DIVIDEND POLICY AND THE STOCK MARKET REACTION TO DIVIDEND ANNOUNCEMENTS IN PAKISTAN - Part 3

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2.1.6. Payout Determinants

Various late studies have inspected profit payout strategies in Pakistan utilizing the skeleton of Lintner (1956).  For example, Nishat and Bilgrami"s (1994) confirmation backed Linter’s model.  The dissection taking DPS as the variable for a specimen of 225 organizations recorded on the KSE over the period 1980-86; they archived the presence of a halfway modification prepares for organizations moved to another profit payout.

Besides, the creators presumed that there was really a wide scope of identifiable impacts on payouts; for instance, substantial size firms, firms with outside proprietorship and private segment firms declare higher profit payouts. By contrast other informative variables, for example, last year’s benefit, last year’s held profit, net fluid holdings and the change in value possessions had no huge relationship with dividends. A later study by Ahmed and Javid (2009) recorded that Pakistani firms for the most part took after Linter’s model; utilizing regression  dissection with the current profit yield as the variable for 320 non-monetarist firms recorded on the KSE over the period 2001-06. The creators recommended that Linter’s model portrayed the profit conduct of the Pakistani dividends. Their results highlighted target payout proportions going from 25.0% to 39.0% with firms taking from between 1.6 to 2.4 years to get to this target level.

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Rather than these studies, Naeem and Nasr (2007) proposed that a current productivity was not a paramount variable in the determination of Pakistani companies profit arrangements. Utilizing a regression model with “dividend payout ratios” as the ward variable, they found that last year’s profit payout was the most compelling component on a company’s current profit arrangement for the specimen of 108 firms recorded on the KSE over the period 1999-2004. As opposed to Linter’s model, U.S. proves that a current gainfulness was not useful in the investigation; this variable had a positive association with profits that were huge at the 10.0% level for the entire specimen and unimportant for the sub-samples. In addition, the creators recorded a lot of variability and insecurity in the profit installments. The profit for every information on the entire specimen demonstrated that on normal 34.0% of firms did not pay any profit with most firms (38.0%) paying somewhere around 0.0% and 2.5% of income to holders.  Aggression of a large sample is mostly common in all past studies, but no one took emphasis on the process of dividend decision making.

2.1.7. Payouts and Share Returns

Various studies have taken a gander at the effect of profits on offer costs of Pakistani firms. For illustration, Nishat and Irfan (2001) utilized this manifestation of examination to reject  Mm’s (1961) profit immateriality hypothesis for 160 organizations recorded on the KSE over the period (1981-2000). The creators separated their specimen period into a reform (1981-90) and the change time (1991-2000), it was also observed that the profit arrangement did influence offer costs of Pakistani firms in a significant way. The creators utilized profit yields and profit payout as a substitute for profit approach; these were incorporated as autonomous variables alongside income unpredictability, size, long haul obligation and development in a relapse show that endeavored to clarify cost instability. The results demonstrated that both profit yield and profit payout had a fundamentally negative effect on value unpredictability.

The indicating hypothesis of profit strategy in Pakistan were underpinned by Kanwer (2002) that examined the profit approach from 317 organizations recorded on the KSE over the period 1992-98. The creator utilized a relapse model with profit yields as the ward variable; a sham variable was utilized as a substitute for the indicating impact focused around whether profit expanded or diminished later on. The results demonstrated that the sham variable was emphatically connected with profit yield that underpinned the indicating hypothesis that future income had a tendency to be connected with expanded current profit yield. The profit impact was altogether stronger for six out of the ten commercial enterprises inspected. The six commercial enterprises were material, building, bond, fuel and vitality, jute and vanaspati and partnered. In two commercial enterprises (chemicals furthermore sugar) the relapse coefficient for profits was higher than for hold income yet not critical; while the impact on income was stronger in the "other” and “paper and board" commercial enterprises.

