Determinants of Dividend Payout Ratio

Determinants of Dividend Payout-Ratio: A Study of Philippine Stock Exchange-Listed Banks, 2007-2011

Dividend policy is one of the most controversial subjects in finance literature and still `management always ponders about the dividend payment and also why investors need to pay attention on dividend. It is also a corporate profit that is paid out or considered as an income by the corporation to be distributed to its shareholders as a reward for investing. It is also considered as the sharing of recognized assets among shareholders that could either be paid by the corporation or called out by shareholders anytime. However, it is not a business expense for the corporation. Thus, the rules and guidelines used by the corporation to decide on the amount of dividend paid out to their shareholders are according to the corporation’s earnings. This is referred as corporate dividend policy.

The Philippines has a comprehensive banking system encompassing various types of banks, from large universal banks to small rural banks and even non-banks. There are 22 banks or financial institutions that are listed in the Philippine Stock Exchange, 3 of which are Government owned and 14 of which are Private-owned. As of March 31, 2011, there are 19 universal banks, 19 commercial banks, 73 thrift banks, 595 rural banks, 40 credit unions and 15 non-banks with quasi-banking functions, all licensed with the Bangko Sentral ng Pilipinas (Central Bank of the Philippines) under Republic Act No. 8791, also known as the General Banking Act of 2000. Previous empirical studies have focused mainly on developed economies. This study looks at the issue from emerging markets perspective by focusing specifically on Philippines’ Bank Sector.

Problem Statement

“There are many researches done on the subject of dividend policy for many countries but the actual motivation of dividend decision still remains unsolved in corporate finance and puzzled the researchers and corporate managers for many years” (Baker & Powell, 1999). Most of the researches and studies prior to empirical studies on the determinants of dividend payout ratio have been conducted mainly on U.S. firms. And according to Chay and Suh (2005), firms outside the U.S. are operating under different economic and legal environments and thus may exhibit a different set of behavior in their financial activities. Therefore, examining dividend policies of firms outside the U.S. will offer more insights for us into the factors that influence corporate financial decision.

As stated by Chay and Suh, different countries have different cultures, rules and regulations restricted on the dividend policy and are also practicing different policies. As a developing country, Philippines’ still lack the research that investigated on the leading determinants of the dividend policy. Thus, the main purpose of this study is to understand and to find out if the factors selected affect dividend payout-ratio in the Philippines’ bank sector.

Objectives of the Study

1. Determine whether or not the company’s selected variables affect dividend payout ratio. 2. Evaluate and identify the most influential variable for the banks. 3. Find out if this study has the same results to the other related studies.

Limitation of the Study

This study is limited only in the Philippines and the selected banks that are listed in the Philippine Stocks Exchange. There are 7 out of 11 banks considered on this study and these are the banks that gave away dividends from the years 2007-2011. And so far, no work has been done in the Philippines on the determinants of dividend pay-out ratio. So there is a dearth of literature in this field.

Significance of the Study

The significance of this study is to find out on how corporate manager should decide on the dividend policy and what should be considered before they make any decision. The sound dividend policy is very important since a high and regular corporate dividend policy decided by corporate management would create a benchmark for doing well and therefore more dividends can be distributed to shareholders while maintaining the overall health of the company. Also, to provide data for other future related studies in the Philippines. Moreover, it will be interesting to see whether the related studies have the same features or results to the Philippine market.

Review on Related Literature

A. Related Theories


According to the Ross, Westerfield and Jordan (2008), dividend can be defined as cash paid out from current or accumulated retained earnings rather than other sources. This payment of dividend to shareholders depends on the company management’s willingness to distribute their surplus of cash from their net income to shareholders or to retain it for other re-investment opportunities. But in some countries such as Brazil and Chile companies are forced to pay a minimum portion of their earnings to shareholders by law (Brealey 2008).

From the research constructed by many different researchers, the reasons of paying dividends are similar whereby lesser dividend payout will lead to the investing of excess cash flow in projects or acquisitions with insufficient net present value by managers for mature company with highly stable. However, paying out too much of cash dividends may reduce the financial flexibility of high growth firms and force them to pass up valuable investment opportunities due to lack of capital. Thus, either of these situations could negatively affect a firm’s value over time (Baker and Powell, 2000).

