample two criteria had to be met. First, the firm had to be listed in the Stock Exchange market for the whole of the period under consideration. Second, the firm would be required to be listed in the year (1995). The final sample consists of 149 firms in a 5 year period; that is, a panel of data with 718 observations, since some data were missing. The key variables of interest are the: measures of dividends distributed earnings sales and changes in this years distributed earnings and dividend from this year to the year before (DE and D). for the analysis panel data was used. This models is a powerful research instrument, since it combines the cross-sectional data with time-series data, and provides results that could not be estimated and studied if only time-series or cross-section data were used. e empirical results verified the hypothesis that the Greek companies prefer to distribute, each year a rather constant dividend, which they adjust from year to year according to their distributed earnings and size. Omran Pointon (2003) conducted a study on "dividend policy trading characteristics and share prices. The dividend policy of a firm is a significant aspect of

29

corporate financial management, for it has potential implications for share prices and hence returns to investors the financing of internal growth through retentions the size of the equity base within the firm again through retentions and hence its gearing leverage ratio. For developing economies growth through the realization of investment opportunities is likely to be an important element of an economic reform program. There are three issues we attempt to address: Shares price determinations. Dividend payout ratios Dividend stability. For a sample of 94 firms using data up to (1999) we find that retentions are more significant than dividends in determining prices of shares that are actively traded on the Egyptian stock market. However for non-actively traded shares the accounting book value is the most important determinant. Reductions in dividends are associated with a lack of liquidity and profitability. Dividend increases are linked to higher pre-tax operating profit effects which outweighed post-tax effects. As to aspects that influence dividend payout ratios of actively traded firms, important factors are gearing and the market to book value, the latter a surrogate for investment opportunities. For non-actively traded firms, a more complex pattern emerges .Aivazia Booth and Clearly (2003) use the return on capital employed as a measure of profitability, although they do not distinguish between a dividend increase and a dividend decrease. D'Souza and Saxena (1999) although they do not find significant relationship between dividends and investment opportunities. Aivazian et al. (2003) also use the market to book value, i.e. q-ratio, but find that emerging market firms do not exhibit the expected sign in their regressions unlike in their study of the US. Ramcharran (2001) finds support for the aspect of pecking order theory (Myers 1984) that retentions lower dividend desire associated with greater growth. According to the pecking order theory Myers (1984) o firms should prefer to
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finance investment by retentions rather than by debt. The data were drawn from the financial information provided by the Kopsas Egypt Financial Year Book (1999/2000) Fiani and Partners (2000). DeAngelo et al (2004), conducted the study on dividend policy, agency cost and earned equity. The study consists on why firms pay dividends? If they didnt have their assets and capital structure, would eventually become unsustainable as the earnings of successful firms exceed their investment opportunities. The gives the analysis of 25 largest long standing in 2002 dividend payers firms would have cash holdings of $ 1.8 trillion which is 51% of total assets, up from $ 160 billion 6 % of assets and $ 1.3 trillion in excess of their collective $ 600 billion in long term debt . They find that their dividend payments prevented significant agency problems since the retention of the earnings would have given the managers command over an additional $1.6 trillion with out access to better investment opportunities and without any monitoring. This sense suggests that firms with high retained earnings are especially like to pay dividends. In this view firms pay high dividend when earned equity to total equity is high, and decline when this ratio decline and when this ratio is zero or near to zero, it means firms dont have the earned equity. The finally found that the highly significant association between the decision to pay dividends and the ratio of earned equity to total equity controlling for size of the firm, profitability, growth, leverage, cash balance and history of dividends. The methodology can be explained in terms of three stages to the research multiple regression analyses are performed to explain the share price in terms of three attributes namely the retention the dividend and the book value per share. Comparisons are made between firms that are actively traded on the Egyptian Stock Market and those that are not further multiple
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regression analyses are performed to assess a range of possible determinants of the dividend payout ratio. The choice of variables is consistent with other empirical work reviewed in the previous section. Once again, comparisons are made according to stock market trading. The stability of dividends, comparing dividends for the current year with those for the previous year, is analyzed by means of logistic regressions. The first logistic regression assesses the relevance of various factors, including profitability and liquidity, to the decision to decrease dividends, or to let them remain fixed. On account of the smaller data-set see later firms are not distinguished according to stock market activity. The second logistic regression follows a similar approach, but classis firms according to whether dividends increased or remained the same. The right-hand side of each logistic regression looks the same as a standard multiple regression equation. However each logistic regression assesses the logarithm of the odds ratio as a linear function of the explanatory variables. In the first logistic regression the odds ratio is chosen to represent the ratio of the probability that the dividend stayed the same to second the probability that it decreased. In the second logistic regression, the ratio refers to first the probability of an increased dividend, to third the probability of the dividend staying the same. In each respective spreadsheet the binary variable, to represent each firm's dividend choice, is assigned a zero or one. So in the first logistic regression the value one represents the dividend staying the same, whereas in the second the value one arbitrarily represents the dividend increasing. The logic for our choice is that the higher the value of the binary variable, the higher the dividend. Right-hand side variables with positive coefficients would then be associated with a higher dividend propensity. This paper has addressed three issues concerning dividend policy of Egyptian firms: its role in share price determination; the identification of key factors affecting dividend
