The Impact of Surplus, Promoter Holding, Leverage and Retained Earnings on Dividend Payment Decisions: Evidence from Small- and Mid-sized Firms in India

Abstract

Free cash flow is a crucial component in deciding the dividend payout ratio; but literature has not sufficiently explored the effects of the same, specifically on dividend payment decisions. We therefore examine whether a firm’s deficit or cash surplus affects ‘cash dividend payout’ for Indian small- and mid-sized firms. Also, we have explored the idea of studying the effect of promoter holding on the dividend policy of mid-cap and small-cap firms listed in the stock exchange of India. Our study also determines the relationship between retained earnings and the dividend policy. The sample of the study includes 174 non-financial companies from the NIFTY MidSmallcap 400 Index from April 2011 till March 2019. Applying the Logit and Tobit models, we have arrived at the findings. Our findings demonstrate that surplus cash positively influences the decision of paying dividends in both mid-cap and small-cap firms. The findings also indicate that mid-cap firms use retained earnings for scaling up rather than distributing dividends and small-cap firms distribute dividends. We prove that Indian business houses with high promoter holdings are less in favour of distributing dividends. The results have the limitation of geography and period and may not be valid for other countries.