Divided Policy and Firm Performance - Research Paper Example

Topic Divided Policy and Firm Performance: A Study of 40 Listed Firms on the New York Stock Exchange ABSTRACT This research was aimed at determining the relationship between dividends and firm performance using a list of twenty companies listed at the NYSE for the time between 2010 and 2014. The research questions used in the research were: (i) What is the relationship between dividends and firm performance among the companies listed at the NYSE, (ii) What is the relationship existing between the dividend payout and ownership structure of the listed firms in New York Stock Exchange, and (iii) What is the relationship existing between the dividend payout and the firm size of twenty listed firms on the New York Stock Exchange. Questionnaires will be used to collect data from these companies and the information about their stock exchange history in NYSE for the periods 2010 to 2014 was retrieved from financial statements in Yahoo Finance, Bloomberg. The data will be subjected to regression analyzes and further analysis of the same will be done with SPSS software. The aim of this is to determine the truthfulness of the hypothesis through the presenting the data in tables and other technical representations. Keywords: NYSE, Dividends, Dividend policy, Firm Performance. Introduction Firms want to maximize the wealth of shareholders in order to increase revenues and make more profits. The wealth of the shareholders is influenced by profit margin improvement, growth in sales, capital investment decisions as well as the structure of the capital in the firm. Hence the performance of a firm can be measured based on how well a firm has improved on the wealth as well as its capability to get more income from the capital that the shareholders have invested. Powell (2000) claimed that the value of the firm can also be affected by dividend policy that in turn has impact on shareholders’ wealth. Signaling theory proposes that dividend policy can be used in communicating future prospects of the company to investors and shareholders (Ajanthan, 2013). signifying the importance of dividend policy. In order for a firm to maximize its stock price, it should set a high dividend payout ratio as well as offer high dividend since they are less risky compared to capital gains. Previous researches have been conducted to study the relationship between dividend and performance of the firm which produce different opinion on the same. Results of the analysis of the data in this study showed that there is a positive correlation between the size of the firm, ownership structure, and the dividend payouts as shown by the positive correlation of coefficients. Revenues and total assets of the company also influence the firm performance. Dividends are signals for investors and affect the value of the firm (Nguyen, 2011). Definition of Terms Dividends – This is the distribution of the profits of a company (Deeptee & Roshan, 2009). Dividend Policy – These are the guidelines and regulations used by a company to make decisions on how to pay dividends to its shareholders (Nissim & Ziv, 2001). Firm Performance – This is the ability of the company to accumulate income over a given span of time. This encompasses the effectiveness of the company covering financial and operational outcomes. It is measured in terms of the company’s profitability from the earnings it has generated (Santos & Brito, 2012). Research Aim: The aim of the research is to investigate whether there exists a relationship between dividend payout and financial performance among the forty firms listed in New York Stock Exchange. Research Objectives The aim of the research is to investigate whether there exists a relationship between dividend payout and financial performance among the forty firms listed in New York Stock Exchange. There are variables influencing the research like ownership structure of the firms, the size of the form and the dividend payouts. The hypothesis to be tested in thus study are: H0: Absence of significant relationship between the dividend payout and financial performance of twenty listed firms in New York Stock Exchange H1: There is no significant relationship exist between the dividend payout and ownership structure of the twenty listed firms in New York Stock Exchange H2: There is no significant relationship between the dividend payout and the firm size of twenty listed firms on the New York Stock Exchange. Literature Review The current business is versatile and the topics of dividend policy as well as financial performances are so crucial sectors deserving exploration to determine their relationship in economic grounds. The dividend policy of a firm is central to how it defines its financial policies and is