Dividend practices in corporate sector of Bangladesh: A study of the companies listed with Dhaka stock exchange

Abstract

The dividend policy is a pivotal policy around which other financial policies rotate. Appropriate dividend distribution policy can not only set a good corporate image, but also to build the confidence of investors in the company's future prospects. A review of literature reveals that the studies investigating the dividend policies of companies abroad have been conducted. The research work in this field is not enough yet in Bangladeshi context. No comprehensive study in this area has so far been made in the corporate sector in Bangladesh. Against this backdrop, the present study has been undertaken to evaluate dividend policy practices of listed companies in Bangladesh. The objectives of this study are to analyze the impact of dividend policies on market prices of shares, to identify the determinants of dividend policies of corporate firms, to examine the dividend policies practiced in corporate firms, to examine the application of existing dividend models in the context of Bangladesh, to identify the Flaws with the Existing Dividend Practices of Corporate Firm, to provide the policy implications of dividend policy to strengthen the capital market of Bangladesh. The hypotheses have been drowning on the basis of existing wisdom as well as theoretical framework of the study. The research findings and inferences of this study are expected to be useful to practitioners, investors, policy makers, researchers, and academicians. The sample includes listed financial and nonfinancial firms of DSE (Dhaka Stock Exchange). The size of population is 147 listed companies from where 22 companies from banking sectors and 86 companies from manufacturing sectors are taken as sample by applying stratified random sampling technique. The period of study is 20 years from 1994 to 2013. The secondary data have been collected by consulting available literatures and sources (companies’ annual report, publications of DSE etc.). The data thus collected have been tabulated manually and electronically. It can be worth mentioning that the study has collected opinions and views of board of directors, CFO (Chief financial officer) on 5- point likert scale. The Cronbach α of the data is found 0.810. This has substantial reliability of data collected through enumerators. The data have been analyzed by applying financial techniques, statistical techniques and econometric techniques. The financial techniques are-financial ratios, market ratio, market model, BHAR (buy and hold abnormal return) and the statistical techniques are descriptive statistics (mean, minimum, maximum, etc.), ANOVA, correlation, and regression. The pooled data OLS, GLS, panel data analysis (FE, RE), factor analysis, structural equation modeling have been used as econometrics techniques. The study has also used techniques like F test, Wald chi-square test, t test, chi-square test for testing hypotheses of the study. The study has been used the SPSS, STATA, EXCELL, AMOS for analysis of data. The study has been organized into eleven chapters. The study has examined the impact of dividend policy on the firm value by applying panel data analysis techniques (fixed effect and random effect) and it has found that the dividend policy has significant impact on the firm value. The R2 value of the models are 0.765 in FE and 0.69 in RE which signify the more accounting for higher variance of independent variables on the value of the firm. The outcome of this model has been line with the relevant theorem of dividend. The announcement effects of dividend on share price are analyzed with event study (market model and BHAR) and it is found that the dividend initiation announcements react on the market price of share around the event dates in both financial and nonfinancial sector. The dividend omission announcements also have impact on market price before and after the event date in only nonfinancial sector. The study has found a common behavioral model (The abnormal returns start to decline from day-4 and reach to lowest at event day then further start to raise. The abnormal returns reach to peack at day5 ). This finding has supported the wisdom of the signaling theory of dividend. The study has identified the determinants of dividend policy by applying OLS, FE, GLS, structural equation modeling techniques. Among the determinants, the lagged dividend payout ratio, sponsor, risk, profitability and leverage are positively significant and liquidity, sales growths are negatively significant to the dividend payout ratio in nonfinancial sectors. The lagged DPR, size of the firm and leverage have positive impact on the dividend payout ratio and the retained earnings ratio has negative impact on DPR in financial sector at 5 percent level of significance. The R2 of the models in nonfinancial sectors are 0.963 in OLS and 0.63 in FE and the R2 of OLS , GLS are 0.582 , 0.592 respectively in financial sectors which indicate the more accounting for higher variance of independent variables on the dividend payout ratio. A structural equation model on dividend determinants has been developed in this study. Factors Influencing Dividend Policy have been identified through survey from listed companies of DSE and analyzed with non parametric test and factor analysis. The study has found that the Earnings and liquidity factor, Past dividend issue factor, market price related factor are the most significant determinants in dividend decision in nonfinancial sectors and the ‘target payout and past dividend pattern factor’, ‘earnings and catering factor’, ‘liquidity and market reaction factor’ are important determinants of dividend decision in financial sector. So, the companies mainly consider the current earnings, liquidity position and pattern of previous years’ dividend payment of the company in the time of dividend payment. A theoretical model of dividend influencing factors has been developed from the findings. This thesis presents the dividend practices and performance of listed companies of Bangladesh. In Non financial sectors: The miscellaneous sector provides the highest payout. The DPS, EPS, MPS of the large size firm is better than small and medium size firms. The payout of the older firms is more than the newly listed firms. The highest payouts are in medium leveraged firm, low risk’s firm, medium PE ratio’s firm. The survey results have revealed that the both the shareholders and the companies prefer the cash dividend most. The most of the companies pay cash dividend with stable payout. The most of the companies follow increasing trend in dividend payment but no satisfactory research is conducted to justify the investors’ preference. In financial sector: The maximum payouts are in large size firm, earlier listed companies, low leveraged firm, and high risk’s firm, medium PE ratio’s firm. The survey results have revealed that the companies prefer both cash & stock dividend most but majority shareholders prefer stock dividend. The most of the companies follow stable payout with increasing trend in dividend payment but no satisfactory research is conducted to justify the investors’ preference. The study has examined the application of dividend models in Bangladesh by using factor analysis and parametric, nonparametric test and it is found that the catering theory, signaling theory, dividend relevance theory are the most important theories followed by the dividend decision makers in nonfinancial sectors. The dividend policy decisions are followed the signaling theory, bird- in-the hands policy, Lintner model, residual policy and life cycle theory in financial sector of Bangladesh. The important problems in dividend practices are identified by parametric test, nonparametric test and descriptive statistics from survey opinion of board of directors and the problems are ‘cash dividends affects on liquidity’, higher expectation of shareholders, imperfect capital market, regulatory changes, ambiguity of dividend, unanticipated economic change, insider trading. The other related problems are previous non- payment culture, lack of study on dividend policy, lack of dividend policy in firm, investors’ attitude toward dividend. On the basis of the findings and inferences, the study has suggested pragmatic policies and strategies for making appropriate dividend policies and finally making prudent dividend decision of corporate firm. The policy implications include corporate policy measures, strategic measures, model based suggestions and regulatory measures for optimum dividend policy decision. The important suggestions for dividend policy are regular dividend payment, maintain liquidity level, regularity measures for preventing information leakage and insider trading, enforcement of existing laws etc. This study represents the picture of the dividend performance and dividend policy in the corporate sectors in the Bangladesh. The developed models from this study will help the investors, policy makers, companies and related stakeholders. This research will explore the avenues of further research on dividend policy of an emerging market and act as a referred study.