Abstract
This study analyzes the firm-specific factors affecting the dividend payout decisions of the companies whose shares are traded on the Borsa Istanbul stock exchange. To this end, the dynamic panel regression is applied to 853 observations of yearly average of 106 companies listed on the Borsa Istanbul between 2009 and 2015. According to results from the Arellano–Bover/Blunder-Bond two-step system generalized method of moments, a statistically significant positive effect on dividend payout was found in the relationship between the dividend payout of the previous year, the company’s return on equity and the market value/book value ratio, liquidity and the company’s size. The demonstration of a positive relationship between dividend payout and return on equity supports the free cash flow hypothesis and the positive relationship with the previous year’s dividend payout ratio supports the dividend smoothing hypothesis for Turkey.
Highlights
Until the middle of the 20th century it was unchallenged and generally accepted that dividend payout had a positive effect on a company’s value
The results show that the determinant of the dividend payout in Turkish stock market is not different from developed markets
RCAPi,t shows the mathematical inverse of firm i’s market capitalization in year t, PROi,t shows firm i’s return on equity in year t, LIQUi,t shows firm i’s liquidity ratio in year t, AGEi,t shows firm i’s age in year t, FAMi represents a dummy variable indicating whether the firm i is controlled by a family, DEBTi,t shows firm i’s debt ratio in year t, MVi,t shows firm i’s market value/book value in year t, ηi shows unobservable firm effects, εi,t shows the effect of unobservable cross section variables changing over time
Summary
Until the middle of the 20th century it was unchallenged and generally accepted that dividend payout had a positive effect on a company’s value. According to the irrelevance hypothesis, the profit generated by a company, under conditions of a fully competitive market, must not have a positive effect on the company’s value. A company’s value can be increased only if the company invests its retained earnings into projects which provide higher yield. There is no relationship between the company’s value and dividend payout. Contrary to the irrelevance hypothesis, in the real-world investors continue to request dividend payout with the expectation that it will add positively to the company’s value. Companies’ dividend payout decisions are one of the most studied subjects in the field of finance
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