integral to the way in which the company operates in day to day transactions and also incorporates various perceptions from the firm and its shareholders with the inclusion of employees, regulatory bodies, the government as well as other stakeholders of the company. There are previous research articles which have endeavored to address the issue of dividend policy and financial performance of a firm. Hussainey, Oscar and Chijoke-Mgbame (2011) argued that share prices and the dividend policy are very crucial to the stock market of UK. These individuals studied to establish whether there is any relationship existing between share price and dividend policy as well as whether there is any association between the two terms. They discovered that there is a positive relationship between these two terms but a negative relationship between the stock price changes and the dividend payout ratio for a given firm. Hussainey, Oscar and Chijoke-Mgbame (2011) concluded that the share price is determined by divided policy in the UK stock market. Other researchers, Harada and Nguyen (2011) went further to establish any relationship existing between ownership concentration and dividend policy by analyzing Japanese firms. Harada and Nguyen (2011) established a direct relationship existing between concentrated ownership and dividend policy in the firms they selected. The amount of dividends is determined by the owners of a firm as well as the manner in which the dividends need to be shared. Reddy, Locke, and Scrimgeour (2010) tried to establish principle based corporate governance and its relationship with the performance of a firm by collecting information from the New Zealand Securities Commission. They concluded that an effective corporate policy acts as a booster to the confidence of the investors, and may also influence the amounts of dividends of the firm. Other authors, Shao, Kwok and Guedhami (2010) discussed how culture influences corporate dividend policies. The authors (Shao, Kwok, and Guedhami, 2010) stated that objective assessment only cannot be relied upon to determine dividend policy. However, other numerous processes can be considered too such as the subjective perceptions of investors and the managers of the firms. Lam and Lee (2012) also discussed the role of the family ownership in the policies in the targeted companies. The amount of dividends and the general performance of firm can also be influenced by the role of family members as well as business strategies that the firm has adopted. Ramdani and Witteloostuijn (2010) furthered the discussion to advance on the similar vies of Lam and Lee by analyzing the interdependence of the different stakeholders within the firm. Since many companies pay dividends in terms of cash to its shareholders, there is a need of applying an effective dividend policy of deciding the appropriate percentage of sharing their profits to their shareholders (Mohanraj & Deepa, 2012). Shareholders’ interests are maximizing on their wealth from the dividends they receive from the respective firms. Now the big question that emerges is whether these dividends have a positive relationship with the performance of a firm in terms of share price. Dividends show the potential earnings of a company and this is what attracts shareholders. Farsio et al. (2004) however argued that the causal relationship between dividends and firm performance varies from time to time and does not hold in the long run. The relationship between current dividend payout and the growth of future earnings is based on the free cash flow theory. Low dividends means low investments and hence low growth at the long run. Dividends are the signs of how a firm is performing and if they decline, it will discourage investors from investing in such firms as it is an indication of poor performance. That is why managers will be willing to pay low dividends to avoid them from reducing in case the earnings of the firm reduce. Dividend payout ratio is influenced by cash flow, risk, profitability, growth, tax and agency cost. Managers of corporations need to understand how the decisions they make concerning dividends affect the performance of their firms (Moradi, Salehi & Honarmand, 2010). Some firms are afraid of changing their dividend policy as it may be reversed sometime later and hence opt to stay with a stable dividend policy with a target payout ratio periodically adjusted to meet their target. They have an uninterrupted record of dividend payouts showing a consistency in the findings of Lintner in 1956. However, according to (Baker, Powell & Veit, 2002), a firm should change its dividend policy in relation to shifts in earnings. In a research conducted by Naser, Nuseibeh and Rashed (2013) on firm listed in the Abu Dhabi Securities exchange