Electronic copy available at: http://ssrn.

com/abstract=2258333
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DETERMINANTS OF CORPORATE DIVIDEND POLICY IN INDIA - A STUDY
OF LISTED IT COMPANIES AT BSE

*Prof. Raj Kumar **Pawan Kumar Jha

* Professor, Faculty of Management Studies, BHU, Varanasi-221005
e-mail:rajkumar_bhu@rediffmail.com, rajkumar@fmsbhu.ac.in

* *Research Scholar, Faculty of Management Studies, BHU, Varanasi-221005
e-mail: pawan_jha2011@yahoo.com
________________________________________________________________________
ABSTRACT

Dividend policy is widely researched topic in finance but still it remains a debatable issue
to decide what factors determine equity dividend. This study is an attempt to empirically
analyze the determinants of equity dividend of Indian Information Technology Sector. For
this purpose, various key factors affecting equity dividend such as net profit after tax,
lagged equity dividend, cash flow, depreciation charged, lagged net profit after tax and
change in sale over the preceding two years are taken into account. A sample of ten IT
companies listed at Bombay Stock Exchange (BSE) has been selected using convenience
sampling for the period of five years i.e. 2007 to 2011. The empirical evidence from this
study reveals that net profit after tax, cash flow and amount of depreciation charged have
significant impact on the equity dividend and also good predictors of equity dividend in IT
sector.

Keywords: Dividend Policy, Dividend Puzzle, Lagged Equity Dividend, Determinants
_________________________________________________________________________
1. INTRODUCTION
Dividend policy decision is considered one of the three major decisions of financial
management. The decision of the firm regarding how much earnings could be paid out as
dividend and how much could be retained is the concern of dividend policy decision. It
determines what proportion of earnings is paid out to shareholders by way of dividends
and what proportion is ploughed back in the company for reinvestment purposes. The
development of such policy will be greatly influenced by investment opportunities
available to the firm and the value of dividends as against capital gains to the
shareholders. Management should develop such a dividend policy which divides the net
earnings into dividends and retained earnings in an optimum way to achieve the objective
of maximizing the wealth of shareholders.
The dividend policy has been an issue of interest in financial literature since Joint
Stock Companies came into existence. Academicians and researchers have attempted to
solve several issues pertaining to dividends and formulate theories and models to explain
corporate dividend behavior. Despite many researches conducted by financial economists,
the issue of dividend policy determinants still remains debatable. Researchers have
Electronic copy available at: http://ssrn.com/abstract=2258333
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primarily focused on developed markets; however, additional insights into the dividend
policy debate can be gained by an examination of developing countries which is currently
lacking in the literature.

The rest of the paper is organized as follows: Section 2 presents brief backdrop of IT
Industry in India. Section 3 concisely reviews the existing literature. Objective of the
study is presented in section 4. While section 5 describes the data and methodology.
Section 6 contains empirical analysis and results. Finally, conclusion over the results is
presented in section 7.
2. BACKDROP OF INDIAN INFORMATION TECHNOLOGY INDUSTRY

The IT industry in India is one of the fastest growing industries and has built up
valuable brand equity for itself in the global markets. IT industry plays vital role in
strengthening the economic and technological foundations in India. It comprises of
Software industry and information technology enabled services (ITES), which also
includes business process outsourcing (BPO) industry. India is considered as a
pioneer in software development and a favorite destination for IT-enabled services.

The origin of IT industry in India can be traced to 1974, when the mainframe
manufacturer, Burroughs, asked its India sales agent, Tata Consultancy Services (TCS), to
export programmers for installing system software for a U.S. client. The IT industry
originated under unfavorable conditions. Local markets were absent and government
policy toward private enterprise was hostile. The industry was begun by Bombay-based
conglomerates which entered the business by supplying programmers to global IT firms
located overseas.

During that time Indian economy was state-controlled and the state remained
hostile to the software industry through the 1970s. Government policy towards IT sector
changed when Rajiv Gandhi became Prime Minister in 1984. His New Computer Policy
(NCP-1984) consisted of a package of reduced import tariffs on hardware and software,
recognition of software exports as a "delicensed industry", permission for foreign firms to
set up wholly-owned, export-dedicated units and a project to set up a chain of software
parks that would offer infrastructure at below-market costs. These policies laid the
foundation for the development of a world-class IT industry in India.

