Determinants of Corporate Dividend Policy: A Tobit Model Approach

Abstract

Dividend is the return that a shareholder gets from a company, out of its profits, on his shareholding. Equity investors receive returns in two forms—dividends and capital gains. The factors that drive dividend policy of a company have been topic of extensive research for a long time now with various, sometimes even conflicting, theories trying to find some pattern in the behaviour vis-à-vis dividend payouts. The objective of the article is to find the validity of the different views on determinants of dividend policy in India and empirically prove their significance using Tobit regression model. We develop framework based on major theories on corporate dividends available in literature so as to examine the determinants of dividends comprehensively. The firm-level panel data of National Stock Exchange (Nifty 50) companies from 1999–2000 to 2009–2010 is taken for this purpose. Accuracy and validity of the results is ensured using various diagnostic tests and test procedures to find the best-fit models. The findings suggest that firm’s size (market capitalization) and firm’s growth and investment opportunity are significant determinants of corporate dividend policy in India. The firm’s debt structure, profitability and experience are found to be not significant in the Indian scenario and in this way the results do negate some theories. The results of the study can be used by investors to take informed decision while deciding on investments based on dividend yield for Nifty 50 Index companies and to predict dividend yields in future using the significant determinants.