Dividend Payout Ratio

The factors that affect dividend payout are the following:

Cash flow

The level of cash flow of a firm is an important determinant of dividend payments. A poor liquidity position means fewer dividends due to shortage of cash. Amidu and Abor found a positive relationship between cash flow and dividend payouts. Anil and kapoor also indicate that cash flow is an important determinant of dividend payout rate. Liu and Hu (2005) in his study of Chinese listed firms found that cash dividend payout ratio of most firms were between 20 to 50 percent, meaning that cash dividend payment was higher than the accounting profit. However, he found that 50 percent of the sample firms had dividend cash payment higher than the cash flow. He attributed this finding to the ruling made by the security commission of China in 2000 which stated that listed companies must have cash dividend payment in the past three years. This shortage of cash was usually financed through selling shares or right issue.

Debt Equity Ratio

Baker and Powell (2001) stated that firms with less financing outside will lower dividend payouts. In his research, he states that firms with higher levels of debt will need higher levels of liquidity to allow payoffs on potential implicit claims and firms will normally choose to use more equity instead of financing outside to avoid costs of financial distress. However, according to leading scholars who investigate dividend policies in developing markets, Aivazian et al. (2003) found that emerging market companies exhibit dividend behavior that are similar to US companies but these dividends are explained by profitability, debt and the market-to-book ratio. Their empirical results from the research provide strong support to the statement in which low debt ratio corresponds to high dividend payments which suggests that financial constraints affect dividend policy.

Operating Income

The amount of profit realized from a business’s operations after taking out operating expenses – such as cost of goods sold (COGS) or wages – and depreciation. Operating income takes the gross income (revenue minus COGS) and subtracts other operating expenses and then removes depreciation. These operating expenses are costs which are incurred from operating activities and include things such as office supplies and heat and power. Operating Income is typically a synonym for earnings before interest and taxes (EBIT) and is also commonly referred to as “operating profit” or “recurring profit.” Calculated as:

Operating Income = Gross Income – Operating Expenses – Depreciation & Amortization

B. Related Methods

Regression analysis

Regression analysis is widely used for prediction and forecasting, where its use has substantial overlap with the field of machine learning. Regression analysis is also used to understand which among the independent variables are related to the dependent variable, and to explore the forms of these relationships. In restricted circumstances, regression analysis can be used to infer causal relationships between the independent and dependent variables.

C. Related Studies

Linter (1956) conducted a classic study on how U.S. managers make dividends decisions. He developed a compact mathematical model based on survey of 28 well established industrial U.S. firms which is considered to be a finance classic. According to him the dividend payment pattern of a firm is influenced by the current year earnings and previous year dividends. Baker, Farrelly and Edelman (1986) surveyed 318 New York stock exchange firms and concluded that the major determinants of dividend payments are anticipated level of future earnings and pattern of past dividends. Pruitt and Gitman (1991) asked financial managers of the 1000 largest U.S. and reported that, current and past year’ profits are important factors influencing dividend payments.

Baker and Powell (2000) conclude from their survey of NYSE-listed firms that dividend determinants are industry specific and anticipated level of future earnings is the major determinant. The liquidity or cash flows position is also an important determinant of dividend payouts. A poor liquidity position means less generous dividends due to shortage of cash. Alli et. al (1993) reveal that dividend payments depend more on cash flows, which reflect the company’s ability to pay dividends, than on current earnings, which are less heavily influenced by accounting practices. They claim current earnings do not really affect the firm’s ability to pay dividends. Anil, K., and Kapoor, S., (2008) work on the determinants of the Dividend payment Ratio in the information technology sector of India. They define that profits of the firms always matter and displayer of the good dividends. According to this research, there is number of other factors which are involve to display the dividend decision possibility like corporate taxes, growth of sales, market to book value ratio and cash flow. With respect to this research it shows that the dividend payment ratio is optimistically associated with cash flow and profit, but it is negatively associated with growth of sales, corporate taxes, and market to book value ratio.