Today, Indian IT companies such as Tata Consultancy Services (TCS), Wipro,
Infosys, HCL et al are renowned in the global market for their IT prowess. Some of the
major factors which played a key role in Indias appearance as key global IT players
include escalating number of skilled professionals in IT, vast academic infrastructure of
India. India has second leading English speaking work force in the world. The cost of
software development and other services in India is very competitive as compared to
west. Indian IT industry has also gained enormously from the availability of a robust
infrastructure (telecom, power and roads) in the country. In the last few years Indian IT
industry has seen tremendous growth. The growth rate of the IT domestic market is 16.7
per cent in the financial year 2011-12. The domestic market has increased from Rs 786
billion to Rs 918 billion.
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3. LITERATURE REVIEW

Lintner (1956) focused on the behavioral aspect of corporate dividend policy and
concluded that managers only increase dividends when they believe that the level of the
firms earning has permanently increased.
Brittain (1966) studied the tax structure and corporate dividend policy over a period
of 1919-1960. The results indicated that the capacity of a firm to pay dividends has been
better explained in terms of cash flows as a variable, i.e., profits after taxes plus
depreciation as against the Lintners profits net of taxes, as it reflected true earnings.
Fama and Babiak (1968) studied the determinants of dividend payments by
individual firms using data for 392 major industrial enterprises over the period from 1946
to 1964. The study concluded that net income seems to provide a better measure of
dividend than either cash flows or net income and depreciation included as separate
variables in the model.
Rao and Sarma (1971) conducted an empirical study to enquire into the
determinants of dividends of public and private limited enterprises. Their efforts revealed
that the basic Lintner model was adequate for explaining the dividend behaviour in the
case of majority of the industries such as coal mining, sugar, jute textiles, chemicals and
cement industries.
Bhattacharya (1979) suggested that the reasoning underlying the bird in the hand
hypothesis(BIHH) is fallacious. Moreover, he suggested that the firms risk affects the
level of dividend not the other way around. The notion that firms facing greater
uncertainty of future cash flows (risk) tend to adopt lower payout ratios seems to be
theoretically plausible.
Bhat and Pandey (1994) supported the Linters findings and revealed that Indian
managers maintained an uninterrupted record of dividend payments and also try to avoid
abrupt changes in their dividend policies.
Mishra and Narender (1996) examined the dividend behavior pattern of State
Owned Enterprise (SOEs) in India by applying Lintners model. The study concluded that
the number of dividend paying SOEs in India is comparatively small compared to the total
number of profit sharing SOEs. In majority of the SOEs, the DPS has remained stagnant
irrespective of the continuous increase in the EPS.
Sexena (1999) identified firms past revenue growth rate, forecasted growth rate of
earnings, number of common stockholders of the firm and systematic risk as the major
determinants of dividend payout policy.
Eriotis (2005) examined the effect of distributed earnings and size of the firms to
dividend policy of Greek firms by using the well tested model of John Lintner. The
empirical findings of the study suggested that distributed earnings and size of firms has
been significant impact on dividend payment in Greek market. These firms have set
dividend policy on the basis of target payout ratio which was adjusted each year to
distributed earnings and size of the firm.
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Naceur, Goaied and Belanes (2006) tested Lintners model by using static and
dynamic panel data regression to check whether Tunisian firms follow stable dividend
policy. The results disclosed that Tunisian firms relied more on current earnings than past
dividends while fixing dividend for current year and also there has been instability of
dividend policy.

