Managerial Finance

Dividend policy in India: new survey evidence

H. Kent Baker, Sujata Kapoor,
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MF
41,2
182
Received 31 January 2014
Revised 31 January 2014
Accepted 29 March 2014
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Managerial Finance
Vol. 41 No. 2, 2015
pp. 182-204
© Emerald Group Publishing Limited
0307-4358
DOI 10.1108/MF-01-2014-0024
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0307-4358.htm
Dividend policy in India: new
survey evidence
H. Kent Baker
Kogod School of Business, American University,
Washington District of Columbia, USA, and
Sujata Kapoor
Department of Management, Jaypee Business School, Noida, India
Abstract
Purpose – The purpose of this paper is to survey managers of dividend-paying firms listed on the
National Stock Exchange (NSE) in India to learn their views about the factors influencing dividend
policy, dividend issues, and explanations for paying cash dividends and repurchasing shares.
The authors compare the results to other dividend surveys based on firms in Indonesia, Canada,
and the USA.
Design/methodology/approach – The authors use questionnaire to gather primary data from a
sample of 500 firms listed on the NSE.
Findings – The most important determinants of dividends involve earnings (the stability of earnings
as well as the level of current and expected future earnings) and the pattern of past dividends.
Comparing the overall rankings of the 21 factors by respondents from Indian firms to those of
Indonesian, Canadian, and US firms reveals statistically significant correlations. Respondents also
perceive that dividend policy affects firm value. Respondents also view maintaining an uninterrupted
record of dividends as important. The most highly supported explanations for paying cash dividends
concern signaling, the firm life cycle, and catering. Although none of the theories of repurchasing
shares is dominant, respondents provide little support for the agency explanation.
Research limitations/implications – Although the tests suggest that the sample does not suffer
from non-response bias, the findings should be viewed as suggestive rather than definitive because
of the relatively low response rate.
Originality/value – The paper presents new evidence about dividend policy of Indian firms.
To the knowledge, this is the most comprehensive survey of Indian firms to date that captures
managerial perceptions on both cash dividends and share repurchases.
Keywords India, Dividends, Survey, Dividend policy, Stock repurchases,
Securities exchange board of India
Paper type Research paper
Introduction
Dividends remain one of the greatest conundrums of modern finance. As Baker et al.
(2002, p. 255) note, “Despite a voluminous amount of research we still do not have all
the answers to the dividend puzzle.” According to Baker et al. (2011), a major reason for
this ongoing debate is the heavy reliance on economic modeling approaches without
an in-depth understanding of how investors and managers behave and perceive
dividends. To resolve the dividend puzzle, Chiang et al. (2006) conclude that the main
thrust of academic research should turn toward learning about the motivations and
perceptions upon which this motivation is based.
Distributing cash to shareholders via alternate forms has increased dramatically
in many countries. Since the mid-1980s, US firms have increasingly used share
repurchases to distribute cash to shareholders. In 1998, the Indian government yielded
to the corporate sector’s demand for permitting share repurchase, which are commonly
known as buybacks in India. Being aware of management’s views on factors
 influencing cash dividends and repurchases is important to understanding dividend Dividend
policy in India. policy in India
Although most dividend studies focus on US firms, a growing body of evidence
exists on dividend policy outside the USA ( Baker et al., 2011). To provide further
insights on how managers of Indian firms perceive dividends, we survey managers
of dividend-paying firms listed on the National Stock Exchange ( NSE) in India to learn
their views about the factors influencing dividend policy, dividend issues, and 183
explanations for paying cash dividends and repurchasing shares.
The Indian capital markets present a unique case in the study of corporate
dividends. The Indian economy has undergone major changes in the last few decades.
Emerging from the closed economy of the 1980s, the 1990s was a decade of
liberalization of the economy. In the 2000s, the economy witnessed unprecedented
growth supplemented by substantial increases in capital market activity. Changes also
occurred to the legal framework, with the Securities Exchange Board of India (SEBI)
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being entrusted with the regulatory power to govern the capital markets to ensure
compliance. Ownership structure in India differs from most Anglo-Saxon countries
such as the USA and the UK. In India, large shareholders, especially directors and
promoters, have greater incentives and ability to control the financing decisions of their
companies than small investors.
Our study investigates four major questions:

RQ1. What are the most important factors that managers perceive as influencing
the dividend policies of NSE-listed firms?

RQ2. Do the overall perceptions about the factors influencing dividend policy differ
between managers of Indian firms and those from Indonesia, Canada, and
the USA?

RQ3. What views do managers of Indian firms have on dividend processes and
patterns, dividend policy and firm value, and residual dividend policy?

RQ4. What level of support do managers of Indian firms give to various

explanations for paying cash dividends and repurchasing shares?

Our study contributes to the dividend literature in several ways. First, it updates
and expands previous survey-based research on dividends and provides new evidence
from managers of Indian firms. Survey evidence on Indian dividend policy is limited
and more than a decade old ( Bhat and Pandey, 1993; Anand, 2004). We examine issues
not previously addressed in dividend surveys involving managers of Indian firms.
To our knowledge, this is the most comprehensive study in an Indian context to date
that captures the perceptions of managers on both cash dividends and share
repurchases. Second, we compare the views of managers of Indian firms with those in
Indonesia, Canada, and the USA on factors influencing dividend policy. Thus, our
study helps to corroborate whether certain primary reasons, which we call first-order
factors, dominate dividend decisions.
The remainder of this paper has the following organization. The next section
reviews some important literature about dividends. This is followed by a discussion
of our research methodology and its potential limitations and then our survey results.
The final section provides a summary and conclusions.
 MF Literature review
41,2 The literature on dividends and dividend policy is voluminous, including surveys
dating back more than 50 years. We discuss two main topics in this section. First, we
review explanations for paying cash dividends and repurchasing shares. Second, we
examine the survey research on dividend policy. More detailed discussions of dividend
theories and policies are available in Lease et al. (2000), Bierman (2001), Frankfurter
184 et al. (2003), Baker (2009), and Baker et al. (2011).

