Abstract
Present study examines the relationship between corporate payout policy and market capitalization by studying payout ratio and dividend yield as measures of payout policy and controlling other variables of size, growth, EPS, Leverage, GDP growth, and Interest rates. Different statistical techniques of correlation, regression, fixed effect and random effect are applied on pooled and panel data to find out the relationship between corporate payout policy and market capitalization. The results show that measures of corporate payout policy, dividend yield and payout ratio has strong negative correlation with market capitalization. Control variables of size and leverage have positive significant correlation with market capitalization while higher earnings per share are leading it negatively and these relationships are statistically significant at various levels of significance. Overall results suggested that the corporate payout policy has significant impact on market capitalization in Pakistan and this notion is consistent with the earlier studies.
Highlights
The issue of Payout policy and its effect on firm’s stock price had been debated since 1961 after the work of Franco Modigliani and Merton H
Market Capitalization (MC) is market capitalization, a is constant term, Dividend Yield (DY) is dividend yield, Payout ratio (PR) is payout ratio, LVRG stands for leverage, growth for asset growth, Earnings per share (EPS) is earning per share, size is size of the firm, I stands for interest rate, Gross Domestic Product (GDP) is taken as GDP growth rate and e stands for error term
Present study examines the relationship between corporate payout policy and market capitalization using sample of 68 firms from nonfinancial sector listed at KSE-100 index for the period of five years through 2006-2010
Summary
The issue of Payout policy and its effect on firm’s stock price had been debated since 1961 after the work of Franco Modigliani and Merton H. Firms with high payout policy enjoy higher stock prices According to this theory, shareholders or new investors always desire current dividends in spite of future expectation of capital gain for minimizing the uncertainty risk related to future cash flows. Catering Theory: According to catering theory given by Baker and Wurgler (2004), decision whether to payout dividend or not should be determined by the current investors demand They argued that managers should provide incentives to the stock holders keeping in view their needs and wants and should pay dividends when investors prefer those firms which pay dividends and should keep the earnings with the firm when investors prefer capital gains to dividends. Once a firm start paying dividend, it is up to the management to raise or reduce the dividends according to earnings of the firms
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