Dividend Policy and Firm Performance of the Big Non-financial Companies - Research Proposal Example

DIVIDEND POLICY AND FIRM PERFORMANCE OF THE BIG NON-FINANCIAL COMPANIES Name of the student Name of the professor Course Date Key words: Dividend, Firm, Performance, Policy Abstract The allocation of dividend is one of the critical decisions in finance and they are very important since they held in determining the flow of funds to investors and the amount of funds being retained in the business for further investment. Furthermore, they help in providing the information to stakeholders concerning the performance of the company. Basically, this study looked at the dividend policy on the firm performance in United Kingdom using the data from 40 companies from the Bloomberg.com. From the results, the dividends payments ratios influences company performance positively with EPS and EP ratios showing high relationship. Introduction Dividend can be defined as the company’s earnings which are distributed to shareholders. In most countries, shareholders do not have powers to increase dividends distributed to them and this is squarely lies on the hands of directors (Denis, 2008). The issue of dividend policy is recent past has become very critical, it remains very much significant financial policy not only for the organization additionally from the shareholders, shoppers, workers and even the administrative bodies. From the view point of the company, it is the pivotal point where the company policy revolves around (Gejalakshmi & Azhagaiah, 2015). The allocation of dividend is one of the critical decisions in finance and they are very important since they held in determining the flow of funds to investors and the amount of funds being retained in the business for further investment. Furthermore, they help in providing the information to stakeholders concerning the performance of the company (Nuhu, Musah & Senyo, 2014). The investments that the company makes determines its future earnings and this in returns determines the potential amount of dividends the will be declared and it also influences the cost of capital of the company (Denis 2008). The survival of any company is purely dependent in the kind of investment facilities and the type of internal financial deployed by its managers (Daniel, Denis & Naveen, 2008). Through the use of retained earnings, company can be able to accumulate huge capital that can be used for long term investments in the company. In most countries, government puts restrictions on its fiscal policy the amount of dividend payout to the shareholders. This invariably has forced part of the realized profit to be ploughed back for more investment in the company (Tahir & Sabir 2015). Statement of the problem Dividend policy has been for several years analyzed but there is no universally accepted explanation for firms observed or trends in dividend behaviour Daniel, Denis & Naveen (2008). Describes dividend policy as one of the top 10 complicated problems in finance which remains unresolved (Tahir & Sabir 2015). This is in line with the Black 1976 who stated that it is not easy to look at the dividend picture since it seems like a puzzle with pieces that do not fit together. Many researchers and scholars have mainly focused on the developed markets with little attempt to explore other markets. Meanwhile, the gap also exist in establishing the impact or sources of impact on the dividend policy on the performance of the big firms (Tahir & Sabir 2015). Along these lines, this examination will investigated the current sources to decide and recognize the important effects between profit strategy and firm execution of some enormous non-money related organizations. Objectives of the study 1. To establish factors that contributed to the company dividend policy ratios and firms performance 2. To determine the relationship between dividend policy ratios and the firms performance 3. To establish major factors of corporate dividend policy and firm performance. 4. To find out the related elements between dividend policy and firm performance to show whether exists impacts. Research questions 1. What are the factors that contributed to the company dividend policy ratios and firms performance? 2. What is the relationship between dividend policy ratios and the firm’s performance? 3. What are the main factors of corporate dividend policy and firm performance? 4. What are the other related elements between dividend policy and firm performance to show whether exists impacts? Research Hypothesis 1. H01: There is no relationship between the company dividend policy and firms performance 2. H02: There is no relationship between dividend policy ratio and firm performance Significant of the study Currently, the dividend policy issue has been viewed by scholars has challenging and complicated but very interesting as it forms important components of firms financial policies. Firm’s valuation are influenced by dividend payout decisions. Furthermore cash dividend in the company have a special position among the company shareholders. Nevertheless, the main problem is the reason for adopting a given policy of dividend payout. There are several factors that determines the dividend policy of a company and corporate governance is one of them. The dividend policy used by the company is the policy guidelines that regulates what the directors will propose as the dividend payout to shareholders, the firms policy are the primary elements of the corporate policy. Therefore, the study is very significant as it will help companies in establishing their policy and whenever they are forming their policy they will be able to determine the type of policy they will use to determine dividend payout as this will in return know how it will impact on the company at large. Literature review Theoretical review This sections explains the relevant theories and how they are relevant to the study. In the agency theory, it proposes that the dividend policy of a given company is determined by the agency cost which results from the ownership and control divergence. In most cases, the directors may failed to adopt dividend policy that maximizes the return for shareholders but would rather choose a dividend policy that maximizes their own private benefits (Minnick & Rosenthal, 2014). If the managers choose a dividend policy which reduces the available free cash flow will actually help in maximizing the shareholders wealth rather than using the funds for their own private benefit. If this is adopted, it will help in attracting new equity to the firm and the firm will be subjected to the market discipline and monitoring. Another important theory is the signal theory (Mooradian & Yang, 2001) The sign