Why firms pay cash dividends

For more than a half century, researchers have tried to justify why companies pay cash
dividends and have proposed various theories, motives, and explanations. Below
are seven broad categories, which are not necessarily mutually exclusive, for paying
dividends:
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(1) Bird-in-the-hand theory. Investors value cash in the hand more than a future
promise of capital gains when making decisions related to stocks due to lower
risk (Gordon, 1959, 1963; Walter, 1963; Bhattacharya, 1979).
(2) Signaling explanation. As insiders, managers choose dividend payment levels
to convey private information about the firm’s future prospects to investors,
which in turn reduces asymmetries ( Bhattacharya, 1979, 1980; John and
Williams, 1985).
(3) Agency theory. Dividends help to overcome the agency problem stemming from
the separation of ownership and control in a firm with diffused ownership
( Jensen and Meckling, 1976; Rozeff, 1982; Easterbrook, 1984; Jensen, 1986).
(4) Taxes and clientele effects. Differentials in tax rates between dividends
and capital gains lead to different clienteles ( Elton and Gruber, 1970; Miller and
Scholes, 1978, 1982).
(5) Firm life cycle theory of dividends. Dividend policy is a function of a firm’s life
cycle. That is, firms tend to begin paying dividends when their growth rate and
profitability are expected to decline in the future ( Mueller, 1972; Fama and
French, 2001; DeAngelo et al., 2006).
(6) Catering theory of dividends. Managers give investors what they currently
want. They cater to investor demand by paying dividends when investors put
a stock price premium on payers and by omitting or reducing dividends when
shares of dividend-paying firms trade at a discount (Baker and Wurgler,
2004a, b).
(7) Financial flexibility. Managers seek financial flexibility in making capital
structure decisions. Therefore, firms characterized by high financial leverage
and consequently limited financial flexibility may have to be more flexible with
aspects of their dividend policy decisions than firms with lower financial
leverage (Graham and Harvey, 2001).
Based on their review of the non-survey research literature, Baker et al. (2011, p. 251)
conclude: “There is no clear winner among the competing dividend theories and no
single theory has become the dominant solution to the dividend puzzle. Some empirical
support exists for each theory.” They note, however, that agency theory and signaling
explanations appear to have more convincing empirical support than the tax-preference
 explanation. Although no theory provides definitive answers, more recent theories Dividend
such as the firm life cycle theory and catering theory of dividends offer some useful policy in India
insights but still produce mixed results.

Why firms repurchase shares

Grullon and Ikenberry (2000), Lease et al. (2000), Baker et al. (2003), and Baker et al.
(2011) among others discuss various theories explaining why firms buy back their 185
stock. The following are five explanations for repurchasing shares:
(1) Signaling and undervaluation. Information asymmetry between management
and outside investors provides incentives for firms to announce share-repurchase
programs to signal managers’ private information about their companies and
convey their assessment to the market if they believe the company’s stock is
undervalued (Bhattacharya, 1979; Miller and Rock, 1985; Ofer and Thakor, 1987;
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Williams, 1988).
(2) Agency cost of free cash f lows. Firms use share repurchases as a mechanism to
mitigate the agency costs of free cash flows. Firms with abnormally high levels
of cash flows and/or few investment opportunities are more likely to initiate
share repurchase programs and return extra cash to shareholders ( Dittmar,
2000; Brav et al., 2005).
(3) Takeover deterrence. Managers use repurchases as a means of deterring an
unwanted bid by signaling firm value or increasing cost of purchasing
remaining shares outstanding ( Harris and Raviv, 1988; Stulz, 1988).
(4) Capital structure adjustments. Share repurchases provide a way for managers
to change their firm’s capital structure. Using debt-financed stock repurchases
results in more substantial changes in capital structure than using cash flows
as the source of the repurchase ( Dittmar, 2000; Hovakimian et al., 2001).
(5) Flexibility. Option grants to corporate executives may lead to potential dilution
of earnings per share (EPS). Firms may buy back shares to offset such
dilution and to increase EPS. Managers may substitute share repurchases for
dividends when they are heavily compensated ( Lambert et al., 1989; Hsieh and
Wang, 2009).
Based on their review of non-survey empirical evidence, Baker et al. (2011, p. 324)
conclude that “the evidence suggests a lack of a universally accepted motivation
behind repurchases. Thus, different firms are likely to have varying motives for buying
back their shares.”

Survey research on dividend policy

Researchers have attempted to identify different factors influencing the payment of
dividends using survey research (Baker et al., 2011). For example, in his seminal study,
Lintner (1956) reports that past dividends and current earnings are the primary
determinants of current dividends. He also finds that managers prefer to maintain
stable dividends and make periodic adjustments toward a target payout ratio. Baker
et al. (1985) and Baker and Powell (2000) find that the most important factors influencing
dividend policy by corporations listed on the New York Stock Exchange ( NYSE) are the
level of current and expected future earnings and the pattern or continuity of past
dividends. Baker et al. (2001) report similar results for NASDAQ firms.
 MF Brav et al. (2005), who benchmark their findings to Lintner (1956), find that the
41,2 perceived stability of future earnings still affects dividend policy but the link between
dividends and earnings is weaker. They also report that managers continue to make
dividend decisions conservatively but that the importance of targeting the payout ratio
is not as high. Dividend payers also tend to smooth dividends from year to year and
alter the amount of dividends in response to permanent changes in earnings.
186 Bancel et al. (2005) survey managers from 16 European countries to examine
cross-country determinants of payout policy. They find that the factors largely driving
European managers’ views on dividend policy are similar to those of the US peers as
reported in Brav et al. (2005). For example, Bancel et al. report than an overwhelming
majority of respondents consider the factor “stability and level of future earnings”
as important in making dividend decisions, followed in importance by a “sustainable
change in earnings.” They also find that a complex interaction of a firm’s ownership
structure and the legal and institutional structure of its home country influence
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dividend policy.
Baker et al. (2007) explore the perception of Canadian managers with respect to
dividend policy and investigate the uniqueness of the Canadian context. Their results
show that managers of Toronto Stock exchange (TSX) listed firms set dividends
consistently with the dividend model of Lintner (1956). Most respondents perceive the
firm’s investment, financing, and dividend decisions are interrelated. Their survey
evidence also reveals that managers express greater support for the signaling and firm
life cycle theories than for the bird-in-hand, tax preference/dividend clientele, agency
cost, and catering explanations.
Baker and Powell (2012) survey managers of dividend-paying firms listed on the
Indonesian Stock Exchange. Their evidence shows that managers view the most
important determinants of dividends as the stability of earnings and the level of current
and expected future earnings. Respondents also believe that the effects of dividends
on stock prices and needs of current shareholders are important determinants.
Survey responses indicate that managers of Indonesian firms perceive that dividend
policy affects firm value.
Based on their review of the survey research literature, Baker et al. (2011) conclude
that certain determinants are consistently important over time in shaping actual
policies. These first-order determinants in making dividend decisions include the
pattern of past dividends, stability of earnings or cash flows, and the level of current
and expected future earnings. The authors caution, however, that the same factors
influencing dividend decisions are not equally important to all firms. As Baker et al.
(p. 306) note, “Because various factors may affect a firm’s dividend decisions in
different ways, no universal set of factors is likely to apply to all firms. Thus, universal
or one-size-fits all theories or explanations for why companies pay dividends are
too simplistic.”

