Empirical evidence on the determinants of dividend pay-outs in the auto components sector in India

Suman Chakraborty,Sandeep S Shenoy,Subrahmanya Kumar N

doi:10.21511/imfi.15(4).2018.29

Suman Chakraborty, Sandeep S Shenoy + Show 1 more

Open Access

https://doi.org/10.21511/imfi.15(4).2018.29

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Abstract

Determinants of dividend policy have been a topic of debate in the academic literature for several decades, but the studies have not been able to give a concluding result on the topic. Existing literature reveals that one of the most challenging decisions, dividend payout, is affected by multiple determinants thereby impacting the value of stock, among which proficatibility, capital structure and level of cash flows are identified to be significant factors. The aim of this study is to evaluate empirically the determinants of dividend payout among the companies in the Indian auto components sector which are listed in major Indian bourses. This paper constitutes a modest attempt to explore the relationship between dividend policy (dividend pay-out ratio) of the companies and the variables representing profitability, capital structure, investments, liquidity and cash flows. The other salient feature of the study is that it examines casual relationship of financial performance, operational efficiencies and investment strategies on decision of paying the dividend. ANOVA, correlation analysis and regression analysis have been used to explore the relationship between the identified variables. The study finds that the dividend policy of the companies in the Indian auto components sector is largely influenced by the operating profit, cash from operations, proportion of cash from operations used for financing the investment activities and the proportion of equity in the capital structure of the companies. The study addresses the Indian auto components sector, which is not researched much, and suggests rejuvenation in dividend policy after accounting a derived variable of cash flow to capital expenditure, as identified relevant to the group of auto manufacturers selected for the study.

Highlights

Corporate dividends play a pivotal role in communicating the financial and operational efficiency to the shareholders and to the investor fraternity
The study finds that the dividend policy of the companies in the Indian auto components sector is largely influenced by the operating profit, cash from operations, proportion of cash from operations used for financing the investment activities and the proportion of equity in the capital structure of the companies
On applying ANOVA to test the relationship between the measures of profitability selected in the study (NPR, EBIT to Total Assets (ETA), Return on Net Worth (RONW) and Operating Profit Ratio (OPR)) and dividend pay-out ratio of the companies selected, we find that all the measures of profitability are associated with the dividend pay-out ratio, but the association is not significant in the case of RONW at 5% level of significance

Summary

Introduction

Corporate dividends play a pivotal role in communicating the financial and operational efficiency to the shareholders and to the investor fraternity. While some companies pay dividend to shareholders on a regular basis, some do not prefer to do that to take advantage of prevailing investment opportunities through ploughing back of profit. Brav et al (2005) indicate that perceived stability of future earnings affects dividend policy as in Lintner (1956) and management views provide little support for agency, signalling and clientele hypothesis of pay-out policy, and pay-out policies have little impact on the investor clientele. Dividend decision is one of the most sensitive decisions that the financial managers will have to take This is so because shareholders may, at times, prefer to gain higher value through market price appreciation than receiving cash dividends and vice versa. The mystery surrounding dividend decision of the companies remains unsolved

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