Relevance of Dividend Theories and Dividend Policy Decisions: Evidence from Manufacturing Sector of Pakistan
Author: Darakhshan Younis

Dividend policy is an important issue of corporate finance and the present study examines the relevance of different theories for 138 firms selected from all major manufacturing sectors of Karachi Stock Exchange over the period 2003 to 2011. This study examines how market imperfections such as asymmetric information, agency costs and transaction cost of issuing external finance affect corporate dividend policy of corporations. The panel data estimation method presented by Blunder and Bond (1998) is used to deal with endogeneity and Hausman test supports the results of random effect model. The results show that dividend yield depends on the last year’s dividend yield and current year earnings that supports the Lintner (1956) model suggesting that management follow smooth dividends and are reluctant to change dividend policy. The results confirm that dividends signal the firm value (returns) and firm performance (returns on assets, market to book value and earnings). The positive and significant relation of free cash flow and collateral capacity with dividend indicate that dividends help to reduce agency cost problems and these findings support agency cost theory. The results verify that firm size and sales growth are more effective instruments to reduce transaction costs. Results also support the hypothesis that dividends are used as a tool to reduce transaction cost of issuing external finance. Large and more profitable firms pay more dividends. The results support dividends are used as signaling devise for outside investors that firm is running on profitable lines and reduce the agency cost and transaction costs. Firm age, market to book value and price earning ratio are used to capture firm maturity the results show the firm life cycle theory of dividend is not valid which further confirms signaling theory of dividend in case of Pakistan. Free cash flow and return on asset are significant and support free cash flow hypothesis. This evidence is in confirmation with empirical findings of other emerging markets Supervisor:- Dr. Attiya Yasmin Javid

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Keywords : Agency Theory, Dividend Policy, Dividend Policy Decisions, Dividend Theories, Manufacturing Sector, Manufacturing Sector-Pakistan, Non Financial Firms, Signaling Theory, Smooth Dividend, Transaction Theory
Supervisor: Attiya Yasmin Javid

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