Survey research on share repurchases

Survey evidence on share repurchases is available from various US and non-US studies
(Baker et al., 2011). For example, Baker et al. (2003), who survey 640 top financial
executives of primarily large US firms, find that responding managers view low
(undervalued) stock price as the most important circumstance leading to the firm’s
most recent stock repurchase. The reasons cited for open-market repurchase are
consistent with the signaling hypothesis, specifically the undervaluation version of this
 hypothesis. Their evidence suggests shifts in the importance managers attach to Dividend
reasons for repurchasing shares over the past several decades. policy in India
Brav et al. (2005) sample financial executives from a cross-section of US public
and private firms. Managers perceive that repurchases provide flexibility and can be
used in an attempt to time the equity market or to increase EPS. Respondents generally
believe that taxes are not a dominant factor affecting repurchases. Management views
provide little support for the agency and clientele hypotheses for repurchasing shares. 187
Although their findings appear to provide strong support for the signaling hypothesis,
they conclude that when considering other evidence from their study, conveying
information does not appear to be related to signaling in the academic sense.
De Jong et al. (2003) investigate the dividend and share repurchases policies
of the 500 largest non-financial Canadian firms listed on the TSX. They find
that the existence of buildup of surplus cash drives the payout decision and that tax
preferences drive the choice of share repurchases. Their evidence also suggests that the
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payout for firms with managerial options plans is less likely to be dividends than
repurchases.
Bancel et al. (2005) survey managers from 16 European countries to examine
cross-country determinants of payout policy. Their results indicate that the
undervaluation of a firm is a driving force for managers of European firms in
repurchasing their shares. Additionally, managers view repurchases as a tool of flexibility
rather than a substitute for dividends. The authors conclude that important factors
governing share repurchase policy appear similar between European and US firms.

Survey research on dividend policy in India

Few researchers use survey methodology to examine dividend policy in India. Bhat and
Pandey (1993) survey finance directors of the Economic Times 250 top companies in
India. Their results show that determinants of dividend policy include current and
expected earnings as well as the pattern of past dividends. Respondents do not view
liquidity as an important consideration in dividend policy. Finance directors believe
that firms strive to maintain an uninterrupted record of dividend payments and
avoid making changes in the dividend payment that might have to be reversed.
Their evidence shows that respondents consider dividends as a signaling device but
they do not find any support for the residual dividend hypothesis. Managers of
Indian firms do not seem to fully understand the clientele hypothesis. Finally,
respondents perceive that firms prefer paying dividends even if they have profitable
investment opportunities.
Anand (2004) presents the results of a 2001 survey to identify the factors that chief
financial officers (CFOs) consider in formulating dividend policy in India. His initial
sample consists of a large cross-section of 474 private sector and the top 51 public
sector firms in India based on market capitalization. The results suggest that managers
of Indian firms believe that dividend decisions are important because they provide a
signaling mechanism for the future prospects of the firm and thus affect its
market value. This does not necessarily mean, however, that the board sets the new
level of the dividend to deliberately send a signal. Managers also consider investor
preferences for dividends and the shareholder profile when designing dividend policy.
Firms have a target dividend payout ratio but want to pay stable dividends with
growth. Anand ( p. 14) concludes “Therefore, dividend policy does matter to the CFOs
and the investors.”
 MF Research design
41,2 Sample and survey
Using the Prowess database of Center of Monitoring Indian Economy (CMIE), we select
500 Indian firms listed on the NSE. These companies are constituents of the S&P CNX
500 Index. The S&P CNX 500 represents about 96 percent of total market capitalization
and about 93 percent of the total turnover on the NSE. From this sample of 500
188 companies, 92 percent of the firms are regular dividend payers, which may suggest a
conservative investor base in India. By comparison, at the end of the third quarter,
the number of stocks paying dividends in the S&P 500 reached a 17 year high (417 or
84 percent of the index), and the number of companies increasing their year-over-year,
dividend per share distribution hit the highest level in at least 20 years (Amenta, 2013).
A mail survey serves as our primary means of gathering data. We model our survey
instrument after those designed by Baker and Powell (2000) and Baker et al. (2001), and
later used by Baker et al. (2007) for Canadian firms and subsequently by Baker
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and Powell (2012) for Indonesian firms to enable comparisons among several countries.
We extend our survey to include issues on stock repurchases, stock dividends (called
bonus shares in India), and stock splits not in the aforementioned surveys. In this
paper, we focus only on cash dividends and share repurchases.
The survey has three sections. One section contains four questions that provide a
profile of respondents and their firms. Another section asks respondents to indicate
the importance of 21 factors (which we refer to as F1 through F21) in determining their
firm’s dividend policy. We use a four-point scale where 0 ¼ no importance, 1 ¼ low
importance, 2 ¼ moderate importance and 3 ¼ high importance. The final section asks
respondents to indicate their general opinion about each of 53 closed-end statements
(which we refer to as S1 through S53). The responses are based on a five-point scale:
1 ¼ strongly disagree, 2 ¼ disagree, 3 ¼ no opinion/neutral, 4 ¼ agree, and 5 ¼ strongly
agree. Of the 53 closed-end statements, we focus on 41 statements: 15 of the 41
statements relate to issues involving dividend policy and the remaining 26 relate to
seven explanations for paying cash dividends and five motives for repurchasing
shares. The survey is available from the authors upon request.
We sent a cover letter requesting participation in this study along with a self-
addressed return envelope and the survey instrument to the company secretary of each
of 500 firms between mid-February and early March, 2013. The cover letter assured
recipients that their answers would be confidential and released only in summary form
and no information would be disclosed about individual companies. If a company
secretary preferred not to respond to the survey, the cover letter instructed that person
to give it to someone actively involved in the firm’s dividend decisions or to return an
unanswered questionnaire. The survey contained a code number to avoid potentially
including duplicate responses in the analysis and to enable us to conduct tests for
non-response bias. We sent reminders through e-mails to non-respondents in the
first week of May, 2013 to increase the response rate and to reduce potential
non-response bias.
By June end 2013, we had received 42 usable responses (an 8.4 percent response
rate). Of the 500 surveys, 16 companies returned the questionnaire unanswered. By
comparison, Anand (2004) received 81 completed questionnaires resulting in a 15.4
percent response rate. Our lower response rate may result from a more comprehensive
survey and reflect the increasing difficulty of getting Indian managers to respond
to surveys. Of the respondents, 82.5 percent indicate they are actively involved in
determining their company’s dividend policy. The most common positions or titles of
 respondents are company secretary (70 percent) and CFO (10 percent). The remaining Dividend
respondents belong to one of the following categories: general managers (finance), policy in India
director (finance), and director (investor relations).