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payout ratios and the importance of factors that would cause a shift from keeping the dividends at a stable level. Share Price Determination. For a wide portfolio of both actively and non-actively traded shares on the Egyptian Stock Market, dividends are more important than earnings. However, for actively traded shares, retentions are more significant than dividends. But for non-actively traded shares, the accounting book value is the most important determinant of the share price, and not dividends or earnings. Dividend Payout Ratios For a wide portfolio of actively and non-actively traded shares, gearing and firm size affect the dividend payout ratio. The sign of the regression coefficient for gearing suggests that the traditional pecking order of retentions being preferred to debt may not hold for Egyptian firms. Small firms pay out less for actively traded firms important factors are gearing and the q-ratio, the latter a surrogate for investment opportunities. The result suggests a role for reducing dividends and retaining more in order to finance investment opportunities. For non-actively traded firms, a more complex pattern emerged. In particular, the sign of the coefficient for the q-ratio suggests that, as far as investment opportunities in such firms are concerned, dividend policy patterns contrast with those of actively traded firms. In order to finance investment opportunities, firms whose shares are not actively traded tend not to pay out a smaller proportion of earnings as dividends. Dividend Stability. Dividend stability is denned as maintaining the same level of dividends as for the previous year. To de-stabilize dividends by decreasing them is associated with a lack of both liquidity and overall profitability. Finally, to de-stabilize dividends by actually increasing them is associated with higher overall profitability. In terms of that overall profitability, pre-tax operating profit effects outweighed post-tax operating profit effects. Al- Najjar conducted a study on dividend behavior and smoothing new evidence from Jordanian panel data. This
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paper aims to investigate the dividend policy behavior in Jordan. In which Amman Stock Exchange is considered to be one of the updated emerging markets in the region. Miller and Modigliani (1961) provided their irrelevance theory of dividend policy; this theory is based on the assumptions of perfect markets. They concluded that dividend policy has no effect on either the price of firm's stock or its cost of capital. Research in the area of dividend policy has been concerned with relaxing the assumptions of MM model. Ho (2003) presented a comparative study of dividend policies in Australia and Japan. He examined a 10-year panel dataset, consisted of 332 firms in the Australian and Japanese markets from (1992 to 2001). He found the following relationships: dividend policy is positively affected by size in Australia and by liquidity in Japan, and negatively by risk only in Japan. These results supported the agency, signaling, and transaction cost theories of dividend policy. Aivazian et al. (2003) found that emerging market companies exhibit dividend behavior similar to US companies, in the sense that dividends are explained by profitability, debt, and the market-tobook ratio. Their empirical results (using pooled data) revealed that for both US companies and emerging market companies, profitability affects dividend payments; high ROE (return on equity) lead to high dividend payments. Crutches and Hansen [1989] examine the relationship between ownership, dividend policy, and leverage and conclude that managers make financial policy tradeoffs to control agency costs in an efficient manner. More recently, researchers have attempted to establish the link between firm dividend policy and investment decisions. Smith and Watts [1992] investigated the relations among executive compensation, corporate financing, and dividend policies. They conclude that a firm's dividend policy is affected by its other corporate policy choices. In addition, Jensen, Solberg, and Zorn [1992] linked the interaction between financial policies
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(dividend payout and leverage) and insider ownership to informational asymmetries between insiders and external investors. They employed a simultaneous system of equations and found that corporate financial decisions and insider ownership are interdependent. Despite this rich literature, most prior work implicitly recognizes differences in determinants of financial decisions between regulated and unregulated firms by excluding regulated firms from the analysis. Rozeff [1982] was among the first to explicitly recognize the role of insiders as one of monitoring the managers. He finds that dividend policy for unregulated firms is negatively related to its level of insider holdings. One interpretation of his result is that firms with higher levels of insider holdings have less need to signal firm value through dividends than comparable firms with lower levels of insider holdings. Additionally, in the context of the investment and financing decision, Myers and Majluf [1984] showed that the level of insider holdings is itself a signal of firm value. In a study of electric utilities, Hansen, Kumar, and Shome [1994] focused on the role that dividends play in the monitoring process to reduce equity agency costs. Hansen et al. focusd on electric utilities since they do not seem to fit current dividend theory explanations in the literature. They act differently, perhaps because they are subject to regulatory oversight and insulated from most market disciplines like takeovers. Their paper concludes that the use of higher payout raises the likelihood of monitoring by both management and the regulatory authority. If the regulator sets the rate of return to shareholders (dividend yield) below that required by market, then assuming efficient markets, the marginal investors will drop out. This lowering of the demand for the company's stock will adversely affect its price reflecting greater difficulty in raising equity funds. Moreover,
35