In this research (Anil, K., and Kapoor, S., (2008)) the researcher used Indian sector from information technology to find the determinants of dividend payments, to study it empirically, by using correlation and regression methods to explore the association among the major factors. Furthermore, they explore that if they reroll the earnings in the business so that sector can give better return to its investors, most of the firms working on that pattern and give good results to their investors with good earnings. They also inform that the variables which are in literatures are not enough to explain the pattern of dividend payments of this sector.

They also indicate that IT firm of India has goods capability to give good dividends. Rozeff (1982), Lloyd et al. (1985) and Collins et al. (1996) all showed significantly negative relationship between historical sales growth and dividend payout. D, Souza (1999) showed a positive but insignificant relationship in the case of growth and exhibited negative but insignificant relationship in case of market to book value. Li and Lie (2006) found that the decision to change the dividend and the magnitude of the change depend on the premium that the capital market places on dividends. They also found that the stock market reaction to dividend changes depends on the dividend premium. Thus, the capital market rewards managers for considering investor demand for dividends when making decisions about the level of dividends. Therefore, in our view, a high sensitivity of the stock price to dividend changes should result in a full- dividend-payment solution, while a low sensitivity might lead to dividend cuts or abolishment of the dividend payout. Holder (1998) presented a study regarding the determinants of dividend policies in United States.

The sample consisted of 477 US companies and the time period for the data collection was 1983-1990. The results of the study indicate that there is a positive relationship between dividend payout ratio and size (log of sales) and the free cash flow. Holder states that large companies have easier access to capital markets and should therefore be able to pay higher dividends compared to small firms. Companies with high cash flow also tend to pay higher dividends and the authors’ states that this supports the agency theory, companies with larger cash flow have to pay higher dividends in order to reduce agency conflict. A negative relationship was discovered between dividends and risk (standard deviation of returns) internal ownership and growth (in sales). Gill (2006) conducted a study in the United States. They argue that it is beneficial for companies to pay dividends due to a number of reasons; dividends indicate financial wellbeing, attractive for investors and dividends help to maintain the market price of the stock.

The sample consisted of 266 randomly selected public companies from different industries in United States. The company selected factors in the study are: profit (EBIT /total assets), cash flow, tax (corporate profit /net profit), growth, market to book value and debt equity ratio. There was a positive relationship between dividends and profit and tax and negative relationship between dividends and growth. However, Gill (2006) argues that the impact of the profit is industry specific and varies a lot depending in which industry the company is located. No significant relationship between dividend payments and cash flow, market to book value and debt equity ratio could be established.

This is contrary to previous research which has found a rather strong relationship between cash flow ad dividends. Although dividend policy remains a subject of controversy for many finance scholars, the belief that dividends play a significant role has been illustrated by many empirical studies and behavioral surveys that have been conducted on dividends. A deeper understanding as to the motivation behind dividends would provide opportunity to better value stock, as most current stock valuation models include dividends as a key element. Although the aforementioned literature suggests that dividends provide additional worth to a firm in the eyes of investors, it is unclear what financial factors management uses to support their reasoning behind initiating a dividend policy.



Dependent variableIndependent Variables

Debt equity ratio
Debt equity ratio

Cash flow
Cash flow
Dividend payout ratio
Dividend payout ratio

Operating income
Operating income

Input secondary data in Microsoft Excel from the annual reports of the banks (dividend payout ratio, debt equity ratio, cash flow and operating income) Input secondary data in Microsoft Excel from the annual reports of the banks (dividend payout ratio, debt equity ratio, cash flow and operating income)

Run the regression analysis
Run the regression analysis

Change the variables and re-run the regression analysis
Change the variables and re-run the regression analysis
Model generated is good
Model generated is good
Model generated is not good
Model generated is not good

Generated regression
Generated regression

Evaluation, conclusion and recommendation
Evaluation, conclusion and recommendation
Comparison, Interpretation and analysis of the results
Comparison, Interpretation and analysis of the results

After getting the data needed, input everything in MS excel. Run the regression analysis to generate the regression model. If the model generated is bad, change or add, or remove variables and re-run the regression analysis until a good model is generated. Once a good model is generated, the model will now be used in determining whether the selected variables do really affect dividend payout ratio. In order to determine whether there is a relationship between the dividend payout ratio and the company selected factors, the researcher formulated a number of hypotheses.