Statistical tests
We use a t-test for the null hypothesis that the mean response for each of the 21 factors
influencing dividend policy equals 0 (no importance). We calculate the Spearman rank 189
correlation coefficient, rs, to determine whether a significant relationship exists between
the rankings of the 21 factors by the managers of Indian firms and those in Indonesia,
Canada, and the USA. We use a one-sample t-test to determine whether the mean
response for each of the 41 issues involving dividend policy differs significantly from
3 (no opinion) on a five-point scale. Finally, we use several tests for non-response bias
including a t-test for equality of means with and without assuming the equality of
variance and a non-parametric Wilcoxon test.
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Potential limitations
As with any methodology, survey research has potential limitations. For example,
the phrasing of the survey questions could potentially affect the response. Another
possible concern is the relatively small number and percentage of responses, which
could lead to non-response bias. We took several steps to reduce potential non-response
bias by making the survey reasonably easy to complete, assuring respondents of
confidentiality, sending a reminder e-mail to non-respondents, and offering all interested
parties an executive summary of the results. Due to the relatively low response rate, the
findings should be viewed as suggestive rather than definitive.
To test for non-response bias, we compare characteristics of the 42 responding
firms to those of the 458 non-responding firms using t-test for equality of means
and non-parametric Wilcoxon test. We use the Prowess database of CMIE to obtain the
following data on each of the two groups for 2012: equity dividend, total assets, market
capitalization, price-to-book ratio, and dividend yield. To determine if the responding
and non-responding firms differ significantly on each characteristic, we first test for
equality of variance using Levene’s test. We use the t-test for equality of means.
Given the skewness of the distributions, we also use the non-parametric Wilcoxon test.
The total number of respondents and non-respondents is <500 because of missing
observations. If the characteristics of the two groups are similar, this lessens the
concern about potential non-response bias.
For the NSE-listed firms surveyed, Table I presents descriptive statistics for the 42
responding and 458 non-responding firms on the five characteristics. The results show
that only one of the five characteristics – the price-to-book ratio – differs significantly
at the 0.05 or greater level for the Levene’s test for equality of variances and the t-test
for equality of means (equality of variance not assumed). The Wilcoxon test, however,
is not statistically significant for the price-to-book ratio. Hence, despite the relatively
low response rate, respondents and non-respondents appear statistically similar on
at least four of the five characteristics.
Another limitation of this study is that the number of responses precludes
separating firms by size, industry, and other characteristics and testing for statistically
significant differences between various groups. The small number of responses also
limits our ability to test for differences between the various hypotheses for cash
dividends and share repurchases and to statistically compare our results with those
of other studies.
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MF
41,2

190

Table I.
Characteristics of
survey respondents

for NSE-listed firms

and non-respondents
Equity dividend Total assets Market capitalization Price-to-book Dividend
(Rs Million) (Rs Million) (Rs Million) Ratio Yield (%)

Mean
Respondents 2,115.614 26,0991.562 128,520.243 2.185 1.717
Non-respondents 2,198.614 24,4191.874 111,073.293 2.816 1.848
Standard deviation
Respondents 4,285.295 659,829.921 211,060.841 1.430 1.300
Non-respondents 6,980.512 854,794.1 292,602.3 3.483 3.545
Respondents 37 42 42 42 42
Non-respondents 394 458 458 454 458
Levene’s test for equality of variances 0.096 0.001 0.009 5.218** 0.415
t-Test for equality of means (equality of variances assumed) 0.071 −0.124 −0.377 1.163 0.239
t-Test for equality of means (equality of variance not assumed) 0.105 −0.154 −0.494 2.295** 0.506
Wilcoxon test −1.470 −0.806 −1.519 −1.207 −1.075
Notes: This table shows five characteristics for the survey respondents and non-respondents and the tests for non-response bias. *,**Significant at the 0.05
and 0.01 levels, respectively
 Results and discussion Dividend
Factors influencing dividend policy policy in India
Our first research question attempts to identify the most important factors that
managers of Indian firms perceive as influencing their dividend policies. Table II
reports the level of importance of 21 potential determinants of the dividend policies of
the responding firms. We report the results for each of the 21 factors ranked by their
mean score along with their corresponding t-statistic for the null hypothesis that the 191
mean response equals 0 (no importance). Respondents view all 21 factors as important
at the 0.01 level or greater. Of the 21 factors, we mainly focus on the highest ranked
factors. Although we received 42 responses to the survey, some respondents did not
answer each of the 21 statements involving factors influencing dividend policy. Table II
shows the actual number of responses to each of these statements.
As Table II indicates, at least half of the respondents view three factors as being of
high importance in determining their firm’s dividend policy: the stability of earnings
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(F2) (66.7 percent), level of current earnings (F3) (64.1 percent), and pattern of past
dividends (F1) (53.8 percent). The next most highly ranked factor is the level of
expected future earnings (F4). Thus, three of the four most highly ranked factors
involve earnings (F2, F3, and F4). The importance that respondents place on earnings
appears rational given that earnings tend to be highly correlated with cash flows and
cash typically serves as the basis for paying dividends. Besides these four factors, the
only other factors whose means fall within the moderate level of importance category
are liquidity constraints such as availability of cash (F5) and the desire to pay out, in
the long run, a given fraction of earnings (F6). Overall, these six factors appear most
important in influencing the dividend policy of the responding Indian firms. We do not
test for statistically significant differences between these factors using, for example, a
chi-square test because of inadequate cell sizes.
Of the 21 factors influencing dividend policy, using dividends as a signaling
mechanism such as using dividend changes to convey information to financial markets
(F16) ranks last. Academics often like signaling theory because it lends itself to
complicated modeling. Our results show, however, that manager of Indian firms tend to
focus on the conservative Lintner (1956) factors rather than signaling.
Our second research question addresses whether managerial perceptions about the
importance of the factors influencing dividend policy differ between Indian firms and
Indonesian, Canadian, and US firms. We calculate the Spearman rank order correlation
coefficient, rs, to determine whether a significant relationship exists between the
rankings of the 21 factors by managers of NSE and IDX ( Indonesian) firms, NSE and
TSX (Canadian) firms, NSE and NYSE listed ( US) firms, and NSE and NASDAQ ( US)
firms. The resulting correlation coefficients are as follows: 0.445 for NSE-IDX
(significant at the 0.05 level), 0.823 for NSE-TSX, 0.767 for NSE-NYSE, and 0.686 for
NSE-NASDAQ (all significant at the 0.01 level). Overall, these correlation coefficients
show that managers of NSE, IDX, TSX, NYSE, and NASDAQ firms rank the factors
influencing dividend policy in a significantly positive manner despite differing
characteristics among the firms and markets on which their stocks trade. We do not
test for statistically significant differences between countries on each individual factor
because of statistical issues involving sample size.
Not surprisingly, both similarities and differences in rankings emerge for individual
determinants of dividend policy. For example, the rankings relating to earnings (F1, F2,
F3, and F4) generally appear among the most highly ranked by managers of firms on
all five markets (NSE, IDX, TSX, NYSE, and NASDAQ). Although not shown in
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Table II.

dividend policy
Factors influencing
Level of importance (%) Rank
None Low Mod High
No. Factor n 0 1 2 3 Mean SD t-value NSE IDX TSE NYSE NASDAQ