the associated costs (e.g., transactions and opportunity costs) will go up. Therefore, even if one assumes that this does not affect the costs of other sources of financing, the increased cost of equity financing will result in a higher overall cost of capital for the firm. Rao and Moyer [1994] developed a theoretical model to study the role of regulatory climate in capital structure decisions of regulated electric utilities. Their model predicts that utilities will react to their regulatory climate by adjusting capital structure. They also provide cross sectional and time series empirical support for their model from their data. They do not, however, comment on the dividend policy issues of (regulated) public utilities that are an integral part of a firm's capital structure decisions. Omran and Pointon (2004) investigated the role of dividend policy in determining share prices, the determinants of payout ratios, and the factors that affect the stability of dividends for a sample of 94 Egyptian firms. They found that retentions are more important than dividends in firms with actively traded shares, but that accounting book value is more important than dividends and earnings for no actively traded firms. he current study investigates the issue of dividend behavior in emerging markets using Jordanian non-financial companies. The dataset is drawn from the Jordanian Shareholding Companies Guide (1999, 2000, 2001, 2002, and 2003). From this dataset, 86 firms are selected these firms maintained their identity and reported their financial accounts without any significant gaps, for the period from (1994 to 2003). However due to missing observations the total number of observations in the estimated models is 743. This study applies pooled and panel to bit models to investigate the dividend policy. The paper finds that the dividend policy in Jordan as a developing country is influenced by factors similar to those relating to developed countries such

36

as leverage ratio, institutional ownership, profitability, business risk, asset structure growth rate and firm size. Furthermore the factors affecting the likelihood of paying dividends are similar to those affecting the dividend policy. Finally the results show that the Lintner model is valid for Jordanian data and that Jordanian firms have target payout ratios and they adjust to their target relatively faster than those in developed countries. Dobrisan conducted a study on monetary policy and capital market efficiency. Howe and Lee (2004) examine three corporate governance characteristics of preferred stock issuers relative to non-issuer managerial equity ownership, board size, and block shareholder ownership. Stieglitz (2002) explains that one must keep in mind that in post-1989 Russia there wan no housing market nor was there any real social safety net. He discusses the nexuses between institutions, privatization, and the impact of suggested economic remedies on the most vulnerable sections of Russian society. (2004) Giudici and Roosenboom examine the determinants of the long run stock price performance of Initial Public Offerings on Europes new stock markets. Habra (2002) examine the underlying factors which influence and cross-sectionals explain differences in the degree of dividend smoothing of firms. Differences in corporate dividend smoothing are documented by estimating the sensitivity of corporations dividend payout ratios to changes in earnings. Theoretical determinants of dividend smoothing are investigated by cross-sectionals regressing the degree of dividend smoothing of firms against firm characteristics. Kontonikas and Ioannidis (2005) analyze the relationship between monetary policy and asset prices using a structural rational expectations open economy model that allows for the effect of asset prices and exchange rates on aggregate demand. Sundaram et al. (2001) find that wealth

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effects are significantly and positively related to board size and to share ownership by independent outside directors and inside directors. Sub-samples based on board size reveal that for small boards. Williamson shows that equilibrium credit rating may be a result of optimal contract under the ex post type of information asymmetry; in a dynamic setting, the repeated game between banks and borrowers is considerably harder to model. Using the Flow of Funds data Christiano et al show that var impulse responses of business liability increase for about a year after a monetary contraction, possibly because facing a fall in sales and a rise in inventories firms find it necessary to raise funds to cover expenses they are unable to cut in the short-run; as recessions deepen firms scale back in production and net borrowing declines. Under the ex post type of information asymmetry Carlstrom and Fuerst simulate a general equilibrium model assuming loan contract depends only on a borrowers net wealth instead of the history of loan repayment. Townsend proves that if there is a cost of verification then the optimal structure of the loan contract is risky debt. Mazur argues that globalization is about more than actual trade openness and penetration of the economy with FDI; globalization imposes a particular set of neoliberal policies on countries. Bhagwati (2004) finds that FDI and trade benefit society on dimensions other than just the narrowly economic. Brown (2001) notes that the bulk of the evidence supports the argument that skill-biased technological change is more important than trade as an explanation. (2006)Naceur Goaied and Belanes conducted a study on the determinants and dynamic of dividend policy. Fisher Black (1976) wrote that the harder we look at the dividend picture, the more it seems like a puzzle with pieces that just do not fit together. More recently Brealey and Myers (2005) list dividends as one of the top 10 important unresolved problems in finance. The situation is pretty much the same today and the words of Fisher Black (1976) may well apply in todays context. In
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a recent survey Allen and Michaely (2003) conclude that much more empirical and theoretical research on dividends is required before a consensus can be reached. Tunisian case presents at least three interesting features that make its study relevant in terms of policy recommendations for this country and others in the Middle East and North Africa region. First the Tunisian ownership structure is highly concentrated and ultimate ownership identification is opaque. Second there are no taxes on dividend and capital gains contrary to other developing and emerging markets. Third the Tunisian Stock Exchange has witnessed several reforms, especially the introduction of an electronic system for transactions in phase with international standards, and this innovation is expected to have an impact on the way firms set their dividend policy. The data used are provided by the TSE and the Council of Capital Market through respectively, their official bulletins and their annuals reports covering the period (19962002). The sample is made up of 48 firms of which 29 belong to regulated industries financial institutions, transport and telecommunication firms. The period of study covers seven years from (1996 to 2002) which appears according to Rozeff (1982) a period long enough to smooth out variables fluctuations. Linters model is applied using static and dynamic panel data regressions. Our results show that Tunisian firms rely more on current earnings those past dividends to fix their dividend payments in the way that dividends tend to be more sensitive to current earnings rather than prior dividends. Any variability in the earnings of the corporation is directly reflected in the level of dividends. This is confirmed by the high value of adjustment speed, which is around 96% 86.68% when excluding the non-dividend-paying firms and 75.4% when excluding the regulated ones. Tunisian managers, just like their counterparts in other emerging markets, do not smooth their dividend payments. Additionally, the target dividend payout ratio is too low 14% for the full sample and 32% with the dividend-paying firms using gmm estimations. Therefore a low

