Corporate dividend behaviour with special emphasis on growth and controlled companies

Abstract

The study examines the divided policies and practices of 158 manufacturing non-government public limited companies for the period 1961-72 and covers about 19% of the total corporate sector. It attempts to answer whether the companies have dividend policies or, is the reported cash dividend true dividend for the shareholders. It also purports to isolate the various determinants of corporate dividend policy, both internal as well as external.

The dividend practices are studied by classifying the companies according to size, industry, growth and control. The difference in the dividend policy for these classifications are statistically tested.

The companies, in general, observe a stable dividend rate and avoid dividend cuts. The reported dividend rates were observed to have a downward trend, and were biased downwards, while the dividend rates adjusted for bonus and right issue increased over the period. The gap between reported dividend rate and the adjusted dividend rate was high among foreign companies indicating the intention of the managements to understate the dividend rates.

The variation in dividend payments with respect to industry or size classifications were not significant. However, they varied, as expected, with growth and control classifications. Companies belonging to large business groups had the lowest payout ratio so as to breed further growth of the group, while foreign companies had high payout ratio.

Testing of various dividend models show that dividend decisions, in general, are well explained by lagged dividend and current year’s profit and are autonomous of other financial decisions. However, in categories of foreign, group or high growth companies, financial variables – investment and debt – affected dividend decisions during the period of high investment.

Companies were observed to change their depreciation method from the written down value to the straight line method. Growth companies changed so as to have equitable distribution of depreciation over the life of the companies, while in other companies the change was to dress up their earnings, to declare high dividend and to understate the reported payout ratio. The change in most of the cases was with retrospective effect and the change was to enable the company to issue bonus shares.

The role of financial institutions in influencing dividend declaration by companies is analysed and the influence of other government policy measures and restrictions on dividends are presented without quantifying their influence on dividends.