Determinants of Corporate Dividend Payout Policy: Evidence from Emerging Economies of South Asia

Abstract

The present study analyzes the effect of firm and country level factors on corporate dividend payout in emerging economies of South Asia. Existing studies mainly investigate the determinants of dividend payout in developed economies with little focus on country level economic, legal and cultural factors especially in emerging economies. The results of previous studies are mixed and inconclusive regarding the relationship of firm level factors and dividend payout. This study contributes to the existing literature by providing evidence on moderating role of country level factors in determining the relationship between firm level factors and dividend payout policy in South Asia. The study uses the data of listed non-financial companies of Bangladesh, India, Pakistan and Sri Lanka, from 2006 to 2010. Firm and country level models are estimated using lestsquare, Tobit, Logit and TSLS techniques. The analysis is conducted in two parts, first the effect of firm level factors with dividend payout in each of four South Asian countries is compared, and second the impact of country level factors on the relationship of firm level factors and dividend payout is investigated. At firm level estimation the results show that dividend payout increases with increase in managerial ownership in Bangladesh and India but decreases in Pakistan and Sri Lanka. Institutional ownership positively affects payout in Bangladesh and India but not in Pakistan and Sri Lanka. Operating cash flow and lagged dividend are important determinants of payout in South Asian countries but cash flow sensitivity does not affect payouts. Regarding country level factors, in high investors’ protection regime, the shareholders enforce managers to pay dividend, which is in line with dividend outcome model. This shows that investors’ protection does not substitute dividend payouts in South Asia. Furthermore, legal rights protection of creditors and employees does not adversely affect dividend payout. Regarding cultural attributes, the study finds that the uncertainty avoidance negatively moderates the relationship between cash flow and dividend payout.