dividend behaviour final

8/17/2019 Dividend Behaviour Final

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DIVIDEND BEHAVIOUR OF PUBLIC LISTED FIRM IN MALAYSIA

By:

NORHISAM BIN YUSOFF

Thesis Submitted t

Othm!" Ye# Abdu$$!h %&!du!te S'h$ ( Busi"ess)

U"i*e&siti Ut!&! M!$!ysi!

i" P!&ti!$ Fu$(i$me"t ( the Re+ui&eme"t (& the M!ste& ( S'ie"'es ,Fi"!"'e-


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Pe&missi" t Use

In presenting this dissertation/project paper in partial fulfillment of the requirements

for a Post Graduate degree from the Universiti Utara Malaysia (UUM), I agree that

the i!rary of this university may ma"e it freely availa!le for inspection# I further

agree that permission for copying this project paper in any manner, in $hole or in

part, for scholarly purposes may !e granted !y my supervisor or in their a!sence, !y

the %ean of &thman 'eop !dullah Graduate chool of *usiness $here I did my

project paper# It is understood that any copying or pu!lication or use of this project

paper parts of it for financial gain shall not !e allo$ed $ithout my $ritten

permission# It is also understood that due recognition shall !e given to me and to the

UUM in any scholarly use $hich may !e made of any material in my project paper#

+equest for permission to copy or to ma"e other use of materials in this

dissertation/project paper in $hole or in part should !e addressed to

%ean of &thman 'eop !dullah Graduate chool of *usiness

Universiti Utara Malaysia

-.-- UUM into"

0edah %arul man

1


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Abst&!'t

2he Malaysian financial mar"et is governed and regulated !y the *ursa Malaysia

*erhad, an indicator of Malaysian financial mar"et# %ividend policy in Malaysian

companies is often infle3i!le as most of the firms are un$illing to cut or "eep a$ay

from omitting dividend even $hen the company4s earnings are falling# 2his research

e3amined $hether there are any correlation !et$een earnings, firm4s si5e and

liquidity against dividend# 2his research used data from companies from seven

different selected sectors covering over period of si3 years from 1--6 to 1-1# 7rom

the results o!tained, this research confirms that profita!ility, si5es and liquidity are

the important determinants of dividend payment in Malaysia and the influence of

industry on payout decision# 2he companies studied appear to !e reluctant to omit

dividend even $hen they suffers losses#

0ey$ords: dividend, determinant , payout decision

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Abst&!.

Pasaran "e$angan Malaysia ditad!ir dan di"a$al selia oleh *ursa Malaysia *erhad,

yang merupa"an penunju" pasaran "e$angan Malaysia# %asar dividen syari"at

Malaysia sering tida" fle"si!el "erana "e!anya"an firma tida" mahu untu"

mengurang"an atau menjauh"an diri dari meninggal"an dividen $alaupun

pendapatan syari"at jatuh# 0ajian ini menguji sama ada terdapat apa9apa hu!ungan

antara pendapatan, sai5 firma dan "ecairan tunai terhadap dividen# 0ajian ini

mengguna"an data dari syari"at dari tujuh se"tor terpilih !er!e5a yang meliputi

tempoh enam tahun 1--691-1# %aripada "eputusan yang didapati, "ajian ini

mengesah"an !aha$a "euntungan, sai5 dan "ecairan tunai adalah penentu penting

dalam pem!ayaran dividen di Malaysia dan pengaruh industri atas "eputusan

pem!ayaran# yari"at9syari"at yang di"aji "elihatan "e!eratan untu" meninggal"an

dividen $alaupun mere"a mengalami "erugian#

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T!b$e ( C"te"ts

Permission to Use#########################################################################################################ii

!stract####################################################################################################################### iii

!stra"########################################################################################################################iv

ist of 2a!les################################################################################################################3

=;P2>+ &?>###########################################################################################################

# Introduction and !ac" ground of the study####################################################

#1 Pro!lem tatement#########################################################################################6

#8 +esearch &!jectives#####################################################################################-

#: ignificance of the tudy#############################################################################

#< cope and imitations of the tudy#############################################################

=;P2>+ 2@#######################################################################################################8

1# 2ypes of %ividend########################################################################################8

1#1 %ividend Policy###########################################################################################6

1#1# +esidual %ividend Policy####################################################################6

1#1#1 %ividend ta!ility Policy#####################################################################A

1#1#8 o$9+egular9%ividend9Plus9>3tras#####################################################A

1#8 %ividend 2heory##########################################################################################B

1#8# 2a3 Preference 2heory#########################################################################B

1#8#1 Irrelevancy 2heory###############################################################################1-

1#8#8 *ird9in9the ;and 2heory######################################################################1-

1#8#: ignaling 2heory##################################################################################1

1#: %ividend %eterminants################################################################################18

1#:# Profita!ility###########################################################################################1:

1#:#1 i5e of 7irms########################################################################################1.

1#:#8 iquidity###############################################################################################1.

