Determinants of Dividend Payout Ratio: Evidence from Indian Companies

Abstract

The present study analyzes the trend and determinants of dividend payout ratio of National Stock Exchange (NSE) listed companies in India. The study is based on 239 companies, which have continuous data during the period 1994-95 to 2012-13. From the trend analysis we find that the number of dividend paying companies has declined but the average dividend paid by them has increased manifold over the last two decades which suggests that the dividend paying companies have paid higher amounts of dividends in the later years. The dividend payout ratio varies across all the industries with the electricity industry having the lowest payout ratio and the miscellaneous manufacturing industry having the highest payout ratio. The empirical results suggest that firms with high free cash flow, firms which are larger, more profitable and mature, pay more dividends while riskier, more leveraged and firms with high investment opportunities tend to pay lower dividends. The dividend distribution tax rate imposed by government affects the dividend payout ratio positively. The market-to-book ratio, debt-to-equity ratio, free cash flow, business risk, age, size, profitability and dividend distribution tax variables are significant for the entire period of study. Whereas, the business risk, profitability and dividend distribution tax variables are significant for the entire period of study i.e. 1995-2013 as well as for the two sub-periods 1995-2003 and 2004-2013. Overall, the results are consistent with the pecking order, transaction cost, signaling and firm life cycle theory of dividend policy and we find a little evidence for agency costs theory.