F2 Stability of earnings 39 0 2.6 30.8 66.7 2.64 0.54 30.69** 1 1 2 6 2

F3 Level of current earnings 39 0 2.6 33.3 64.1 2.62 0.54 30.04** 2 2 4 1.5 3
F1 Pattern of past dividends 39 2.6 0.0 43.6 53.8 2.49 0.64 24.13** 3 7 3 3 1
F4 Level of expected future earnings 39 0 7.7 48.7 43.6 2.36 0.63 23.47** 4 3 1 1.5 4
F5 Liquidity constraints such as availability of cash 39 2.6 15.4 38.5 43.6 2.23 0.81 17.20** 5.5 4 5 8 14
F6 Desire to pay out, in the long run, a given fraction of earnings 39 2.6 2.6 64.1 30.8 2.23 0.63 22.23** 5.5 10 6 9 7
F11 Investment consideration such as the availability of profitable investment
opportunities 39 2.6 12.8 51.3 33.3 2.15 0.74 18.06** 7 9 11 7 15
F12 Desire to avoid giving a false signal to investors by changing
the dividend 37 5.4 18.9 45.9 29.7 2.00 0.85 14.32** 8 21.5 12 5 8
F8 Current degree of financial leverage 36 5.6 33.3 44.4 16.7 1.72 0.81 12.69** 9.5 13.5 8 na 10
F14 Financing considerations such as the cost of raising external funds (debt and equity) 39 10.3 28.2 41.0 20.5 1.72 0.92 11.71** 9.5 16 14 12 19
F19 Legal rules and constraints such as paying dividends that would impair capital 39 5.1 35.9 43.6 15.4 1.69 0.80 13.21** 11 20 19 16 12
F10 Expected rate of return on firm’s assets 38 10.5 26.3 47.4 15.8 1.68 0.87 11.89** 12.5 18 10 13 11
F13 Desire to maintain a target capital structure 38 10.5 28.9 42.1 18.4 1.68 0.90 11.49** 12.5 19 13 11 6
F9 Needs of current shareholders such as the desire for current income 39 7.7 28.2 56.4 7.7 1.64 0.74 13.79** 14 6 9 10 9
F7 Concern about affecting the stock price 39 12.8 30.8 41.0 15.4 1.59 0.91 10.92** 15 5 7 4 5
F20 Contractual constraints such as dividend restrictions in debt contracts 39 17.9 28.2 33.3 20.5 1.56 1.02 9.57** 16 15 20 15 21
F15 Availability of alternative sources of capital 39 15.4 30.8 38.5 15.4 1.54 0.94 10.20** 17.5 12 15 na 17
F17 Projections about future state of the economy 39 7.7 38.5 46.2 7.7 1.54 0.76 2.72** 17.5 8 17 18 18
F18 Desire to conform to the industry’s dividend payout ratio 39 15.4 33.3 41.0 10.3 1.46 0.88 10.33** 19 17 18 14 13
F21 Preference to pay dividends instead of undertaking risky reinvestments 39 17.9 38.5 28.2 15.4 1.41 0.97 9.12** 20 13.5 21 19 20
F16 Signaling mechanism such as using dividend changes to
convey information to financial markets 39 15.4 41.0 38.5 5.1 1.33 0.81 10.33** 21 11 16 na 16
Notes: This table shows the level of importance attached to 21 factors influencing dividend policy by managers of Indian firms ranked from highest to lowest based on the mean
for the Indian sample. It also shows the factor rankings from surveys of managers of exchange-listed firms in various countries NSE (Indian), IDX (Indonesian), TSE (Canada),
NYSE (United States), and NASDAQ (USA). The number of respondents for each factor is less than 42 because some respondents failed to evaluate each factor. *,**Significant at the
0.05 and 0.01 levels, respectively
 Table II, the key determinants that influence dividend policy appear very similar to Dividend
those reported in surveys conducted decades earlier by Lintner (1956) and Baker et al. policy in India
(1985) among others. Thus, some of the more important and consistent determinants
of payout policy appear to be the pattern of past dividends (F1), stability of earnings
or cash flows (F2), and the level of current and expected future earnings (F3 and F4).
These firm-specific factors appear to be first-order determinants in making dividend
decisions. 193

Dividend issues
Our third research question concerns identifying the views managers of Indian firms
have on the dividend process, dividend patterns, dividend policy and firm value, and
residual dividend policy. Table III presents the survey results on these issues. In most
instances, we discuss the percentage of respondents that express agreement (agree and
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strongly agree) rather than the mean response because the former provides a more
easily interpretable way of describing their views.
Panel A of Table III provides respondents’ views on five statements (S2, S3, S4, S5,
and S7) based on Lintner’s (1956) behavioral model describing the corporate dividend
setting. The responses to all five statements differ significantly from 3 (no opinion) at
the 0.01 level. More than 95 percent of respondents believe a firm should strive to
maintain an uninterrupted record of dividend payments (S2). Almost 85 percent of
respondents express agreement that a firm should change dividends based on
a sustainable shift in earnings (S7). About 81 percent agree with the statement that
a firm should set a target dividend payout ratio and periodically adjust its current
payout toward the target (S4). Close to 68 percent of respondents indicate that a firm
should avoid increasing its regular dividend if it expects to reverse the dividend
decision in a year or so (S5). Almost 66 percent express agreement with the statement
that the market places greater value on stable dividends than stable payout ratios (S3).
Overall, these results suggest that respondents agree with the notion of maintaining
continuity when paying regular cash dividends.
Panel B of Table III presents the results for two statements about the historical
pattern of dividends (S1 and S6), which show the responses differ significantly from
no opinion at the 0.01 level. About 98 percent express agreement that a firm should
strive to maintain steady or modestly growing dividends (S1) and about 69 percent
believe that dividends generally follow a smoother path than earnings (S6).
Again, these findings suggest the importance of maintaining a pattern of steady or
growing dividends.
The survey evidence presented in Panels A and B suggests that managers of
NSE-listed firms set dividends in accordance with the dividend model of Lintner (1956).
Consistent with Lintner, responding managers of Indian firms appear to support the
notion of making dividend decisions conservatively and to view stability of dividends
as important. To avoid unnecessary surprises, dividend-paying firms seem to strive for
a stable and slow-growing stream of dividends. These findings also corroborate the
results shown in Table II involving the most important determinants of dividend policy
as perceived by managers of Indian firms, such as the pattern of past dividends (F1).
Panel C of Table III presents responses to six statements used to help discern
whether managers of NSE-listed firms believe that dividend payout policy affects firm
value (S10, S11, S13, S17, S18, and S30). The mean response differs significantly from 3
(no opinion) for four statements (S10, S11, S18, and S30) at the 0.01 level.
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Table III.

dividend policy
Indian firms on
by managers of

issues involving
Level of agreement
SD D NO A SA
No. Statement n 1 2 3 4 5 Mean SD t-value