1#< tatistical 2esting#########################################################################################1A

1#. ;ypotheses of the tudy##############################################################################1B

1#6 =onceptual 7rame$or"################################################################################8-

=;P2>+ 2;+>>####################################################################################################8

8# %ata %escription and ample =onstruction#################################################8

.


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8#1 %ata nalysis###############################################################################################81

=;P2>+ 7&U+######################################################################################################8.

:# Introduction##################################################################################################8.

:#1 Percentage of Payers and ?on9Payers#########################################################8.:#8 =ross 2a!ulation +esults#############################################################################8A

:#8# >P and %P########################################################################################8A

:#8#1 +&> and %P#######################################################################################:

:#8#8 ales and %P######################################################################################:1

:#8#: hareholders4 >quity and %P#############################################################:8

:#8#< ?et Profit and %P###############################################################################::

:#: =orrelation nalysis####################################################################################:.

:#:# =orrelation 2esting for ll ector########################################################:.

:#:#1 =orrelation 2esting for =onsumer Product ector###############################:6

:#:#8 =orrelation 2esting for =onstruction ector#########################################:A

:#:#: =orrelation 2esting for Industrial Product ector################################:B

:#:#< =orrelation 2esting for Plantation ector#############################################:B

:#:#. =orrelation 2esting for Properties ector#############################################


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List ( T!b$es

2a!le # Summary of Models Tested in Previous Studies ……………………………3

2a!le #1 Comparison between Imputation System and Single

Tier Ta System …………………………………………………………………!

2a!le #8 Independent "ariable………………………………………………………#####$

2a!le 1# Sample %escription …………………………………………………………##3&

2a!le :# Percentage of Payers and 'on(Payers for t)e Selected Sectors………##3*

2a!le :#1 Cross Tabulation of +PS and %PS…………………………………………#!

2a!le :#8 Cross Tabulation of -.+ and %PS…………………………………………!&

2a!le :#: Cross Tabulation of Sales and %PS………………………………………###!/

2a!le :#< Cross Tabulation of S)are)olders0 +1uity and %PS……………………##!3

2a!le :#. Cross Tabulation of 'et Profit and %PS…………………………………###!!

2a!le :#6 Correlation Matri for 2ll Sectors…………………………………………#!$

2a!le :#A Correlation Matri for Consumer Product Sector………………………##!*

2a!le :#B Correlation Matri for Construction Sector………………………………#!

2a!le :#- Correlation Matri for Industrial Product Sector………………………###!4

2a!le :# Correlation Matri for Plantation Sector…………………………………#!4

2a!le :#1 Correlation Matri for Properties Sector…………………………………#5

2a!le :#8 Correlation Matri for Tec)nology Sector…………………………………


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CHAPTER ONE

INTRODUCTION

121 I"t&du'ti" !"d b!'. 0&u"d ( the study

n organi5ation4s $illingness to pay dividends to their shareholders over the time

can provide a positive message a!out its financial fundamentals and performance# In

general, profita!le companies pay dividends and dividends are generally paid

quarterly# %ividends also are a!le to provide a signal to other potential investors of

$hat the company is really $orth (squith and Mullins, BA8)# cautiously planned

and e3ecuted policy is important to ma3imi5ing shareholder $ealth# %ividend policy

is needed as unpredicta!le dividend announcement $ill drop a !om!shell to the

mar"et participants $hich can result in a drop in the company4s value $hen there is a

selling off# 2hus, a $ell9devised policy could prevent these une3pected

circumstances and safeguard or even !oost company value (alih and laa, 1--)#

%ividend refers to a sum, $hich a firm pays to its shareholders# %ividend payment is

not a cost for a companyD it is an allocation of assets among the shareholders#

;o$ever high9gro$th companies rarely offer dividends !ecause they normally

reinvest the profit so that they can sustain higher gro$th (+oss et al#, 1--.)#

company should not ma"e a decision to increase dividends lightly !ecause it is a

serious commitment# 2hough, organi5ations are not restricted to pay in terms of cash

+esidual %ividend pproach, $here!y firm $ill pay dividends only after meeting its investmentneeds#

B


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dividend to their investor# 2hey are other types of dividend payments such as stoc"

dividend, split dividend and share repurchases# 2here $ere situations $here!y many

high profiles *oard of %irectors decided to return e3cess capital to shareholders !y

offering stoc" repurchase to the shareholders, this $ill result in fe$er shares

outstanding and $ill gave the remaining share a !igger fraction rights in the

company# ome firms possi!ly $ill come to a decision to give dividends in the form

of stoc" or stoc" split# ?either of these actions has economic value as !oth of the

options do not increase investors4 $ealth#

dividend policy is a decision a!out $hen and ho$ much from the portions of

earnings is paid as dividends (+oss et al#, 1--.)# 2here $ere many researchers $ho

have come up $ith theories to e3plain $hy organi5ations should pay or not pay

dividends# 2hey had also produced and empirically tested a range of models to

e3plain dividend !ehavior and the dividend policy adopted !y organi5ations# 2a!le