theories suggests that the profit arrangement can be utilized by administrators as a gadget to convey data on the firm execution to the potential future financial specialists. The organization money profit declaration regularly pass on important data, which shareholders don't have about the organization administration and the organization future gainfulness henceforth help in diminishing the data anomaly (Huang, Ritter & Zhang, 2014). This will thus help the financial specialists to evaluate the data concerning organization offer costs. The sign theories contentions depend on the data abnormality amongst directors and the outside financial specialists, where administrators will have private and emit data about the present and future organization execution which are not effortlessly accessible for untouchables subsequently the strategy under sign model is important. Dividend irrelevant theories then again demonstrates that the examples of corporate profit payout strategies fluctuate from various sorts of value markets. Mooradian and Yang (2001) states that payout proportion in creating nations are just around 66% of those of created nations like United Kingdom (UK). The immateriality theories further expresses that on the off chance that shareholders does not require money they can utilize their profit to purchase more stock. This theories depends on implausible suspicions of no charges and financier cost thus may not hold (Shah & Hussain, 2012). Empirical review The dividend policy behaviour is one of the most debatable issues in corporate finance and keeps on coming up in both developed and upcoming markets. Pindado, Requejo & Torre (2012) in his study found out that current and past year’s profit, the variability in earnings and growth in earnings and prior year’s dividend have influence on the amount of dividend paid to the shareholders. Pindado, Requejo & Torre (2012) states that although the companies do not have obligations to declare dividends on common stock, they are usually reluctant to change their dividend policy every financial year as the firms struggle to meet stockholders expectations and to build good image among investors and also to indicate that the firms stability is beyond reasonable test in the public. In a study by Setia-Atmaja (2009) indicates that the variation in price to book ratios, systematic and unsystematic risks are not due to dividend per share, furthermore, the expected dividend payout ratio can also be efficient in signaling purposes as well as a proxy for measuring the agency problem. In a study by Stevens & Jose (1992) on the relationship between firm’s dividend payout and performance, they found out that there is a significant positive relationship between the performances of firms and the dividend payout of the sampled firms. The study further revealed that the ownership structure of a company and the size has a significant impact of the dividend payout ratio of a firm. The study by Stevens & Jose (1992) reveals that there is no difference among the dividend payout with or without large block shareholders. Mooradian & Yang, (2001) pointed out the important of management ownership in determining the dividend payout. In a study of Ghana, Baker (2000) study the relationship between dividend payout and company's performance, the study discovered that dividend payout enhances company's performance. Pastry specialist (2000) called attention to that dividend arrangement and other corporate administration system are collaborated (Kajola, Adewumi & Oworu, 2015). The first is the standard way of thinking which shows that the German dividends are lower than those of UK and US dividend. This is not as a matter of course maintained as on a distributed benefits premise. The accurate speak is valid. Furthermore, dividend in UK and US are typically generally smooth as they are portrayed by regular however little changes though dividends in Germany demonstrates less incessant, yet immense changes (Kajola, Adewumi & Oworu, 2015). Thirdly, the connections between corporate control and dividend payout. Fourth is the confirmation that presence of a misfortune in an extra determinant of dividend change and in conclusion, the outcomes have basic ramifications for the present verbal confrontation on the best corporate administration framework with regards to dividend payout (Kajola, Adewumi & Oworu, 2015) Conceptual framework Based on the research objectives and literature review, the following conceptual framework is formulated to explain the relationship between the variables. Where Research methodology Research methodology mainly focuses on the research process which is a tool and procedures which is to be used in the research study. It helps in describing the research design approach, the sampling techniques, data source, instrumentation and research reliability and validity to be used and the model of analysis (Strebulaev & Yang 2013). Research design This research design will specifically be an explanatory study. It will emphasizing on the problem in order to explain the relationship between variables under the study. Sampling design The sample size in this study composed of 40 listed companies in Australia and UK stock exchange. To help in evaluating the topic, researchers will use different methods of statistical package for social science for analyzing the data. Correlations and multiple regression was used to carry out the analysis. Reliability and validity of the data Cronbach’s alpha was used to establish the reliability of the data. The standard value of alpha of 0.7 will be used to compare our results with. The secondary data of the study was collected from the audited annual reports and financial accounts hence these data was considered reliable for the purpose of this study (Strebulaev & Yang 2013). Cross checking of data was done further to ensure that there is no mistake in the data accuracy. All these efforts were made in order to generate validity data for the present study. Hence researcher satisfied content validity. Data analysis model The following dividend payout ratios and indicators of firm performance ratio were considered in developing the model. The above table shows the calculation of various dividend policy ratios and firms’ performance ratio The following regression models were used in the analysis Data Analysis and Discussion The multi-Colinearity The two main methods which were used to establish the presence of multi-Colinearity among independent variables in this study. Table 1.0 below shows the multi-Colinearity among the variables Variables Tolerance VIF EPS 0.091 8.983 P/E 0.193 5.177 DPOR 0.694 1.442 PB 0.094 9.682 From the table, the test of Colinearity, none of the tolerance level is Read More