Interrelationship between Capital Structure and Dividend Policy with Reference to Select Indian Companies

Abstract

The present article examines the interrelationship between capital structure and dividend policy company-wise. In an earlier study (Kaur, Chattopadhyay, and Rakshit, 2018) this interrelation was empirically analysed taking BSE listed 40 sample companies. In the present study sample size is extended from 40 to 90 sample companies comprising 5 companies from each of 10 industries (namely, Automobile, Cement, Large Heavy Engineering, Fertilizer, Oil Exploration, Pharmaceutical, Refineries, Large Tea, Large Textile and Large Tyre) and by including 5 sample companies from each of 8 additional industries (namely, Computer Hardware, Computer Software, Construction, FMCG, Large Heavy Electricals, Mining/Minerals, Large Steel and Telecommunication) which are chosen from BSE listed companies on the basis of highest turnover for the year 2011. As per the non-fulfilment of criterion of availability of continuous data for the 15 year's study period i.e., from 1999-2000 to 2013-14 the study has not omitted 11 sample companies from the study. For analysing the said interrelationship, the study has applied Akaike's Information Criterion AIC), Granger Causality Test and Panel Data Regression technique. From the estimated results of Granger Causality Test, we observe that F-Statistic value, using Dividend Payout Ratio as independent variable, is significant for 14 sample companies, while F-Statistic value, using Leverage as independent factor, is significant for other 11 sample companies. In the cases of other 4 sample companies, both Dividend Payout Ratio and Leverage Ratio are Granger cause of other. Next, we have estimated two regression equations as per the prescription obtained from Granger Causality Test along with other control variables. On considering both the regression results jointly we may come to the final conclusion that leverage statistically negatively depends on dividend payout ratio, but the converse is not true. But this conclusion is valid for the sample companies, which cannot be generalised with certainty.