Panel A. Dividend process

S2 A firm should strive to maintain an uninterrupted record of dividend
payments 41 0 0 4.9 53.7 41.5 4.37 0.581 15.047**
S3 The market places greater value on stable dividends than stable payout ratios 41 0 14.6 19.5 48.8 17.1 3.68 0.934 4.683**
S4 A firm should have a target dividend payout ratio and periodically adjust the
payout toward the target 41 0 4.9 14.6 63.4 17.1 3.93 0.721 8.234**
S5 A firm should avoid changing its regular dividend if it might have to reverse
that change in a year or so because this may create an unfavorable impression
among investors about the firm 41 0 9.8 22.0 56.1 12.2 3.71 0.814 5.566**
S7 Dividends changes generally follow a shift in long-term sustainable earnings 39 0 0 15.4 69.2 15.4 4.00 0.562 11.113**
Panel B. Dividend patterns
S1 A firm should strive to maintain steady or modestly growing dividends 40 0 0 2.5 52.5 45.0 4.42 0.549 16.402**
S6 Dividends generally follow a smoother path than earnings 39 0 5.1 25.6 66.7 2.6 3.67 0.621 6.701**
Panel C. Shareholder value and other dividend policy issues
S10 A firm should formulate dividend policy to produce maximum value for its
shareholders 41 0 0 2.5 46.3 51.2 4.49 0.553 17.219**
S11 An optimal dividend policy strikes a balance between current dividends and
future growth that maximizes shareholder value 41 0 0 0 51.2 48.8 4.49 0.506 18.825**
S18 A firm’s dividend policy affects its cost of capital 41 0 7.3 24.4 56.1 12.2 3.73 0.775 6.042**
S30 A firm’s investment, financing, and dividend decisions are interrelated 41 2.4 2.4 4.9 73.2 17.1 4.00 0.742 8.634**
S17 A dividend policy that meets shareholder needs may be helpful in defending
against a takeover bid 41 7.3 22.0 41.5 26.8 2.4 2.95 0.947 –0.330
S13 Any change in dividend policy is likely to affect firm value 41 0 19.5 43.9 31.7 4.9 3.22 0.822 1.710
Panel D. Residual dividend policy
S9 A firm’s new capital investment requirements generally have little effect on
modifying its pattern of dividends 40 5.0 50.0 5.0 32.5 7.5 2.88 1.159 –0.682
S16 A firm should view cash dividends as a residual of earnings only after meeting
investment needs 41 0 12.2 17.1 58.5 12.2 3.71 0.844 5.367**
Notes: This table presents the survey responses for dividend-paying Indian firms on 15 statements involving four issues: dividend process (Panel A), dividend
patterns (Panel B), dividend policy and shareholder value (Panel C), and residual dividend policy (Panel D). Rankings are based on a five-point scale ranging
where disagree (SD) ¼ 1, disagree (D) ¼ 2, no opinion (NO) ¼ 3, agree (A) ¼ 4, and strongly agree (SA) ¼ 5. The t-value shows the result of testing the null
hypothesis that the mean response equals 3 (no opinion). *,**Significant at the 0.05 and 0.01 levels, respectively
 The evidence shown in Panel C of Table III shows that all or almost all of the Dividend
respondents express agreement with the following statements: an optimal dividend policy in India
policy strikes a balance between current dividends and future growth that maximizes
shareholder value (S11) (100 percent) and a firm should formulate dividend policy to
produce maximum value for its shareholders (S10) (97.5 percent). Further, more than
93 percent of respondents concur that a firm’s investment, financing, and dividend
decisions are interrelated (S30). A majority (68.3 percent) expresses agreement that 195
a firm’s dividend policy generally affects its cost of capital (S18). These results suggest
that the respondents typically perceive that dividend policy is relevant in contrast to
the theory set forth by Miller and Modigliani (1961) assuming frictionless markets.
Because Indian markets are imperfect, finding that managers strongly support the
view that a firm’s payout policy affects firm value is not surprising. This evidence
aligns with the perceptions of managers of Indonesian, Canadian, and US firms who do
not support the dividend irrelevance proposition. As Baker et al. (2011, p. 274) note,
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“[…] although the precise impact of dividend policy on value remains a contentious
question, managers generally tend to operate as though dividend policy matters.”
Respondents are less certain about other issues. Our evidence shows that almost
44 percent express no opinion on the statement that any change in dividend policy is
likely to affect firm value (S13) and about 42 percent of respondents have no opinion on
the statement that a dividend policy that meets shareholder needs may be helpful in
defending against a takeover bid (S17). The mean responses of both the statements
do not differ significantly from 3 (no opinion) at the 0.05 level.
Panel D of Table III presents the responses to two statements about residual
dividend policy (S9 and S16). About 71 percent of respondents believe that a firm should
view cash dividends as a residual after funding desired investments from earnings (S16).
Although the majority (55 percent) of respondents do not think a firm’s new capital
investment requirements generally have little effect on modifying its pattern of dividends
(S9), the mean response does not differ significantly from 3 (no opinion) at the 0.05 level.
Thus, our results suggest a mixed response regarding residual dividend policy.
Overall, our results are consistent with the view that respondents believe that
dividend policy matters. Most respondents apparently view dividend policy as an
integral part of business strategy, which includes both financial and investment
decisions. When the dynamics and characteristics of the firm change, its dividend
policy may also change if the firm wants to maximize shareholder value. Trying to
understand why respondents believe dividend policy matters is an important issue to
investigate. Therefore, we examine managerial perspectives on the underlying reasons
for paying dividends.

Explanations for paying cash dividends

Our final research question attempts to learn the level of support that managers of Indian
firms give to various explanations for paying cash dividends and repurchasing shares.
Table IV reports the level of support that respondents assign to various explanations for
paying cash dividends whereas Table V reports the results for share repurchases.
Panel A of Table IV shows the responses to two statements involving the
bird-in-the-hand theory (S14) and (S15). The mean is statistically different from 3 (no
opinion) at the 0.01 level only for S15 but not for S14 at the 0.05 level. The results are
mixed but show some support that investors prefer a certain dividend stream to uncertain
stock price appreciation (S15).
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dividends
Table IV.

paying cash
explanations for
of indian firms on
Views of managers
SD D NO A SA
No. Statement n 1 2 3 4 5 Mean SD t-value

Panel A. Bird in the hand theory

S14 Investors prefer certain, current dividends to possibly higher but
riskier stock price appreciation 40 5.0 22.5 17.5 47.5 7.5 3.30 1.067 1.778
S15 Investors prefer a certain dividend stream to uncertain stock price
appreciation 41 4.9 12.2 22.0 53.7 7.3 3.46 0.977 3.037**
Panel B. Signaling theory
S12 A firm should consider the trends in dividend policy of its competitors
when setting and reviewing its dividend policy 41 4.9 19.5 29.3 43.9 2.4 3.20 0.954 1.309
S19 Dividend changes provide signals about a firm’s future prospects 41 0 4.9 17.1 75.6 2.4 3.76 0.582 8.315**
S20 A firm should adequately disclose to investors its reasons for changing
its dividend policy 41 0 4.9 14.6 58.5 22.0 3.98 0.758 8.243**
S21 A firm’s stock price usually falls when it unexpectedly cuts or omits its
dividend 41 2.4 4.9 22.0 61.0 9.8 3.71 0.814 5.566**
S22 A firm’s stock price usually increases when it unexpectedly increases
its dividend or pays a dividend for the first time 41 0 20.5 29.3 58.5 15.0 3.54 0.711 4.835**
S23 Dividend increases are ambiguous because they can suggest future
growth or lack of investment opportunities 39 0 20.5 35.9 43.6 0 3.23 0.777 1.856
Panel C. Agency theory
S27 The payment of dividends forces a firm to seek more external
financing, which subjects the firm to scrutiny of investors 40 2.5 45.0 35.0 17.5 0 2.68 0.797 −2.579**
S28 The payment of dividends serves as a bonding mechanism to
encourage managers to act in the interest of outside shareholders 40 2.5 32.5 40.0 25.0 0 2.88 0.822 −0.961
S29 Dividends are less important as a corporate monitoring mechanism for
investors when companies comply with corporate governance norms 40 2.5 27.5 30.0 35.0 5.0 3.12 0.966 0.819
Panel D. Taxes and clientele effects
S25 Investors are attracted to Indian firms that have dividend policies
appropriate to their particular tax circumstances 41 0 12.2 19.5 65.9 2.4 3.59 0.741 5.060**

