“A Study on Dividend Policy and Its Impact on behaviour of Listed Manufacturing Companies in India”

Abstract

The present study examines the dividend behavior of Indian corporate firms over the period 1990 – 2001 and attempts to explain the observed behavior with the help of trade-off theory, and signaling hypothesis. Analysis of dividend trends for a large sample of stocks traded on the NSE and BSE indicate that the percentage of companies paying dividends has declined from 60.5 percent in 1990 to 32.1 percent in 2001 and that only a few firms have consistently paid the same levels of dividends. Further, dividend-paying companies are more profitable, large in size and growth doesn’t seem to deter Indian firms from paying higher dividends. Analysis of influence of changes in tax regime on dividend behavior shows that the trade off or tax-preference theory does not appear to hold true in the Indian context. Test of signaling hypothesis reinforces the earlier findings that dividend omissions have information content about future earnings. However, analysis of other non-extreme dividend events such as dividend reductions and non-reductions shows that current losses are an important determinant of dividend reductions for firms with established track record and that the incidence of dividend reduction is much more severe in the case of Indian firms compared to that of firms traded on the NYSE.  Further, dividend changes appear to signal contemporaneous and lagged earnings performance rather than the future earnings performance.