Husam et.al.(2007) examined the determinants of corporate dividend policy in
Jordan using Tobit specifications. The results suggested that the proportion of stocks held
by insiders and state ownership significantly affected the amount of dividends paid. Size,
age, and profitability of the firm seemed to be determinant factors of corporate dividend
policy in Jordan.
Naeem and Nasr (2007) observed the determinants and trends of dividend policies.
Results of their study show that Pakistani companies are either reluctant to pay dividends
or pay very low amount as dividends and their current dividend decisions depend on
previous year dividends and Profitability Ratio.
Kapoor (2008) examined the determinants of dividend payout ratios of CNX IT
listed companies for study (i.e. 2000-2006) in India. The study concluded that existing
literature did not explain the dividend payment pattern of IT sector. Only liquidity and
beta (year to year variability in earnings) was found to be a noteworthy determinant.
Musa (2009) analyzed the dividend behavior by using Parsimonious multiple
regression model developed by Musa (2005). The empirical results revealed that the five
metric variables have significant impact and non-metric variables have insignificant
impact on the dividend policy of Nigerian firms. However, three of the variables-current
earnings, previous year dividend and cash flow have been found to be significant in the
model.
Okpara and Godwin Chigozie (2010) aimed at investigating the factors determining
dividend pay-out policy in Nigeria. The results showed that three factors-earnings, current
ratio and last years dividends impact significantly on the dividend payout and dividend
yield in Nigeria.
Asif, Rasool and Kamal (2011) examined the relationship between dividend policy
and financial leverage of listed companies of Pakistan during the period of 2002-2008 by
using extended Lintners (1956) model. The results showed the negative relationship
between dividend payout and financial leverage while dividend yield showed the positive
relationship between dividend yield and dividend per share.
Bose and Husain (2011) examined the determinants of Indian dividend Policy in
case of five sectors i.e. Software, Finance, Steel, Electrical machinery and
Pharmaceutical. The results disclosed that majority of firms increased their dividend
payment due to increase in profits and decrease their dividend payment due to decrease in
profits. The Lintners model failed to explain the asymmetric dividend policy behavior of
Indian firms.
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Summinder and Prabhjot (2012) concluded that Lintners model and Dobrovolskys
model has been best fit in the present scenario in case of Indian Manufacturing MSMEs as
per cross-sectional regression results. As per the results of fixed effect firm model of
Panel regression analysis, Lintners model, Britains first model and Darlings model hold
good in case of Indian Manufacturing MSMEs.
4. OBJECTIVE OF THE STUDY
The main objective of this study is to empirically analyze the dynamics and determinants
of dividend policy.

5. DATA AND METHODOLOGY
This Section describes the data, variables specification and models employed to address
the issues and accomplish the objective of the study.
5.1 DATA
The study is analytical and empirical in nature based on secondary data. For present study
a sample of ten IT companies listed at Bombay Stock Exchange (BSE) has been selected
using convenience sampling for the period of five years i.e. 2007 to 2011. The data have
been collected from secondary sources viz., annual books and accounts of selected
companies and financial journals. The list of the sample companies has been appended to
the annexure (Annexure I). For the analysis of cross sectional data, correlation and the
multiple linear regression analysis have been used.

5.2 VARIABLES SPECIFICATION
The explanatory variables used for the determination of dividend payout policy are
explained with expected signs in Table I whereas dependent variable is equity dividend.
Table I
Description and Expected Relationship of Variables
Variables Proxies Expected Relationship
Dependent Variable
D
t
Total equity dividend per share t
Independent Variables
P
t
Net profit after tax in period t Positive (+)
P
t-1
Net profit after tax in period t-1 Positive (+)
D
t-1
Total equity dividend in period t-1 Positive (+)
CF
t
Cash flow(Net profit after tax plus
depreciation) in period t
Positive (+)
A
t
Depreciation charged in period t Positive (+) /Negative(-)
S
t-2
Change in sales in period t over the
preceding two years
Positive (+)/Negative (-)
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5.3 MODELS
The study seeks to enquire into the determinants of corporate dividend behavior with the
help of regression models. The models are:
Lintners Model (1956)
D
t
=
0
+
1
P
t
+
2
D
t-1
+ e
t
----------------------------------------------------------------(1)
Brittains cash flow Model (1966)
D
t
=
0
+
1
CF
t
+
2
D
t-1
+ e
t
-------------------------------------------------------------(2)
Brittains explicit depreciation Model (1966)
D
t
=
0
+
1
P
t
+
2
D
t-1
+
3
A
t
+ e
t
-------------------------------------------------------(3)
Darlings model (1957)
D
t
=
0
+
1
P
t
+
2
P
t-1
+
3
A
t
+
4
S -
2
+ e
t
-------------------------------------------(4)