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target ratio and high adjustment speed indicate the low smoothing and instability of dividend policy in Tunisia. We also highlight some determinants that may influence the dividend policy pattern. First the results indicate that highly profitable firms with more stable earnings can afford larger free cash flows and thus pay out larger dividends. Moreover fast-growing firms distribute larger dividends so as to appeal to investors. This agrees with the informative content of dividends. On the other hand ownership concentration does not have any impact on dividend payment. In fact being closely held Tunisian firms witness less agency conflicts and shareholders do not resort to dividends in order to reduce managerial discretion and protect their interests. Moreover the liquidity of the stock market has a negative influence which confirms that the implementation of the electronic transaction system in the TSE has facilitated the realization of capital gains which has reduced the need for dividend payments. Finally the negative coefficient on size found in the full sample has disappeared when regulated firms are excluded, which reduces the robustness of this factor Ferris Noronha (2007) conducted a study on The More the Merrier An International Analysis of the Frequency of Dividend Payment. The previous literature in corporate payout policy examines the decision to pay or not to pay dividends DeAngelo et al. (2004) Baker and Wurgler (2004) how much to pay Rozeff (1982) Miller and Rock (1985) or how to pay repurchases versus dividends (Stephens and Weisbach, 1998

Jagannathan et. al. 2000). But no study examines how frequently the firm should pay dividends once the decision to pay has been made. Thaler (1980) subsequently describes the process of mental accounting by which investors evaluate their gains separately from their losses, and thereby increase their overall utility. These arguments suggest that an investor receives a higher level of utility from a sequence of smaller discrete payments than a single aggregate payment. Barberis and Thaler (2003) describe how the
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concave utility function of prospect theory allows an investor to receive greater utility from a $2 dividend and an $8 capital gain compared to a $10 capital gain in spite of an identical dollar increase in shareholder wealth. (2003) Barberis and Thaler note that this differential bundling of the shareholder distribution produces two different levels of investor utility. The investor that receives the ten dollars bundled as a $2 dividend and a $8 capital gain experiences a higher level of utility compared to the investor who receives only a $10 capital gain. Barberis and Huang (2001) make the case that if a stocks recent performance is good, an investors utility increase from the gain leads that investor to become less concerned about future losses from the stock and, consequently, to view the stock as less risky. Thus, the investor is willing to discount future cash flows from the stock at a lower rate. To the extend that investors code more frequent dividends as more frequent gains, a situation which closely parallels the bird-in-the-hand argument, we should expect stocks paying dividends more frequently to have higher valuations because investors perceive them to be less risky, other things equal. Kahneman and Tversky (1979) and the confirming simulations and modeling of Barberis and Thaler (2003) and Barberis and Huang (2001) imply that a more frequent payment of dividends increases total investor utility we nevertheless observe that there is significant international cross-sectional variability in the frequency of dividend payment. LaPorta ET. al. (2000), find that firms in strong investor protection countries pay more dividends than those incorporated in less favorable regimes. LaPorta et.al. (2000) argues that shareholders in these countries are better able to force cash disgorgement, thus precluding insiders from using a high percentage of the firms earnings for personal benefits. Lintner (1956) establishes in the literature that firms are reluctant to cut dividends for their shareholders. Subsequent studies Ghosh and Woolridge (1988) Denis et al.
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(1994) show that firms are penalized in the marketplace when they do reduce them. The data used in this study are drawn from a variety of sources. We obtain annual financial and accounting data from the Compustat Global Industrial database while monthly market return information is collected from the Composted Global Issues database. From the research conducted by Al-Twaijry and Abdulrahman Ali (2007) on the dividend policy and payout ratio for Kuala Lumpur stock exchange (KLSE) during the period of year 2001 to 2005, the companies size were considered as an independent variable that has an effect on the dividend per share .The difference between large companies and small companies gave significantly (p < 0.10) better DPS in year 2001 and this difference kept on increasing for the next four years. Thus the size of the companies can be considered as one of the determinants and independent variable as the previous research. Besides that Eriotis (2005) also studied the Greek firms set their dividend policies not only by net distributed earnings but also the changes in dividend and size of the firm where the empirical findings of the research suggested that size of the firms was included as a signal about the firms dividend. Aivazian et al. (2003) also supported the research conducted by Al-Twaijry and Abdulrahman Ali (2007) and Eriotis (2005) where a firms size is expected to explain the firms dividend policy. In their study 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. The nature of the legal regime for our sample countries is obtained from the classification reported in LaPorta et al (2000). LaPorta et. al. (2000) show that shareholders in common law countries are more successful in extracting dividends from managers than those of firms incorporated in civil law countries. This study investigates a heretofore unexamined aspect of dividend policy the frequency with which a firm elects to pay its dividends to shareholders. The behavioral insights of prospect theory Kahneman
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and Tversky( 1979) and process of mental accounting developed by Thaler (1980) jointly suggest a dividend payment schedule that emphasizes frequency in an attempt to increase investor utility. We find however a substantial global variation in dividend payment frequency. Rather than a dominant and highly frequent pattern of dividend payment, we find that there is a clustering around three payment periodicities annually semi-annually and quarterly. Indeed the most common frequency for dividend across global capital markets semi-annual, which is relatively infrequent from a U.S. perspective. We conclude from our analysis that there are effects beyond that identified in prospect theory and mental accounting that influence the frequency with which dividends are paid. We observe, for instance, that there is an important distinction between legal regimes, with shareholders in common law countries receiving their dividends twice as frequently as their civil law counterparts. This result also holds for a sample of dividend initiators. Beyond the effect of legal regime, we find that the level and standard deviation of the firms operating income exert significant influences on dividend payment frequency. Firms with higher levels of permanent operating income tend to pay their dividends more frequently. We find however that firms with more variable levels of operating income pay their dividends less frequently, perhaps in an attempt to reduce investor disappointment when earnings are insufficient to satisfy dividend expectations.

