Dividend decisions are an important aspect of corporate financial policy since they can

have an effect on the availability as well as the cost of capital. The Lintner proposition
which asserts that the corporate management maintains a constant target payout ratio has
been the most influential.

However, the concept of primary of dividend decisions as well as the reasons for it are
not unambiguously defined. There is a variety of theories which attempt to rationalize the
observed secular constancy of the dividend payout ratio. These studies examine the
factors underlying the structure of the management, the nature of the product and
financial markets, as well as the influence of the shareholders in their attempt to explain
the Lintner proposition. However, in the case of any one firm, the following two pertinent
questions need to be examined on an empirical basis to provide substance to the notion of
primary of dividend decisions. (a) What are dividend decisions primary for?, and (b) for
whom are they primary? An attempt has been made to develop a theoretical framework to
approach these questions and identify the appropriate concept of primary and determine
empirically the relationship of the primary notion with the objectives of the share holders
and the management.

The modeling framework postulates that (a) the dividend decisions may be primary to the
management of the firm and /or the shareholder, and (b) each of the decision makers can
have a short run and /or long run objective when they evaluate dividend decisions. Share
price increases have been postulated as the basic short run objective of both the groups of
decision makers. Similarly, both the share holders and the management are viewed as net
worth maximizes over the long run.

The fundamental hypothesis for the short run models is that the management increases
the dividend per share whenever the share price down, and that the share holder responds,
to these in such a way as to increase the share price. This result is expected if dividend
decisions are primary for both the groups.

In the long run context, it was felt that a progressive management would increase the
networth the firm by investments in fixed assets or through building the reserve base.
Dividends would be a primary decision if the internal financing of investment is
constrained by the necessity to pay dividends at a constant rate.

These are two extreme forms in which dividend decisions can be considered to be
primary. A variety of intermediate positions are possible in any specific case of a firm.
The models were designed to accommodate a rich variety of such behavioral patterns.

The theoretical structure was empirically tested for 71 firms of the corporate sector in 6
industries using the data of the Bombay Stock Exchange Directory for the period 1967-68
to 1980-81. The results generally indicate that the methodology of the present study
would be helpful in examine the notion of the primary of corporate dividend policy.

The following are the salient features of the empirical results.

(a) In the case of 17 firms dividend decisions were found to be primary. The factors
which accounted for primary were the following: (1) need to build the desired internal
reserve base in the long run, and (2) inadequacy of funds to finance available investment
opportunities while maintaining a desired payout ratio.

(b) The Lintner hypothesis was validated under the following circumstance: (1) the
managers are oriented towards building up reserves to minimize dependence on external
funds, (2) there is a lack of motivation or market opportunity for growth of the firm and
(3) there is no shortage of funds to pursue the desired objectives.
(c) Primary of dividends in the long run was observed in the case of 27 firms. The
significant reasons were (1) shortage of funds to take care of growth opportunities as well
as requisite dividends, and (2) inadequacy of funds the desired reserve base.

Throughout this analysis dividend decisions were considered to be primary, if and only if,
both the groups of decision makers agree to the same objective and respond to each
other’s perception of goal satisfaction. Viewed form this vantage point dividend decision
were primary only in a few cases. The Lintner hypothesis of a constant dividend payout
ratio appears to hold only because of managerial motivations and not as a response to
share holders desire. To that extent attributing primary to dividend decisions in such a
content appears to be misplaced. Most of the management in the corporate sector appear
to desire the security of internal financing and build reserves as a priority after paying
certain minimum dividend per share.

Despite these conclusions from the models of the present study two inadequacies became
apparent during the course of work: (a) the goals pursued by the management and the
share holders can be at variance. The conflict resolution mechanism have not been
explicitly modeled. (b) The interrelationships between the short run and long run models
are as yet tenuous. Further progress along these lines is possible. But it will bee an
agenda for the future.