established that investors prefer dividends due to the fact that they are not certain about the stock prices appreciating in future. The respondents in their research also stated that corporate value and corporate cost of capital are affected by the dividend policy of the firm. However, the dividend policy and firm performance aspects are integral in all the above discussions. RESEARCH METHODOLOGY This study will rely on data collected from Yahoo Finance, Bloomberg and from financial statements of the firms listed in the NYSE for the periods 2010 to 2014. SPSS software will then be used to analyze the regression and further analysis of the collected data (Hair, Money, Page & Samouel, 2007). This research aims at determining the truthfulness of the hypothesis via the data presented in terms of graphs, charts as well as techniques of representing graphs. The choice of research methodology and data collection techniques is based on the best mechanism of achieving the purpose of the research for examining the relationship that exists between dividends and firm performance (Saunders, Lewis & Thornhill, 2003). The ordinary least square (OLS) will be used to test the hypothesis as well as the regression equation under consideration. Research Design This section serves as the template of fulfilling the objectives of the research as well as for answering the questions raised at the beginning of the study. Since the aim of the study is to determine the relationship between the variables, casual research design was adopted to explain whether there exists a positive relationship between dividends and firm performance (Hair, Money, Page & Samouel, 2007). About thirty companies listed in the NYSE were investigated and correlation and regression analysis was obtained through the use of SPSS software. Population The target population of the research was 40 firms listed in the NYSE and targeted the managers, CEOs and the CFOs of these companies. The selected firms were from different sectors of the economy such as Commercial and Residential Mortgage REITs and Finance, Oil and gas, Investment Managements, Coal Operations, Manufacturing Telecommunications and Petrochemicals. The table below shows the financial statements of the 40 companies as at 2014. (All values in $). Company’s name Dividends paid Total assets Net profit before tax Net profit after tax Revenues 1. Arlington Asset Investment 3.50 3.62B 123.54M 55.4M 123.54M 2. Ellington Financial 2.96 1.35B 81.7M 59.94M 93.85M 3. Hugoton Royalty Trust 1.10 4.32M 65.81M 54.92M 99.65M 4. Rhino Resource Partners 13.85 41.12M 37.03M -81M 239.05M 5. Resource Capital 3.20 2.3B 80.41M 62.16M 99.44M 6. Chimera Investment 2.80 1.81B 687.79M 589.2M 687.79M 7. Newcastle Investment 7.43 765.28M 239.02M 67.79M 291.53M 8. Rentech Nitrogen Partners 0.31 77.77M 334.61M -1.04M 334.61M 9. Natural Resource Partners 14.00 136.11M 372.89M 108.83M 399.75M 10. PennyMac Mortgage Investment 2.99 3.58B 354.77M 179.46M 442.33M 11. Och-Ziff Capital Management 1.72 1.74B 1.54B 850.36M 1.54B 12. Memorial Production Partners 2.20 2.93B 357.38M 119.2M 494.1M 13. Vector Group 1.49 857.84M 494.25M 82.48M 1.59B 14. Niska Gas Storage Partners 1.40 1.54B 207.39M -19.21M 207.39M 15. Frontier Communications 0.40 1.49B 4.31B 163.43M 4.77B 16. StoneMor Partners 2.43 101.87M 254.43M -6.86M 288.08M 17. TCP Capital 1.54 47.73M 106.58M 78.1M 106.58M 18. Ferrellgas Partners 2.00 (constant in the 5 years) 364.93M 791.32M 36.23M 2.41B 19. Consolidated Communications 1.55 (constant in the 5 years) 134.14M 393.07M 28.41M 635.73M 20. Petro Logistics (2013) 1.70 123.55M 244.25M 177.52M 757.48M 21. Manitowoc 0.08 1.19B 986.1M 169.4M 3.89B 22. CVR Refining LP 2.93 885.5M 400.29M 358.7M 8.83B 23. ArcelorMittal 0.17 99.18B 5.99B -520M 79.28B 24. Sandridge Permian Trust 2.54 4.75M 124.82M 123.02M 133.43M 25. Harte-Hanks 0.34 206.49M 107.58M 37.3M 553.67M 26. Baytex Energy Trust 2.41 5.65B 937.05M 1.43M 1.39B 27. Apple 1.81 68.53B 70.54B 53.48B 182.8B 28. FBL financial group 1.40 305.57M 168.25M 147.1M 692.93M 29. New York Mortgage 1.08 9.4B 77.83M 142.58M 378.84M 30. DHT holdings 0.08 212.27M 58.69M 12.97M 180.78M 31. Arc Logistics Partners LP 1.40 331.58M 27.31M 1.33M 54.9M 32. Whitehorse Finance 1.42 19.33M 37.54M 19.54M 37.54M 33. Stellus Capital Investment 1.42 7.12M 32.32M 10.46M 32.32M 34. Triangle Capital 2.56 96.77M 104.51M 31.48M 104.51M 35. Hsbc 2.45 1,744.31B 63.78B 18.68B 63.78B 36. Overseas shipholding group Inc. - 707.66M 340.49M -267.08M 957.43M 37. Crestwood Equity Partners 5.50 538.1M 766M -9.3M 3.93B 38. Invesco Mortgage Capital 2.00 230.81M 412.04M -201.74M 693.93M 39. Williams 1.24 1.42B 1.7B 452.68M 4.39B 40. Regions 0.18 81.17B 5.3B 1.6B 5.41B Data Collection Methods The data used in this research is from financial