Abstract
Economic fallouts from COVID-19 have been unprecedented across all industries, with a handful of exceptions. The present study attempts to capture the impact of dividend distribution tax elimination, introduced through the Indian Finance Act 2020, on corporate dividend behavior in India. It explores the determinants of dividend payouts, changing payout decisions, dividend behavior of regular payers, and the prevalence of factors associated with changing payouts. Out of the top 1000 firms, based on their market capitalization at the Bombay Stock Exchange, 509 non-financial firms pursuing consistent dividend payments from 2015 to 2019 are analyzed. The study also examines the dividend behavior of regular payers exhibiting a stable or step-up payout from 2015 to 2019. COVID’s impact on the firm’s financial performance and sentiments seems to dominate, suppressing investors’ expectations of enhanced payouts associated with dividend distribution tax advantages, with considerable reductions in payouts and omissions shown by regular and irregular payers in 2020 and 2021 vis-à-vis the preceding years. The findings signify that the dividend payouts of sample firms are positively associated with the firms’ size, MBV ratio, and past dividends, and negatively allied with free cash flows and the EBITDA margin. Regular payers are observed to be more sensitive to past dividends. The study lends credence to the conservatism and prevalence of signaling and catering theories in the dividend behavior of Indian corporate firms.
Highlights
Kentaka ArugaDividend distribution is a crucial corporate financial decision, likely to have significant implications for a firm’s growth and shareholder value
The present study examines the impact of the amended dividend tax and economic disruption of COVID on the dividend decision of Indian corporate firms
This paper examines the changes in the payout policies of Indian corporate firms following DDT elimination under the Financial Act 2020, amid the economic disruption of COVID
Summary
Dividend distribution is a crucial corporate financial decision, likely to have significant implications for a firm’s growth and shareholder value. The dividend constitutes the part of corporate earnings distributed to shareholders after making provisions for investment requirements and targeted capital structure (Higgins 1972; Walter 1963). Reddy 2018), agency relationship (Jensen 1996), board composition, ownership structure (Rajput and Jhunjhunwala 2019; Juhmani 2020), viable investment opportunities, firm growth rate (Walter 1963), and investors’ expectations (Baker and Wurgler 2004; Bilel and Mondher 2021). The literature provides numerous theories supporting the varied dividend-paying behavior seen in the corporate sector. While traditional Walter, Gordon, and Modigliani approaches postulate dividend decision-making to be an idealistic situation of the perfect capital market. Behavioral theories posit the influence of investors’ market sentiments and agency issues in firms’ payout decisions. As per the Walter approach (Walter 1963), dividends are the product of a firm’s rational choices based on viable investment opportu-
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