Likewise, the discoveries of the relapse model demonstrated that a size had a positive however irrelevant association with profit installments; the current’s year held income and the business to book degree had negative associations with profit having coefficients of -9.7 % and -19.0 % respectively. As of late, Kaleem and Salahuddin (2006) utilized an occasion study procedure to dissect the effect of profit reports at normal offer costs on the Lahore Stock trade; they ascertain MAAR and CAR for a specimen of 24 organizations recorded on the trade over the period 2002-03. Results from the CAR were additionally inconsequential since estimations of -0.6 in 2002 and -0.4 in 2003 were recorded. In spite of the fact that these transient discoveries were inconsequential, the results demonstrated that financial specialists brought about misfortunes of 2.5% in 2002 and 1.7% in 2003 over a period beginning 30 days prior to the profit advertisement and completion seven days after the ex-profit date. By complexity, Zaman (2007) discovered a huge positive effect of profit advertisements on offer costs. Zaman (2007) dissected the effect of distinctive events on offer costs of six exceedingly exchanged organizations recorded on the each of the three-stock trades of Pakistan from June 2000 to June 2005.

The creator utilized a business sector based occasion philosophy, ANOVA and different relapses with a specific end goal to complete his examination. The results demonstrated a huge positive effect of profit and income affirmations on offer costs. Rather than these studies, Mubarik (2008) reported that share costs do not react to the profit publications. The information shows that profit reports and offer costs have frail and negative relationship with each other.  As opposed to different investigations into created what is more developing markets, the results demonstrated an irrelevant negative AAR estimation of -0.002 (t-esteem = -1.8) and a critical negative CAAR esteem (-0.04, t-esteem = -26.8) on the advertisement date. Besides, the estimations of the CAAR around every one of the 20 days of the occasion window were critical and negative. In accordance with Mubarik (2008), Akbar and Baig (2010) found that, the returns are negative for the 41-day window, for money profits. The total anomalous return to day t-1 to t+1 was -0.009 with t-estimation of -2.3. Also, the creators discovered critical positive anomalous returns to stock profit and synchronous money and stock profit advertisements.

2.1.8. Literature of Behavioral Aspect of Dividend Policy

Many researchers are working in developing an understanding about the behavioral aspects of the dividends and dividend policy. This section of the literature involves the information about the fact that why the companies are paying out the dividends when there is tax levied on them (Black, 1976). The dividend payout policy has been affected by the culture, economic policies and the regulations of the countries. Al-Malkawi, Rafferty and Pillai (2010) presented an overview of dividend theories including tax-preference, bird-in-hand, clientele effects, and agency theories. These theories are often used to explain the behavior of investors and senior management of the companies. The study provides an understanding of different dividend policies and presents empirical studies related different dividend policies (Al-Malkawi, Rafferty, Pillai, 2010).

Lintner in 1956 studied the behavioral implications of the dividend policy. He conducted research on 28 companies of the United States and interviewed the executives of the companies. He split the results into two parts depending on the variable that dividend. The first part of the result discussed that the management was cautious about the dividend payments while building the payout strategies. The second part elaborated that the management were no ready to cut the payout as this was the negative signal for the investors. They said that the investors were interested in earnings and dividends both. The dividends were paid out depending on the earning capacity of the dividend (Lintner, 1956).

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Similar to it, the survey from Baker and Powell (1999), gave a strong response to the work of Lintner’s model. They supported the concept of the target payout ratio and the partial adjustments regarding the dividends. Of all, 75 % were of the belief that it resulted in the steady growth and the stability for the dividend (Baker, Powell, 1999).

Bhattacharya (2009) examined the behavior of investors about the dividend information available. Bhattacharya (2009) stated the function of dividends serves as a signal of cash flows. According to Bhattacharya (2009), usually investors-outsiders are unaware of companies’ profit and that capital gains are taxed at lower rates than cash dividends. Bhattacharya (2009) used the model of dividends that helped explain dividend payout rate and investors’ behavior (Bhattacharya, 2009). The main concept of the theory is that the amount of dividends paid to shareholders is either equal or greater than cash flow generated of fixed policy of investments. However, Magni (2007) stated that in retention of dividend policy is relevant. Kinkki (2001) stated that dividend policy has been the most researched issue in finance science. According to Kinkki (2001), the current empirical studies provide weak evidence of the dividend behavior theories. He emphasized the evaluation of existing empirical financial research (Kinkki, 2001).

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