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Chapter 3
Theoretical Foundations
In this chapter I am going to explain the links of variables that affect the dividend. There are many factors that affect the dividend such as liquidity position, return on equity and corporate tax. Some factors effect positively and some effect negatively on dividend. The determination of dividend is base upon on these variables.

Introduction
It is a distribution of a portion of companys earnings declared by the board of directors to its shareholders. The dividend is most often quoted in terms of the amount each share receives dividend per share It can also be quoted in term of percentage o the current market price referred as dividend yield. This payment of dividend to shareholders depends on the company managements willingness to distribute their surplus of cash from their net income to shareholders or to retain it for other re-investment opportunities. Many corporations retain a portion of their earnings and pay the remainder as a dividend. For a joint stock company, a dividend is allocated fast as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company paying dividends is not an expense rather it is the division of an asset among shareholders. Public companies usually pay dividends on a fixed schedule but may declare a dividend at any time, sometimes called a special dividend to distinguish it from a regular one.

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The most commons forms of dividend are Special dividend Cash dividend Stock dividend Property dividend Special Dividend Normally public companies declare their dividend on a specific schedule. However, they also have a option to declare a dividend at anytime. This type of dividend is referred as special dividend. Cash Dividend Cash Dividend normally paid in checks; this is a basic form of dividend. Cash Dividend considered a type of investment earnings and is taxable. Stock Dividend This type of dividend given in the form of bonus shares or stocks of the issuing company or a subsidiary company. In routine this type of dividend offered on the basis of prorates allocation. Property Dividend This type of dividend is distributed in the form of assets by the issuing company or a subsidiary company.

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Other dividends It can be used in structured finance. Financial assets with a known market value can be distributed as dividends; warrants are sometimes distributed in this way. For large companies with subsidiaries, dividends can take the form of shares in a subsidiary company. A common technique for "spinning off" a company from its parent is to distribute shares in the new company to the old company's shareholders. The new shares can then be traded independently. The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as Return on Equity = Net Income/Shareholder's Equity Net income is for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock. Shareholder's equity does not include preferred shares. Also known as "return on net worth" (RONW). The ROE is useful for comparing the profitability of a company to that of other firms in the same industry tax that must be paid by a corporation based on the amount of profit generated. The amount of tax, and how it is calculated, varies depending upon the region where the company is located. Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold, are known as liquid assets. The ability to convert an asset to cash quickly. Also known as "marketability". It is safer to invest in liquid assets than illiquid ones because it is easier for an

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investor to get his/her money out of the investment. .Examples of assets that are easily converted into cash include blue chip and money market securities.

Theoretical Framework

Return on equity

Dividend Corporate Taxes

Liquidity

Relationship of Return on Equity with Dividend:

(2006) Ashiq Ali and Oktay Urcan conducted a study on dividend Increases and Future Profitability. They find that in low dividend premium years, there is a significant positive relation between dividend increases and unexpected future earnings changes, consistent with the signaling theory of dividends. However, in the high dividend premium years, the relation between dividend increases and unexpected future earnings changes is insignificant. (1966) Brittain also verified a positive relationship between dividend and net profit.

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Relationship of Corporate Taxes with Dividend:

Corporate taxes play a vital role to pay dividend in the company. A tax that must be paid by a corporation based upon the amount of profit generated the amount of profit tax and how it is calculated varies depending upon the region and where the company is located. Anil, Kapoor (2008) is found that is inverse relationship between corporate taxes and dividend.