(continued )
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SD D NO A SA
No. Statement n 1 2 3 4 5 Mean SD t-value

S26 Stocks that pay high (low) dividends attract investors in low (high) tax 41 2.4 34.1 34.1 29.3 0 2.90 0.86 −0.726
brackets
Panel E. Firm life cycle theory of dividends
S8 The pattern of cash dividends generally changes over a firm’s lifecycle 41 0 2.4 12.2 70.7 15.0 3.98 0.612 10.210**
Panel F. Catering theory of dividends
S24 A firm should be responsive to dividend preferences of its shareholders 40 0 7.3 26.8 61.0 4.9 3.63 0.698 5.814**
Panel G. Financial flexibility
S31 Cash dividends represent a fixed cost that impairs financial flexibility
by restricting debt capacity 41 2.4 39 24.4 31.7 2.4 2.93 0.959 −0.489
S32 Dividend policy decisions are more flexible than financing decisions
because by altering dividend policy, the firm can alter the mix of
internal and external sources of financing 40 2.5 17.5 30 50 0 3.28 0.847 2.054*
Notes: This table presents the survey responses for 41 dividend-paying Indian firms on 17 statements involving seven explanations for paying dividends.
Rankings are based on a five-point scale where strongly disagree (SD) ¼ 1, disagree (D) ¼ 2, no opinion (NO) ¼ 3, agree (A) ¼ 4, and strongly agree (SA) ¼ 5.
The t-value shows the result of testing the null hypothesis that the mean response equals 3 (no opinion). *,**Significant at the 0.05 and 0.01 levels, respectively

Table IV.
Dividend
policy in India

197
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Table V.

explanations for
share repurchases
of Indian firms on
Views of managers
SD D NO A SA
No. Statement n 1 2 3 4 5 Mean SD t-value

Panel A. Signaling and undervaluation

S33 Share repurchases signal that the firm’s stock is undervalued 41 0 19.5 7.3 58.5 14.6 3.68 0.960 4.554**
S34 Share repurchases reveal positive information about the firm’s future 40 0 10.0 12.5 75.0 2.5 3.70 0.687 6.445**
prospects
Panel B. Agency cost of Free Cash Flows
S35 Share repurchases reveal a lack of attractive investment opportunities
available to the firm 41 0 17.1 34.1 41.5 7.3 3.39 0.862 2.897**
S36 Share repurchases provide a way to lessen conflicts of interest between
managers and shareholders 40 0 42.5 40.0 17.5 0 2.75 0.742 −2.130*
S41 When corporate profits are under pressure, share repurchase programs
receive higher priority use of corporate cash flow than cash dividends 41 2.4 22.0 56.1 19.5 0 2.93 0.721 −0.650
Panel C. Takeover deterrence
S39 Share repurchases serve as an anti-takeover mechanism to ward of an
unwanted bidder 41 0 0 29.3 63.4 7.3 3.78 0.571 8.758**
Panel D. Capital structure adjustments
S37 Share repurchases provides managers with a way to change their
firm’s capital structure 41 0 9.8 14.6 70.7 4.9 3.71 0.716 6.328**
S40 Share repurchases are a useful way to alter the corporate gearing ratio
(measure of financial leverage) 41 0 2.4 24.4 73.2 0 3.71 0.512 8.845**
Panel E. Flexibility
S38 Share repurchases provide flexibility and can be used in an attempt to
time the equity market or to increase earnings per share 41 0 0 24.4 73.2 2.4 3.78 0.475 10.522**
Notes: This table presents the survey responses for 41 dividend-paying Indian firms on nine statements involving five explanations for share repurchases.
Rankings are based on a five-point scale where strongly disagree (SD) ¼ 1, disagree (D) ¼ 2, no opinion (NO) ¼ 3, agree (A) ¼ 4, and strongly agree (SA) ¼ 5.
The t-value shows the result of testing the null hypothesis that the mean response equals 3 (no opinion). *,**Significant at the 0.05 and 0.01 levels, respectively
 Our evidence shares some similarities with both Indonesian (Baker and Powell, 2012) Dividend
and Canadian surveys (Baker et al., 2007), which are inconclusive about how managers policy in India
view the bird-in-the-hand theory. Baker and Powell’s (2000) survey of NYSE firms
shows no support for this explanation for paying dividends. This argument is also not
supported by managers of NASDAQ-listed firms (Baker et al., 2001). A potential
explanation for these differences is that managers of NSE-listed firms perceive that their
investors are more conservative than their counterparts in the USA. 199
Panel B of Table IV presents managers’ opinions on six statements reflecting various
aspects of signaling theory. Given that the mean of four of these statements (S19, S20, S21,
S22) are positive and differ significantly from 3 (no opinion) at the 0.01 level, our analysis
focusses only on these statements. Of the responding managers, 78 percent express
agreement that dividend changes provide signals about a firm’s future prospects (S19)
and more than 90 percent agree that a firm should adequately disclose to investors its
reasons for changing its dividend policy (S20). More than 70 percent of respondents also
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express agreement on the effect of dividend changes on stock prices (S21 and S22).
Specifically, these respondents believe that a firm’s stock price usually falls when it
unexpectedly cuts or omits its dividend (S21) and a firm’s stock price usually increases
when it unexpectedly increases its dividend or pays a dividend for the first time (S22). In
general, this evidence supports the signaling theory. The high ownership concentration in
Indian firms may help to explain the sensitivity that respondents hold involving the effect
of dividend changes on in a firm’s stock price.
Although respondents appear to recognize that dividend changes can convey
information to financial markets, Table II shows that using dividends as a signaling
mechanism ranks last among the 21 factors influencing dividend policy. Respondents
generally agree that dividends may send a signal about the future but this not the same
as saying that the board sets dividend policy with the primary purpose of sending
a signal. Hence, signaling could simply be a desirable consequence of a firm’s
dividend policy
Panel C of Table IV provides the responses to three statements about agency theory
(S27, S28, and S29), but only S27 is statistically significant from 3 (no opinion).
Respondents express a high level of no opinion for all three statements: 35.0 percent for
S27, 40.0 percent for S28, and 30.0 percent for S29. On average, respondents disagree
that the payment of dividends forces a firm to seek more external financing, which
subjects the firm to scrutiny of investors (S27). Similar to Canadian managers (Baker
et al., 2007), respondents from Indian firms do not support the agency argument for
cash dividends. This observation could be attributed to greater emphasis on
compliance to corporate governance norms by Indian companies. Another explanation
for the responses could reflect an unwillingness to recognize or admit the existence of
agency problems. Previous survey studies indicate that Indonesian (Baker and Powell,
2012) and US managers (Baker and Powell, 2000; Baker et al., 2001) lend mixed or very
little support for the agency theory explanation.
Panel D of Table IV provides survey responses to two statements about taxes and
clientele effects (S25 and S26) but only S25 differs significantly from 3 (no opinion).
About 68 percent of respondents express agreement that investors are attracted to
Indian firms that have dividend policies appropriate to their particular tax
circumstances (S25). Taxes may be an important consideration for investors if
dividends and capital gains are taxed at different rates. In India the companies
distributing cash dividends have to pay dividend distribution tax, while investors who
receive dividends do not have to pay taxes on them based on the Income Tax Act of
 MF 1961. US studies show mixed support for the tax preference explanation for paying
41,2 dividends (Baker and Powell, 2000; Baker et al., 2001).
Panel E of Table IV presents how respondents view the life cycle model of dividends.
Almost 86 percent of respondents express agreement that the pattern of cash dividends
generally changes over a firm’s life cycle (S8). Their views are consistent with those
expressed by Indonesian, Canadian, and US managers reported in previous surveys.
200 As Panel F of Table IV shows, almost 66 percent of respondents express agreement
with the statement that a firm should be responsive to the dividend preferences of its
shareholders (S24). This evidence is consistent with an underlying tenet of catering
theory that managers base their dividend decisions on investor sentiment. By contrast,
Canadian managers show little support for catering theory (Baker et al., 2007) but
Indonesian managers do (Baker and Powell, 2012).
Panel G of Table IV presents views on two statements involving financial flexibility
(S31 and S32), but only the mean response for S32 differs from 3 (no opinion) at the
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0.05 level. Only 50 percent of respondents agree that dividend policy decisions are more
flexible than financing decisions because by altering dividend policy, the firm can alter
the mix of internal and external sources of financing (S32). Respondents express highly
mixed views about whether cash dividends represent a fixed cost that impairs financial
flexibility by restricting debt capacity (S31). Overall, the perceptions on the relationship
between financial flexibility and dividend policy are mixed.
Based on the evidence shown in Table IV, respondents appear to agree more
strongly with the signaling, life cycle, and catering hypotheses while showing mixed
support for the bird-in-the-hand, agency, taxes and clientele explanations for paying
cash dividends.