statements that have been audited from the companies listed in NYSE for the period between 2010 and 2014. It was collected in electronic form and was accompanied by a checklist containing the names of the firms, the dividends they have paid, their total assets, revenues as well as the net profit collected after taxation. The information from these variables were then used in the research (Hair, Money, Page & Samouel, 2007). Procedures of the Research This section entails the steps to be followed when developing the instruments used to collect data. That is why a checklist is provided to ensure that all the data on the subjects in the sample frame are collected (Santos, & Brito 2012). The checklist contained columns rows and columns of this form: Company’s name Dividends paid Total assets Net profit before tax Net profit after tax Revenues Prior to the real research, a pilot testing was done to check on the applicability of the statements in the questionnaires and to check also whether it will meet the purpose intended for the study. Amendments were proposed and in-cooperated as required. Then the questionnaires were emailed to the managers, CEOs and the CFOs of the selected firms, with copies being addressed to the head offices of the companies. Upon completion, they were then emailed back with all of them marked as the respondents felt was necessary. Methods of analyzing the data Regression analyzes will be done on the data, and SPSS software will be used to analyze further the data. This research utilizes both inferential and descriptive statistics to analyze the collected data. Inferential statistics are used to come up with conclusions that are a step ahead of the present data as evaluated by past researches in the same field whereas descriptive statistics is adopted as the data used here is numerical that serves the purpose of generating various analysis relevant to interpreting the presented data in a manner that fulfils the objectives of the research. These descriptive statistics used in the study were mean and standard deviation. Regressive analysis was used in measuring the direction and the degree of the involved variables (Santos, & Brito 2012). Model specification Following is the model of examining the association that exists between independent and dependent variables among the listed firms in NYSE (Santos, & Brito 2012). This can be as well be presented explicitly as: Where DPO it is the Dividend Payout ratio and is expressed as the dividend per equity share/earnings per share. ROE it is the Return on Equity for firm i at time t (in years). It is used as a proxy for performance and is expressed as the as the net profit after tax/shareholders equity. OS it is Ownership structure and is calculated by dividing the percentage of shares that the board of directors hold by the total numbers of shares. FSIZE it is the size of the firm an is expressed as the total number of directors present in the Board of Directors. Other terms are: e is the disturbance term, t is the Variables’ time dimension, β0 is Intercept and β1-3 are the coefficients of slope parameters. β1 - β3 > 0 and the independent variables ROE, OS and FSIZE are all expected to have positive signs of the coefficients (a priori expectations). DISCUSSION OF RESULTS Pearson correlation analysis of the empirical findings of the study on the relationship between dividends and the performance of the firms showed a positive correlation. The Pearson correlation analysis result also showed that there exists a positive correlation between OS and the dividend payout of the listed firms in NYSE. Correspondingly, the Pearson correlation analysis result also showed that there exists a positive correlation between the size of the firm and the dividend payout of the listed firms. Descriptive statistics tables Before the regression model analysis was done, it was preceded by the test for multicollinearity since multicollinearity has the capability of affecting the parameters that the regression model utilizes. If the tolerance value is less than 0.1 according to (Santos, & Brito 2012). then a serious multi-collinearity is evident in the analysis of the problem between the independent variables. Form the results above, the tolerance values are greater than 0.10 indicating absence of multi-collinearity between the independent variables. The VIF values of this study are all less than 10 and hence no call for concern. The coefficient of determination of the variables, R2 value form the regression analysis above was found to be .04. It is the measure of the overall fitness of the model clearly indicating that it can explain about 4% of the variability of the dividend payout of the selected firms. However, the model was significant and cannot be dismissed. This means that 