Relationship of liquidity with Dividend:

The empirical importance of these variables for the firms decision to pay dividends is examined in(2001) Fama and French and is further confirmed in our study. Second the liquidity of the firms common stock can also be related to the size, profitability, and growth opportunities of the firm. Therefore it is important to examine the link between firm dividend policy and liquidity after controlling for the possibility of such a relation. The liquidity or cash flow is also an important determinant of dividend payout. (1993) Alli et. al. found that dividend payments

depend on cash flows which reflect the position of the company to pay dividends. According to Alli et. al. (1993) there is a positive relationship between cash flows and dividend payments. (Becker)(2006) found additionally an increase in liquidity effectively expands the set of positive Net Present Value projects a firm may undertake because it reduces the cost of capital This would also tend to confirm an inverse relationship between liquidity and dividends because the more liquid a firms stock, the more a company would be able to invest in positive NPV projects, thus decreasing the amount paid out in dividends.

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Chapter 4
Data and Methodology
The variables which are used for study are return on equity, corporate taxes, liquidity and dividend. The following symbols are used for the representation of the variables in the study. Dividend (D) Return on equity (ROE) Corporate taxes (C T) Liquidity (L)

4.0 Data
In the study we want to investigate the correlation and regression relationship between return on equity, corporate taxes, firm size, and liquidity with dividend. So in the study the dividend is used as a dependent variable and return on equity, corporate taxes and liquidity are studied as the independent variables. For the research the annual data will be used for 15 years which is available to me. We used the data of 15 years as we want to investigate the determination of dividend. The data of all above variables is taken from the annual reports of banks. Sampling Technique and Sample The Population of my study will be banking sector of Pakistan in which the sample size is 15 years previous data of dividend of banking sector is taken in order to conducting the study on determination of dividend in banking sector of Pakistan. Measures: In case of measuring return on equity, corporate taxes, liquidity and dividend only secondary sources of data will be used.

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4.1Methodology
To make analysis of data we will use SPSS software in which we will make analysis in to two parts where part one will lead descriptive statistics that will be use to describe and summarize data and include measures of central tendency (average) and dispersion (the spread of data or how close each other is to the measure of central tendency) (Lewin, 2005) and part two will lead to inferential statistics that will be use to identify differences between groups, look for relationships between attributes and create models in order to be able to make predictions (Lewin, 2005). The methodology that we will adapt is discussed below one by one In order to get the overall summary of variable we will used descriptive statistics in which we will come to know about the nature of response that we will get from respondent like the value of maximum, minimum, mean and standard deviation. We will use frequency distribution which is a descriptive measure used for a graphical representation of the data to check the frequency (occurrence of one option) of the data as well as the normality curve to check either data is normally distributed or not. To check the overall picture for identifying the relationship between dependent and independent variable we will use scatter-plots.. Scatter plot will used to see the graphical picture of relationship between the dependent and independent variable. We will use regression analysis to find out the effect size of independent variable on dependent variable that how much change will occur in dependent variable due to change in independent variable by using regression equation for analysis. Where we will check the value of f-test to check the goodness of fit of the model. We will also make focus on the value to T to check the significance level of relationship for the acceptance or rejection of our alternative hypothesis. We will also make focus on the value of R square to see the contribution level of variable mean how much independent variable contribute in changing the value of dependent variable.
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Chapter 5 Analysis

In this chapter, I am going to analyze the data and discuss the results of the findings, which is taken from the annual reports of banks. The result of the study analysis is presented in this chapter. Descriptive analysis used to describe the data by using descriptive summary as well as histogram with normal distribution curve. Inferential analysis used to describe the relation between variables by checking the acceptance or rejection of hypothesis and to see the nature of relationship between variables. In inferential portion the study tested the relationship between Return on equity (ROE) corporate taxes (CT) Liquidity (L) and dividend (D). 5.1 Data Screening: Data screening and preparation is focused on ensuring that the data contained the appropriate range of scores for all analyzed variables including the identification of possible outlines. We used secondary sources for collection of data. After that the most complicated work is to make analysis of the data. So, for that purpose the first step is data screening in which we collect data for secondary sources and used spss software for data analysis. so, firstly we compute all the variables to get the final shape of our data variables and after that used different test for analysis. Lets discussed the detail of each variable one by one in the results portion.

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5.2 .Descriptive Statistics

N return_on_equity corporate_taxes liquidity dividend_payout Valid N (list wise) 15 15 15 15 15

Minimum 26.72 1.66E6 1.25E7 1.43E5

Maximum 70.50 9.87E6 7.85E8 8.45E5

Mean 43.3387 5.6279E6 1.6631E8 4.8308E5

Std. Deviation 14.70987 2.24124E6 2.51570E8 2.53144E5

In the above table, the minimum value of divided_ payout is 1.43E5and the maximum value of dividend pay-out is 8.45E5. The mean of dividend pay-out is 4.8308E5 and the standard deviation of dividend pay-out is 2.53144E5.The minimum value of return on equity is 26.72and the maximum value of return on equity is 70.50. The mean of return on equity is 43.3387and the standard deviation of return on equity is 14.70987. The minimum value of corporate tax is 1.66E6 and the maximum value of corporate tax is 9.87E6, the mean of corporate tax is 5.6279E6 and the standard deviation of corporate tax is 2.24124E6 The minimum value of liquidity is 1.25E7and the maximum value of liquidity is 7.85E8.The mean of liquidity is 1.6631E8and the standard deviation of liquidity is 2.51570E8.

