Dynamics and Determinants of Dividend Policy in Pakistan: Evidence from Karachi Stock Exchange Non-Financial Listed Firms

Abstract

This study examines the dynamics and determinants of dividend payout policy of 320 nonfinancial firms listed in the Karachi Stock Exchange during the period of 2001 to 2006. It is also one of the very first examples which try to identify the potential dynamics and determinants of dividend payout in Pakistan by using the well established dividend models in the context of emerging markets. For dynamic equation we used the extended model of Lintner, Fama and Babiak and a ‘proposed’ model in dynamic setting. The results consistently establish that Pakistani listed non-financial firms rely on both the change in dividends and change in net earnings which clearly demonstrate that the firms rely on both current earning per share and past dividend per share to set their dividend payments. However, the study clearly shows that dividend tends to be more sensitive to current earnings than prior dividends. The listed non-financial firms having the high speed of adjustment andlow target payout ratio show the instability to smoothing their dividend payments. To find out the determinants of dividend payout policy, dynamic panel regression has been performed. It has been found that, profitable firms with more stable net earnings can afford larger free cash flows and therefore pay larger dividends. Furthermore, the ownership concentration and market liquidity have the positive impact on dividend payout policy. Besides, the slack and leverage have a negative impact on dividend payout policy. The market capitalization and size of the firms also have a negative impact on dividend payout policy which clearly shows that the firms prefer to invest in their assets rather than pay dividends to its shareholders.