Where in all these equations:
D
t
and D
t-1
= Total equity dividend in periodt andt-1 respectively.
P
t
= Net profit after tax in periodt
CF
t
= Cash flow in periodt
A
t
= Amount of depreciation in periodt
S -
2
= Change in sales in a year over the preceding two years
e
t
= Error term

6. EMPERICAL ANALYSIS AND RESULTS
This section describes descriptive statistics, correlation and regression analysis which have
been presented in tabular form.

6.1 DESCRIPTIVE STATISTICS
Table II presents a summary of the descriptive statistics of the dependent and independent
variables for the sample firms. It reports the minimum, maximum, mean, standard
deviation and number of observations for each of the dependent and independent variables.


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Table II
Descriptive Statistics

Variables Minimum Maximum Mean Standard
Deviation
N
Dependent Variables(Rs Crore)
D
t
2.05 3914.43 548.63 875.35 50
Independent Variables(Rs Crore)
P
t
27.07 7569.99 1685.71 2169.74 50
D
t-1
1.64 3914.43 455.73 704.62 50
CF
t
31.69 8107.81 1899.70 2396.87 50
A
t
4.62 907 313.98 240.42 50
P
t-1
13.22 5819 1412.47 1840.29 50
S
t-2
-1273.78 10116.74 2762.75 3216.58 50

Note: D
t
-equity dividend; P
t
- net profit after tax; D
t-1
-one year lagged equity dividend; -
CF
t
cash flow; A
t
-amount of depreciation, P
t-1
-one year lagged net profit after tax, S
t-2

-change in sales over the preceding two years.

6.2 CORRELATION MATRIX
Table III provides matrix of multiple correlations of regression variables.

Table III
Correlation Matrix for the selected variables
Variables D
t
P
t
D
t-1
CF
t
A
t
P
t-1
S
t-2

D
t
1 0.877** 0.787** 0.871** 0.769** 0.871** 0.564**
P
t
1 0.881** 0.999** 0.939** 0.980** 0.708**
D
t-1
1 0.874** 0.766** 0.847** 0.601**
CF
t
1 0.950** 0.982** 0.709**
A
t
1 0.948** 0.675**
P
t-1
1 0.689**
S
t-2
1
** Correlation is significant at 0.01 level (two tailed)
The above table depicts that the equity dividend (D
t
) is positively related with net profit
after tax (P
t
) as 0.877 followed by cash flow (0.871) and lagged net profit after tax (0.871).
It concludes that though equity dividend is positively related with lagged equity dividend,
amount of depreciation charge and change in sales over preceding two years, the Pearson
correlation coefficient of these explanatory variables are lower than other explanatory
variables. Thus highest correlation is observed between variable equity dividend and net
profit after tax, which is also significant at 0.01 level of significance.

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6.3 REGRESSION RESULTS
The ordinary least squares (OLS) regression results for the sample observation are
presented in the following table.
Table IV
The results from the regression analysis
LM BCFM BEDM DM
(Constant) -45.969
(-0.596)
[0.554]
-51.616
(-0.651)
[0.518]
19.174
(0.244)
[0.808]
60.562
(0.765)
[0.448]
P
t


0.332***
(5.572)
[0.000]
0.567***
(4.959)
[0.000]
0.339**
(2.513)
[0.016]
D
t-1


0.077
(0.418)
[0.678]
0.131
(0.720)
[0.475]
-0.091
(-4.484)
[0.631]

CF
t


0.284***
(5.311)
[0.000]

A
t


-1.801**
(-2.371)
[0.022]
-2.230**
(-3.007)
[0.004]
P
t-1


0.331*
(1.966)
[0.055]
S
t-2


-0.0263
(-1.063)
[0.293]
R-Square 0.771 0.762 0.796 0.816
Adj. R-
Square
0.761 0.752 0.782 0.800
Std. Error 428.160 436.16 408.55 391.908
DW 1.878 1.898 1.842 2.050
F-Statistics 78.904 75.180 59.646 49.863
Sig-F 0.000 0.000 0.000 0.000

Parentheses contain (t-statistics); [p-value]; *** significant at the level 1%; **
significant at the level 5 %; * significant at the level 10%.