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5.3 Histogram
Figure 1.1 Figure 1.2

Figure 1.3

Figure 1.4

The all above histograms shows the graphical representation of the bars that is showing the response of the respondents regarding determinants of dividend pay-out. The bars in the histogram from a distribution pattern or curve that is similar to the normal, bell shaped curve. Thus, frequency distribution of the determinants of dividend support is normal. But histogram of liquidity in skewed as compare to the other. the histogram of liquidity is silently not normally
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distributed but approximately is normally distributed . But shape of the carvers meets the requirement of bell-shape, its left and right tails are exactly equal in other case. The figure 1.1 showing the maximum higher bar that is between (40.00 to 50.00.) figure 1.2 showing (4000000.00 to 6000000.00) figure 1.3 showing (200000000.00) and figure 1.4 showing (400000.00 to 600000.00). Graph is also showing the maximum higher bar that is between (1.06 to 1.08).

5.4 Scatter plots

Figure 1.1 Figure 1.2

Figure 1.3

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The above scatters plot matrix diagrams shows the relationship between return on equity, corporate taxes and liquidity with dividend payout. If we observe then the flow of line is come from right to left which shows the positive relationship between return on equity and liquidity with dividend. But on the other hand if we observe the relationship between corporate taxes and dividend payout is negative. It shows that the return on equity and liquidity have the relationship with dividend payout but on the other hand corporate taxes and dividend not have the relationship with divided.

5.5. Correlation
Correlation is used to check the mutual relationship among variables. For checking the relationship we will make two hypotheses: null (H0) and alternative (H1). We interpret the findings on the acceptance or rejection of the hypothesis. We used correlation matrix to check the mutual relationship of different variables. The hypothesis which we developed are given below, Hypothesis 1: H0: there is a no association between return on equity and dividend. H1: there is an association between return on equity and dividend. Hypothesis 2: H0: there is a no association between corporate taxes and dividend H1: there is a association between corporate and dividend Hypothesis 3: H0: there is a no association between liquidity and dividend H1: there is a association between liquidity and dividend.

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Correlation
return_on_equity corporate_taxes liquidity dividend
return_on_equity

Pearson Correlation Sig. (2-tailed) N

.141 .616

.360 .187 15 -.066 .816

.198 .480 15 -.518* .048 15 .052 .853

15 .141 .616 15 .360 .187 15 .198 .480 15

15 1

corporate_taxes

Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N

15 -.066 .816 15 -.518* .048 15

15 1

liquidity

15 .052 .853 15

15 1

dividend

15

*. Correlation is significant at the 0.05 level (2-tailed).

The above table represents the table of correlations. Where three variables corporate taxes liquidity and dividend weak relationship related to return on equity at values (.141.360 and .198). The magnitudes of the above discussed two correlations are less than 0.33 in the absolute terms, which shows the weak correlations between the said pairs of the variables the relationship between corporate taxes, liquidity and dividend is insignificant. The significant level is 0.05. So we rejected H1 and accept HO. . If we see the mutual relationship of corporate with liquidity and dividend at values (-0.66,-.518) then there is negative relationship exist between both variables. The relationship between liquidity and dividend is positive at a value .052 but the relationship between liquidity and dividend at the value of .052 which shows that weak relationship between
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two variables. The significant level is 0.05. But the value of significance is .853. it shows that there is insignificant relationship exist . We accept H0 and reject H1. All the above correlations are statistically not significant at less than five percent level of significant.

5.6 Regression
Regression is used to check the effect size of independent variable on dependent variable. Results of regression analysis are given in table 5.3. The value of the coefficient of determination (R2) is .352. This shows that the correlation between the observed values of dividend payout support and the fitted value of the turnover intention is 35% percent. The adjusted coefficient of determination (adj. R2) shows is adjusted for the degrees of freedom. The value of the adjusted coefficient of determination (adj. R2) is not affected. The value of the adjusted coefficient of determination (adj. R2) is .175, which shows that 17% variations in dividend payout. The value of F-statistic is statistically significant at less than five percent that exhibits that in the estimated model at least one of the partial regressions coefficients is different from zero.

