Dividend behaviour of Indian companies under monetary policy restrictions
Abstract
Purpose – The dividend payout behaviour of firms is a well-studied subject in finance. In recent
times, the influence of macro economic factors and understanding their implications far corporate
financial decisions has assumed significant importance. The objective of this paper is to study the
dividend payout behaviour of firms in India under monetary policy restrictions. Monetary policy
restrictions are expected to affect the availability and cost of external fund relative to internal funds.
The hypothesis is that during monetary policy restrictions the dividend payout policy changes and
payouts reduce.
Design/methodology/approach – The Lintner framework is extended to examine the impact of
these restrictions on the dividend payout. Balanced panel data of 571 firms for years are used, from
1989 to 1997 together with, the GMM estimator, which is the most suitable methodology in a dynamic
setting.
Findings – The results show that Indian firms have lower target ratios and higher adjustment
factors. The finding suggests that the restricted monetary policies have a significant influence on the
dividend payout behaviour of Indian firms; they cause about a 5-6 per cent reduction in the payout
ratios.
Research limitations/implications – The findings of this paper suggest that macro-economic
policies do have an impact on corporate financing decisions. The future research should examine the
impact of various other macro-economic policies and its components on the corporate financing
decisions of firms.
Practical implications – The significance of the macro economic policy variables suggests that
monetary policy restrictions do have an impact on the cost of raising funds, and the information
asymmetry between lenders and borrowers increases, which forces companies to reduce their
dividend payout.
Orginality/value – To one’s knowledge this is the first study providing evidence of the restricted
monetary policy constraining the dividend payout policies of firms in India
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