The Determinants of Corporate Dividend Policy in Pakistan

Abstract

One of the most important financial decision to be made by the organizations is related to their dividend policy. There are different factors that affect the dividend policy such as firm size, financial leverage, profitability, growth opportunities and the ownership structure. Most firms retain the excessive cash for business expansion purpose. That is why market-to-ratio gives an inverse relationship with dividend payout because firms rely on internal source of funds. Similar is the case with leverage and firm size, the more the liabilities of larger firms the more they are willing to retain their free cash flows. On other hand, profitability ratios have a positive impact on dividend policy because the more profitable the firm is, more likely it is to pay dividends to its shareholders. The main purpose of paying dividends is to attract more investors so that the firm can maintain a good repute in the market. If the firm is not giving dividends, the foremost signal received by the market about such firm is that it is unsure about its future cash flows. Which eventually makes this a “highly risky firm”’.

This research is emphasizing on the determinants of corporate dividend policy. This policy plays a greater importance in making a decision about a firms well being. Each firm has its own financial limitations and restrictions when it is making the policy regarding dividend payout. The objective of this study is to find the most significant determinants of dividend policy of firms in different sectors of economy in Pakistan. The relevance of these significant determinants of dividend policy helps to make the final decisions regarding policies in other areas. The data for the study is taken from published resources of State Bank of Pakistan and Karachi Stock Exchange (KSE) for the period 2005 till 2010. The sample size was seventy five companies listed at KSE.