Regression Analysis

Standardized Unstandardized Coefficients Coefficients Model 1 (Constant) return_on_equity corporate_taxes liquidity a. Dependent Variable: dividend B 627477.988 5390.941 -.064 -9.840E-5 Std. Error 230918.581 4549.728 .028 .000 .313 -.569 -.098 Beta t 2.717 1.185 -2.302 -.373 Sig. .020 .261 .042 .716

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Necessary statistics
R2 .352 Adj R2 .175 F-test 1.990 Sig of F-test 1.74

EQUATION : Y = C + 1x1 + 2x2 + 3x3 Y is dependent variable which is dividend. x1 shows the effect of return on equity,x2 shows the effect of corporate taxes, x3 shows the effect of liquidity. C shows constant. The coefficient table presents the results of the regression analysis. The objective of the regression in this study is to find such an equation that could be used to find the factor affecting the determinants of dividend. From the above coefficient table, we identify that the value of constant is 627477.988 and the value of beta is 5390.941, -.064, -9.840E-5 so, from these values, we draw the regression equation as Dividend = C + B1 ROE + B2 C.T + B3 L Putting the values in the equation. Dividend = 627477.988C+5390.941 ROE -.064 C.T -9.840E-5 L The result shows that independent variable return on equity not significant affect to dividend. The value of return on equity is (.261) that is more (0.05) from significant level. The corporate taxes have significant affect on dividend. The value of significance (.042) . Significant level (0.05) On the other hand the liquidity has not significant affect on dividend. the value is( .716)

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and significant level is (0.05). T-test is used to test the significance of the individual partial regression coefficients. Null hypothesis in this test is set as the partial regression coefficient is zero. This test shows that the coefficients of the predictor are statistically significant at less than five percent level of significance.

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Chapter 6 Summary Conclusion and recommendations 6.1 Summary

The primary purpose of the present study is to investigate the role of dividend policies in institutions of Pakistan. This study uses the qualitative method to check the proposed model in the context of Pakistan and to see the generalizability of the research to the large population with the sample size of 15 years previous data of dividend are taken for conducting this research.. The overarching purpose is to guide both researcher and policy makers, to develop and implementation of such policies that improve dividend payout polices. With and extensive review extensive literature review on initial model is proposed which encompass on relationship of dividend with return on equity, corporate taxes, and liquidity to seeing what factor is helpful to determine the dividend payout polices and reducing the difficulties to determine the dividend payout polices . The literature review has provided the basic theoretical evidence with regard to the link between dividend payout and return on equity and other factors for determine the dividend payout. Secondary sources of data are utilized for the purpose of collection of data for variables which are defined for conducting the research on dividend. This study is helpful for literature by checking the role of dividend in a research context of Pakistan. Furthermore, broadly speaking it is beneficial for institution like banks etc to set reforms to enhance the dividend payout polices which is likely to contribute in overall organizational success. Lastly it enhances our understanding of and research area of dividend payout, factors that effected on determination of dividend procedure in the context of Pakistan. Thus this study is an attempt to analyze the impact of return on equity, corporate taxes, and liquidity on dividend payout or determination of dividend. Descriptive analysis used to describe the data by using descriptive

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summary as well as histogram with normal distribution curve. Inferential analysis used to describe the relation between variables by checking the acceptance or rejection of hypothesis and to see the nature of relationship between variables. The histogram shows Thus, frequency distribution of the determinants of dividend support is normal. But histogram of liquidity in skewed as compare to the other. The histogram of liquidity is silently not normally distributed but approximately is normally distribute. Scatters plot matrix diagrams shows the relationship between return on equity, corporate taxes and liquidity with dividend payout that shows the relationship between dividend and return on equity, corporate taxes and liquidity. It shows the positive relationship between return on equity and liquidity with dividend. But on the other hand if we observe the relationship between corporate taxes and dividend payout is negative. We use scatter plot matrix, histogram, descriptive analysis and the correlations and regression. The dividend is used as a dependant variable for the research of determination of dividend. On the other hand return on equity, corporate taxes, and liquidity are use as independent variable. After observing the scatter plot matrix, histogram, descriptive analysis and the correlations and regression has been used for analysis purpose. In this analysis of correlation it shows our finding that there is a significant relationship between corporate taxes and dividend and other hand all the variables have a insignificant relationship between dividend and return on equity and liquidity. The regression analysis shows that there is significant relationship between corporate taxes and dividend but return on equity and liquidity shows insignificant relationship with dividend. The table of necessary statistic also shows the value of R2 adjusted R2, F Test and significance of F.test which is also computed on this analysis. This value which is computed on this analysis shows the variations in the data changes. Despite the contributions of the study,

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several factors may limit the usefulness of the findings expected from the study. This limited my study to the banking sector specifically, thus the results may not be valid in other industries.

6.2 Conclusion
The main conclusions of the paper are that a firm's dividend payout policy will depend upon so many factors which is very crucial for the determinates of dividend pay out policy this paper was devoted to the issue of most importance determinants of dividend. To present day business environment dividend payout policy and its impact on firm value. Combined with a number of other factors dividend payout policy was positioned as a crucial element for determining the return on portfolio of a particular enterprise. The dividend pay out policy depend so many factors. These factors directly or indirectly connected to dividend payout policy. By modeling the behavior of the enterprise value we tried to reveal the most crucial factors, to assess their contribution and to perceive the nature of their influence. By doing so we obtained several interesting results.

6.3 Recommendations
Firstly it is suggested that for the future research the sample size should be increased. Secondly the sample sizes which are used in this study not enough to calculate the better result. It should be increase for this study. Third there are other variables should be considered for this study to get more accurate results.

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There are also some variables which can be used in this study to get more accurate results. These variables are: Risk Stock price Market Book Value Cooperate growth Financial Leverage Corporate profitability

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