THE EFFECT OF DIVIDEND POLICY ON FINANCIAL STABILITY
Keywords:
Dividend policy, financial stability, profitability, liquidity, leverage, cash flow, panel dataAbstract
The question on the potential implications of the analysis of corporate proletarian dividend policies has been a particularly contentious issue in corporate finance and not just the field of corporate finance, since it also has ramifications about financial stability. This paper evaluated dividends, two variables proxied by the dividend payout ratio (DPR) and cash dividend payout (CDP), as dimensions of financial stability, as with profitability and ROA and ROE, liquidity and the current ratio (CR), leverage and the debt ratio (DRR), and the financial and indicator variables of the normalized cash from operational activity flows versus total assets and actual cash flow disclosure. three contributions to total asset methods at the district level, as three forms of the same cross-sectional data under fixed effects time models per corporation, had control variables for the corporate enterprise for variables for enterprise scale and measures for the dependability of the measure of financial stability to proxy total financial stability.
The results demonstrate the significance of dividend policy related to financial health. The firms with dividends were more profitable, had higher liquidity ratios, a more favorable debt ratio and generally, cash flows with lower variability. The control variables lend confidence to the idea that firms with higher growth in sales and larger size were still able to maintain a healthy financial structure. The robustness tests include particularly the sub-sample estimation by firms’ size, other variations in the financial ratios, and the regime shifting tests for crisis periods.
This research article contributes to the body of knowledge in the area, offering empirical evidence to the many theoretical models, including Bird-in-the-Hand, Agency, Signaling and Pecking Order just to name a few. In this sense, the findings demonstrate that dividend distribution should not be researched or considered on its own, or simplify it down to the transfer of wealth to shareholders, but a way to offer a financial QOL down the path. The findings of this study adds to the investor, regulators and managers understanding as to the dividend policies exposure to firm resilience and health of firms during periods of uncertainty.
References
1. Acharya, V. V., Gujral, I., Kulkarni, N., & Shin, H. S. (2011). Dividends and bank capital in the financial crisis of 2007–2009. NBER Working Paper Series, (16193). https://doi.org/10.3386/w16193
2. Allen, F., & Michaely, R. (2003). Payout policy. In G. Constantinides, M. Harris, & R. Stulz (Eds.), Handbook of the Economics of Finance (pp. 337–429). Elsevier.
3. Al-Najjar, B., & Kilincarslan, E. (2019). Dividend policies of European firms: Governance, lifecycle, and growth opportunities. International Review of Financial Analysis, 61, 1–14. https://doi.org/10.1016/j.irfa.2018.12.010
4. Alzahrani, M., & Lasfer, M. (2021). Corporate governance, investor protection, and dividend policy: Evidence from emerging markets. Journal of Corporate Finance, 66, 101824. https://doi.org/10.1016/j.jcorpfin.2020.101824
5. Bae, K. H., Chang, K., & Kang, E. (2021). Dividend policy in the COVID-19 crisis: Evidence from global firms. Finance Research Letters, 42, 101923. https://doi.org/10.1016/j.frl.2020.101923
6. Baker, H. K., & Powell, G. E. (2000). Determinants of corporate dividend policy: A survey of NYSE firms. Financial Practice and Education, 10(1), 29–40.
7. Chen, J., Leung, W. S., & Goergen, M. (2017). The impact of board gender composition on dividend payouts. Journal of Corporate Finance, 43, 86–105. https://doi.org/10.1016/j.jcorpfin.2016.12.004
8. DeAngelo, H., DeAngelo, L., & Stulz, R. M. (2006). Dividend policy and the earned/contributed capital mix: A test of the life-cycle theory. Journal of Financial Economics, 81(2), 227–254. https://doi.org/10.1016/j.jfineco.2005.07.005
9. Easterbrook, F. H. (1984). Two agency-cost explanations of dividends. American Economic Review, 74(4), 650–659.
10. Elghuweel, M. I., Ntim, C. G., Opong, K. K., & Avison, L. (2019). Corporate governance, Islamic governance and earnings management in Middle Eastern and North African banks. Journal of Economic Behavior & Organization, 164, 93–108. https://doi.org/10.1016/j.jebo.2019.06.011
11. Fama, E. F., & French, K. R. (2001). Disappearing dividends: Changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3–43. https://doi.org/10.1016/S0304-405X(01)00038-1
12. Farinha, J. (2020). Dividend policy: Corporate governance and firm value. Journal of Corporate Finance, 64, 101695. https://doi.org/10.1016/j.jcorpfin.2020.101695
13. Gordon, M. J. (1959). Dividends, earnings, and stock prices. Review of Economics and Statistics, 41(2), 99–105. https://doi.org/10.2307/1927792
14. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329.
15. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
16. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (2000). Agency problems and dividend policies around the world. Journal of Finance, 55(1), 1–33. https://doi.org/10.1111/0022-1082.00199
17. Lintner, J. (1962). Dividends, earnings, leverage, stock prices, and the supply of capital to corporations. Review of Economics and Statistics, 44(3), 243–269. https://doi.org/10.2307/1926397
18. Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. Journal of Business, 34(4), 411–433. https://doi.org/10.1086/294442
19. Miller, M. H., & Rock, K. (1985). Dividend policy under asymmetric information. Journal of Finance, 40(4), 1031–1051. https://doi.org/10.1111/j.1540-6261.1985.tb02362.x
20. Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
21. Nguyen, T., & Tran, H. (2021). Dividend policy and firm liquidity: Evidence from emerging markets. Research in International Business and Finance, 58, 101498. https://doi.org/10.1016/j.ribaf.2021.101498
22. Pettenuzzo, D., Sabbatucci, R., & Timmermann, A. (2022). Dividend suspensions and stock return predictability during the COVID-19 crisis. Journal of Financial Economics, 146(2), 444–469. https://doi.org/10.1016/j.jfineco.2021.10.002
23. Rozeff, M. S. (1982). Growth, beta and agency costs as determinants of dividend payout ratios. Journal of Financial Research, 5(3), 249–259. https://doi.org/10.1111/j.1475-6803.1982.tb00299.x
24. Shao, X., Chen, Y., & Sun, J. (2022). Dividend policy, liquidity, and firm risk: Evidence from China. Pacific-Basin Finance Journal, 74, 101771. https://doi.org/10.1016/j.pacfin.2022.101771
Downloads
Published
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
