Abstract
This study aims to determine whether a firm’s dividends are influenced by the sector to which it belongs. This paper also examines the explanatory factors for dividends across individual sectors in India. This longitudinal study uses balanced data consisting of companies listed on the National Stock Exchange (NSE) of India for 12 years—from 2006 to 2017. Pooled ordinary least squares (POLSs) and fixed effects panel models are used in our estimation. We find that size, profitability, and interest coverage ratios have a significant positive relation to dividend policy. Furthermore, business risk and debt reveal a significantly negative relation with dividends. The findings on profitability support the free cash flow hypothesis for India. However, we also found that Indian companies prefer to follow a stable dividend policy. As a result of this, even firms with higher growth opportunities and lower cash flows continue to pay dividends. We also find evidence that dividend policies vary significantly across industrial sectors in India. The results of this study can be used by financial managers and policymakers in order to make appropriate dividend decisions. They can also help investors make portfolio selection decisions based on sectoral dividend paying behavior.
Highlights
All investors expect a certain amount of return on their investment for the risk taken
The business risk variable displays inconsistent signs. We find that it is inversely associated with dividends in the construction and infrastructure (CONSTR), BANKING, and S-OTHS sectors, their importance is opposite in the ITTEL and financial services (FINSER) sectors
For the scale of operations as measured by the log of sales (LgSales), we expected a positive association with the dividend policy, the findings suggest that none of the sectors are significantly influenced by it
Summary
All investors expect a certain amount of return on their investment for the risk taken. Investors can get a return on their investment through dividends (current income). If a company has a lucrative investment opportunity available, it may not distribute its profits. The outlay in a profitable venture will increase the value of a company, resulting in capital gains (future income) to investors. Both dividend payout and retention lead to shareholder wealth maximization. As concluded by Miller and Modigliani (1961), investors should not differentiate among dividends and retaining profits. Miller and Modigliani’s assumptions of a perfect capital market, no taxes, certainty, and fixed investment strategy does not really exist
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