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