Explanations for share repurchases

Table V reports the views of Indian managers on the level of support they assign to various
explanations for share repurchases. The means of eight of the nine statement relating to
share repurchase differ significantly from 3 (no opinion) at the 0.05 level or greater.
Panel A of Table V presents how respondents view two statements about signaling
theory (S33 and S34). Almost 78 percent of the respondents agree or strongly agree that
share repurchases reveal positive information about the firm’s future prospects (S34).
Around 73 percent support the statement that share repurchases signal the firm’s stock
is undervalued (S33). This evidence is consistent with the findings by Baker et al. (2003),
Bancel et al. (2005), and Brav et al. (2005) that support the signaling/undervaluation theory
for share repurchases.
Panel B of Table V provides the responses to three statements about agency theory
(S35, S36, and S41). Two striking findings are evident. First, a large percentage of
respondents offer no opinion about each statement: 34.1 percent for S35, 40.0 percent
for S36, and 56.1 percent for S41. The mean of S41 is not significantly different from
3 (no opinion) at the 0.05 level. Second, a low percentage of respondents agree with the
agency cost explanation: 48.8 percent for S35, 17.5 percent for S36, and 19.5 percent
for S41. Overall, these statements do not support the agency cost explanation for
repurchasing shares.
Panel C of Table V reports how respondents view takeover deterrence theory. Almost
71 percent agree that the share repurchases serve as an anti-takeover mechanism to ward
off an unwanted bidder (S39), which lends support to the takeover deterrence explanation.
Panel D of Table V shows responses to two statements relating to capital structure
adjustments (S37 and S40). The vast majority of respondents express agreement with
 the statements that share repurchases provide managers with a way to change their Dividend
firm’s capital structure (S37) (75.6 percent) and share repurchases are a useful way to policy in India
alter the corporate gearing ratio (S40) (73.2 percent). Thus, respondents typically
perceive that share repurchases provide a way to adjust their firm’s capital structure.
Findings by Baker et al. (2003) for US firms are generally supportive of using share
repurchases to make capital structure adjustments.
Panel E of Table V provides the responses about share repurchases and flexibility 201
(S38). Almost 76 percent of respondents express agreement with the statement share
repurchases provide flexibility and can be used in an attempt to time the equity market
or to increase EPS (S38). This finding lends support to the flexibility explanation for
share repurchases.
Overall, the evidence shown in Table V shows little support for the agency theory
explanation for repurchasing shares. However, none of the remaining theories
examined seems to be dominant.
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Summary and conclusions

We present new evidence on the perceptions of respondents from dividend paying
NSE-listed firms about the factors influencing dividend policy, dividend issues, and
explanations for paying dividends and repurchasing shares. Some evidence confirms
what is already known from earlier surveys and empirical research. For example, the
evidence suggests that the most important factors influencing dividend policy involve
earnings (i.e. earnings stability and the level of current and expected earnings) and the
pattern of past dividends. These factors appear to be first-order determinants in
making dividend decisions among the responding firms.
Comparing the overall rankings of the 21 factors by respondents from Indian firms
to those of Indonesian, Canadian, and US firms reveals statistically significant
correlations. Not surprisingly, differences exist on specific factors influencing dividend
policy. Although survey evidence shows that some factors are consistently more
important than others, no universal set of factors is likely to be applicable to all firms.
Our results also show that respondents perceive that dividend policy affects firm
value. Almost all agree that a firm should formulate dividend policy to produce
maximum value for its shareholders. This involves finding an optimal dividend policy
that strikes a balance between current dividends and future growth that maximizes
shareholder value. Respondents also view maintaining an uninterrupted record of
dividends as important. Because dividend decisions can affect firm value and
shareholder wealth, dividend policy is worthy of a firm’s attention.
Our evidence supports multiple theories for paying cash dividends with the strongest
agreement involving signaling, firm life cycle, and catering theories with the least support
for agency theory. Although respondents express agreement with multiple explanations
for repurchasing shares including signaling/undervaluation, takeover deterrence, capital
structure, and flexibility, none of these theories appears dominate. Clearly, the least
support is for agency theory.

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Corresponding author
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Dr Sujata Kapoor can be contacted at: sujata.kapoor@jiit.ac.in

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