Dividend Policy Decisions - Empirical Evidence from India

Abstract

Purpose - The purpose of this paper is to delve into the current dividend policies practiced by the 166 non-financial companies of the BSE 200 index (sample companies) and also to examine whether the sample companies follow a stable dividend policy. The period of the study is 2001-2011. The paper is primarily based on the research monograph (under publication) titled “Financial M management Practices: An Empirical Study of Indian Corporates" (ISBN 978-81-322-0989-8) by Springer. The study covers virtually all the major aspects of financial management, viz., capital budgeting, capital structure, dividend policies, working capital, corporate governance, global finance and risk management. The authors have obtained the requisite permission to publish this paper. Design /Methodology /Approach - A questionnaire survey was administered to 166 non-financial companies of the BSE 200 index. Secondary data was also collated from 2001-2011. Link has been established with recent literature to lend credence to our findings. Findings - Majority of the sample companies follow stable dividend policy. They seem to follow an approach similar to Lintner's model. This practice is in tune with the sound principles of financial management. The empirical evidence, further, suggests that the sample firm s have dividend-payout ratio of much less than 25 per cent for the entire period of the study perhaps suggesting that the sample consists of companies with good growth opportunities. It is worthwhile to mention here that the dividend payout ratios have been gradually decreasing over the past two decades (as is evident after comparing results with previous studies, viz., Jain and Kumar (1997), Jain and Yadav (2000) and Jain and Yadav (2005)), perhaps indicating better growth opportunities for companies now, necessitating the ploughing back of cash into the business. Research Limitations/Implications - the limitations of the study are that it is country specific and a detailed sectoral analysis of the constituent sectors of the sample companies could have perhaps provided deeper insight into the subject. Practical Implications - the findings of this research, decades of teaching experience of the authors and the literature reviewed have been utilized to evaluate current practices and suggest possible improvements in decision-making. Originality/Value - The literature review revealed gaps for further inquiry into dividend decisions of companies. The available literature consists of examples of corporate practices from Western countries. To the best of our knowledge, there is no in-depth study regarding the dividend decisions and practices of Indian companies (covering the post-recession period). This paper is a modest attempt to fill this gap