Null Hypothesis:

Ho1:cash flow does not affect the company’s dividend payout ratio Ho2:debt equity ratio does not affect the company’s dividend payout ratio Ho3:net income does not affect the company’s dividend payout ratio

Alternative Hypothesis:

Ha4: cash flow affects the company’s dividend payout ratio Ha5:debt equity ratio affects the company’s dividend payout ratio Ha6:net income affects the company’s dividend payout ratio On the basis of the literature review for this research the multiple regression analysis has used because the previous researchers also used the same analysis for that type of research, the researchers are Anil, K., and Kapoor, S., (2008), Baker, H., & Powell, G. (2000), and Kanwer, A., (2003) so the model will examine the impact of Cash Flow, Debt Equity Ratio and operating income on dividend payout. Multiple regression model will be executed. The dependent variable is the dividend payout ratio and the independent factors are Cash Flow, Debt Equity Ratio and Net income. These factors are chosen since these variables are common to other existing studies made on the other countries. The researcher empirically tests the impact of independent variables on the firms’ dividend payout ratio. The relationship is represented by: DPR = bo+b1CF+b2DER+b3NI

DPR=dividend payout ratio
CF=cash flow
DER=debt-equity ratio
NI=net income
Where bo denotes the intercept of the regression equation and b1, b2 and b3 are the regression co-efficient of CF, DER and SG.
The variables that affect the dividend payout are the Cash Flow (CF), Debt Equity Ratio (DDR) and Net Income (NI). This study is conducted on the Philippine banks over a 5 year period from 2007-2011. The banks considered in this study are those who gave out dividends from the years 2007-2011 and are listed in the Philippine Stock Exchange. This study is mainly based on secondary data, which is collected from the Philippine Stock Exchange website, and from the annual reports of the chosen banks.

Regression Results of Empirical Model
R| R square| Adj. R squared| Std. error|
.977| .955| .95| .048|

Regression Coefficients and their Significance
| Regression coefficient| probability|
ConstantX1X2| .592.004-0.028| .001.003.002|

ANOVA results
| Df| SS| MS| F| Significance F|
RegressionResidualtotal| 33134| 1.5280.0721.601| 0.5090.002| 218.373| 0.002|

The results of the regression depicted the two key variables-debt equity ratio and cas flow have significant regression coefficient at 5% level of significance.
R squared value reveals that the existing model explains 95% of the dividend payment pattern of the financial sector since it assumes a value of 0.955. The F value is found to be significant at 5% level of significance suggesting overall applicability of the existing model.



1. Aivazian, V., Booth, l. and Cleary, S., (2003). Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms? Journal of Financial Research, 26(3), pp. 371-387 2. Anil, K., and Kapoor, S., (2008), “Determinants of Dividend Payout Ratios-A Study of Indian Information Technology Sector”, International Research Journal of Finance and Economics, EuroJournals Publishing, Inc. 3. Amidu, Mohammed and Abor, Joshua. (22 March 2006) ‘Determinants of Dividend Payout Ratios in Ghana’, Journal of Risk Finance, Vol 7. 4. Baker, H., & Powell, G. (2000, Spring/Summer2000). Determinants of Corporate Dividend Policy: A Survey of NYSE Firms. Financial Practice & Education, 10(1), 29-40. 5. Gill. A., Biger, N., & Tibrewala, R. (2010). Determinants of Dividend Payout Ratios: Evidence from United States. The Open Business journal, 3, 8-13. 6. Hedensted, J., & Raaballe, J. (2008). Dividend Determinants in Denmark. School of Economics and Management Aarhus: University of Aarhus. 7. Holder, M. E., Langrehr, F. W., @ Hexter, L.J. (1998). Dividend Policy Determinants: an investigation of the influence of stakeholder theory. Journal of the Financial Management, 27 (3), 73-83. 8. Jinho Jeong. (2008). An Investigation of Dynamic Dividend Behavior in Korea, Division of Business Administration, Korea University Working Paper. 9. Lintner, John, (1956), “Distribution of Incomes of Corporations Among Dividends, Retained Earnings and Taxes,” American Economics Review 46 (No. 2, May), 97-1 13. 10. Pruitt SW, Gitman LW. The interactions between the investment, financing, and dividend decisions of major US firms. Finance Rev 1991; 26: 409-30.

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