Cash Flows as Determinants of Dividends Policy in Mature Firms: Evidence from FTSE 250 and Aim Listed Firms

Abstract

Earnings have long been used as a measure to determine dividends policy in firms. While many studies have demonstrated an association between earnings and dividend changes, not many studies have proved so with cash flows. It is argued in this study that while earnings are in important factor in dividend setting process, the liquidity of a firm is more important in changes to dividends as firms don't like to change dividends unless the nature of the change in earnings and cash flows is also permanent. The major objective of this paper is to examine the association between operating cash flows and dividend changes given earnings. Some 25 firms' were selected from FTSE 350 and 25 from FTSE AIM of the London Stock Exchange for the panel data analysis and tested using OLS multivariate regression methodology.The results indicate no significant association between cash flows and dividend changes; however, they do confirm earlier findings that dividend changes are strongly associated with earnings. The thinking behind the regression model is that while there are notable dividend paying firms in the FTSE 350, there is a lack of dividend evidence in AIM firms, hence the models developed test for dividend changes given cash flows in FTSE 350 firms (mature firms) and capital gains in FTSE AIM firms (growth firms) using dividend change as the dependent variable in the mature firms and share price movement for growth firms.Originally in the proposal to this dissertation four sub-hypotheses were proposed, however, the first two hypotheses were amalgamated in to one sub-hypothesis. Also, some of the variables originally declared were deleted or mostly replaced by more appropriate variables.