It has been observed in model (LM) that net profit after tax (P
t
) and lagged equity
dividend (D
t-1
) positively affect equity dividend (D
t
). Whereas, effect of P
t
on D
t
is higher
than D
t-1
showing net profit after tax has a predominant influence on equity dividend and
also statistically significant at 5 percent level. The explanatory variables i.e. P
t
and D
t-1

explain on average 76.1 percent of the variation in D
t
. The F-statistics prove the validity of
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the estimated model. Durbin-Watson test statistic d is equal to 1.878, which indicates that
statistic d is not significant and autocorrelation is zero.

The results in model (BCFM) show that Cash flow (CF
t
) and Lagged equity
dividend (D
t-1
) positively affect equity dividend (D
t
). Whereas, effect of CF
t
on D
t
is more
than D
t-1
showing cash flows receive greater relative weight than lagged equity dividend.
It is statistically significant at 5 percent level. The explanatory variables CF
t
and D
t-1

explain on average 75.2 percent of the variation in D
t
. The F-statistics prove the validity of
the estimated model. Durbin-Watson test statistic d is 1.898, that indicates that it is not
significant and autocorrelation is zero.

With the analysis of model (BEDM), it has been indicated that net profit after tax
(P
t
) positively affect equity dividend (D
t)
. While lagged equity dividend (D
t-1)
and amount
of depreciation charge (A
t)
negatively affect equity dividend (D
t
). Both net profit after tax
(P
t
) and amount of depreciation charge (A
t
) are statistically significant at 5 percent level.
All the explanatory variables i.e. P
t
, D
t-1
and A
t
explain on average 78.2 percent of the
variation in D
t
. The F-statistics prove the validity of the estimated models. Durbin-Watson
test statistic d is 1.842 indicating it is not significant and autocorrelation is zero.

Similarly, the results in model (DM) reveals that net profit after tax (P
t
) and P
t-1

positively affect D
t
.Whereas A
t
and S
t-2
negatively affect D
t
.The explanatory variables
i.e. P
t
, P
t-1
S
t-1
, and A
t
explain on average 80.0 percent of the variation in D
t
. The results
shows that both P
t
and A
t
are statistically significant at 5 percent level. The F-statistics
prove the validity of the estimated model. Durbin-Watson test statistic d is 2.050, which
shows that it is not significant and autocorrelation is zero.


7. CONCLUSION

The results reveal that in model (LM) net profit after tax has a predominant
influence on equity dividend. Similarly, in model (BCFM), effect of cash flow on equity
dividend is higher than lagged equity dividend showing cash flows receive greater relative
weight than lagged equity dividend. Further in model (BEDM), net profit after tax
positively affect equity dividend. While lagged equity dividend and amount of depreciation
negatively affect equity dividend. In model (DM), net profit after tax and lagged net profit
after tax positively affect equity dividend. While amount of depreciation and change is
sales over the preceding two years negatively affect equity dividend. Thus the empirical
evidence from this study shows that net profit after tax, cash flow and amount of
depreciation charged have significant impact on the equity dividend and also statistically
significant at 5 percent level, while lagged equity dividend, lagged net profit after tax and
change in sales over the preceding two years have found insignificant impact on equity
dividends.


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ANNEXURE-I
List of Selected Listed IT Companies at BSE
S.N. Company Name
1 HCL Info systems Ltd.
2 HCL Technologies Ltd.
3 Infosys Ltd.
4 Info Edge India Ltd.
5 Infotech Enterprises Ltd.
6 Mphasis Ltd.
7 Tata Elxsi Ltd.
8 Tech Mahindra Ltd.
9 Tata Consultancy Services Ltd.
10 Wipro Ltd.