96% of the variations in the dividend payout policies of the sampled firms are accounted for by other factors not captured by the model. The adjusted R-squared value of .006 compliments it. It is the proportion of total variance that the model has explained. The F-Statistics were done to prove the validity of the estimated model and had P value that is less than 0.05. This meant that ownership structure, the size of the firm and firm performance are significantly associated with the dependent variable, which is the dividend payout. The results of the first hypothesis form a priori expectations (β1 > 0) of the empirical findings further suggested a significant positive association between the performance of firms and the dividend payout of the sampled firms. The t-statistics values from the table above indicate that the higher the financial performance of a firm, the more the willingness of the firm to pay dividends to its shareholders. This means that the more the more the profit that a firm makes, then the more the firm is willing to improve on its dividend policies to its shareholders. Results of the second hypothesis from the (β2 > 0) and the t-statistics indicated that there exists a significant positive relationship between ownership structure and the dividend payout of the sampled firms. This implied that the dividend policy that a firm operates with is directly impacted by the ownership structure of the firm. When more shareholders are in the board of directors, then this implies that they have a great influence in making decisions that regard dividend policy. Firms with large total assets find it easier to raise funds at lower costs and this allows them to pay more dividends to their shareholders. Third hypothesis results from the empirical findings of the t-statistics showed a significant relationship between firm size and the dividend payout of listed firms in NYSE. Larger companies with large asset pools and profits have the tendency of paying more dividends due to the fact that they can access external financing while relying less on their internal capital. They are sensitive to political costs which they distribute them through dividends. They have better access of capital markets and they might have higher agency problems and hence might pay higher dividends to mitigate such costs. Conclusion Quantitative data was used to collect financial statements from the companies which are audited and also other information was collected from Yahoo Finance and Bloomberg concerning the financial information of the selected firms. The results of the study showed that there exists a strong relationship between dividends and firm performance. The size of the firm as well as the ownership structure of a firm have a significant impact of the dividend payout of firms from the results provided in the study. Despite the fact that a company’s major objective is maximizing on shareholders wealth, the respondents indicated that it is least significant in the study. In order to maximize the value of the shareholders for a firm, it should formulate its dividend policy. The relevant regression analysis provided by SPSS showed a consistent positive relationship between dividends and firm performance. The coefficient of determination of the variables, R2 value form the regression analysis above was found to be .784. It measures the model’s overall fitness clearly indicating that it can explain about 78% of the variability of the dividend payout of the selected firms. The F-Statistics were done to prove the validity of the estimated model and had P value that is less than 0.05 signifying that the size of the firm, its ownership structure and the performance of the firm are significantly associated with the dependent variable, which is the dividend payout. The empirical findings provided suggestions that there exists a significant positive relationship between firm performance and the dividend payout of the selected firms, between ownership structure and the dividend payout and between firm size and the dividend payout of listed firms in NYSE. Larger companies with large asset pools and profits have the tendency of paying more dividends due to the fact that they can access external financing while relying less on their internal capital. Bibliography Afza, T. & Mirza, H. H. 2011. Do Mature Companies Pay More Dividends: Evidence From Pakistani Stock Market. Mediterranean Journal of Social Sciences. Vol. 2 No. 2. Ajanthan, A. 2013. The Relationship between Dividend Payout and Firm Profitability: A Study of Listed Hotels and Restaurant Companies in Sri Lanka. International Journal of Scientific and Research Publications. Vol. 3 No 6. Al-Malkawi, H. N., Rafferty, M., & Pillai, R. 2010. 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