# !elo$ summari5es the range of models tested in previous studies#

2a!le #

Summary of Models Tested in Previous Studies

-


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N Study 3 Rese!&'h Des'&i#ti"s

;auser (1-8) ife9cycle model is used to predict the pro!a!ility

that a firm pays dividend#

1 Garrett and Priestley

(1---)

*ehavioral model of dividend policy

8 !dulrahman (1--6) tatistical analysis of relationship !et$een >P and

%P via Pearson =orrelation

: Easim l9jmi and

;ameeda !o

;ussain (1-)

intner4s (B


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ystem1# 2his development in the system $ill attract more investors $ith the higher

ta3 !rac"et or the high end investor to invest in a dividend paying company# 2a!le

#1 !elo$ illustrates the comparison !et$een Imputation ystem and ingle 2ier 2a3

ystem#

2a!le #1

Comparison between Imputation System and Single Tier Ta System

Im#ut!ti" System Si"0$e Tie& T!4 System

•Payment of ta3 !y a company is

not a final

• 2a3 is $ithhold from dividend

paid, credited to shareholders

• hareholders $ill !e ta3ed on

gross dividends and to claim

!ac" under section - set9off

• 2rac"ing mechanism through

section -A account

• 2a3 paid !y a company is a final

ta3

• 2a3 $ill not !e a!stracted from

dividend paid, credited or

distri!uted to shareholders

• %ividends are e3empt in the

hands of shareholders

• ?o trac"ing mechanism is

required

In countries $here investor rights are not $ell protected, companies tend to pay

greater amounts of earnings as dividends# s a result, a company $ould usually loo"

at the e3ternal factors in adopting their company dividend policy# 2here are also

internal factors that $ould influence dividend policy# 2he other influencing factors

in determining dividend policy are constraints on dividend payments, investment

opportunities, and alternative sources of capital and o$nership dilution (*esley,

1-)#

1 Under the imputation system, ta3 $ill !e esta!lished on the profit at company4s

level and at the shareholders level# =ompanies are required in advance to calculate

ta3 at the corporate ta3 rate on dividends paid# 2he same income $ould !e ta3edagain if the credit is not imputed to the shareholders ($$$#hasil#gov#my)#

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%o investors prefer high or lo$ payouts 2here are three theoriesD first is the

irrelevant theory $hich states that investors do not care $hether payout is set# ?e3t

is the !ird9in9the9hand theory $hich stipulates that investors prefer a high payout#

7inally, the ta3 preference theory, says that investors prefer a lo$ payout in order to

get gro$th and capital gains# Many researchers have made the study that the changes

in dividend $hen announced $ill often accompanied !y a!normal stoc" price

performance# 2hese in facts indicated that investors have a preference for higher

dividends payout instead# 2here is no empirical testing a!le to determine $hich

theory, if any, is correct# 2hus managers must use their o$n judgment and analysis

$hen setting policy in terms of dividend payment# =onsequently, the changes in

dividend may transmit information a!out the company4s anticipation of potential

performance of the firm and represent an indication a!out the company4s future

earnings# ;ence, the dividend change is implicit to indicate a major change in the

company4s earnings#

In this study $e e3amine the underlying assumption that earnings changes, firm4s

si5es changes, liquidity changes and dividend changes are independent# good

measure of the company4s performance is earnings per share# 7e$ studies have

e3amined the relationship !et$een dividend changes and earnings# @atts (B68)

e3amined the dividend9earnings relationship using annual data# ;e found that

forecasts of future earnings improved only marginally $hen current dividends are

included in the forecasting model# 2anveer (1-1) in his study on the impact of

dividend policy on the share price in the Pa"istan4s !an"ing sector discovered that

the current year earnings per share have a positive relationship $ith the dividend

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payouts for current year# ;e also discovered that the si5e of the firms studied have a

positive influence to$ards dividend distri!ution# ?orhayati et# al# (1-) used =ash

7lo$ per hare (=7P) to measure liquidity and >P together $ith +&> as a pro3y

of profita!ility# =orrelation test $as conducted against %P and associations of

relationship $ere esta!lished !y them# In this study si3 independent varia!les $ere

selected to represent specific measurement# 2a!le #8 provides the summary of $hat

the respective independent varia!les represent#

2a!le #8

Independent "ariable

N I"de#e"de"t V!&i!b$e Re#&ese"ti"0

>arnings per hare (>P)Profita!ility

1 +eturn on >quity (+&>)

8 ales7irm4s i5e

: hareholder >quity< ?et Profit iquidity

2here are three categories of changes in >P to !e identifiedD they are increases,

decreases and negative of company4s earnings# Mean$hile, for +&> the categories

are increase, decrease and 5ero# =hanges in ales and hareholder >quity categori5e

!y increase and decrease of the respective items that represents the changes of the

firm4s si5e# =hanges of the firm4s liquidity are represented !y negative net income,

increase of net income and the decrease of net income#

2he purpose of this research is to study and e3amine the Malaysian companies

trading in the *ursa Malaysia *erhad in their relation of companies dividend

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payments are closely related to changes in earnings, si5es and liquidity# 2he

o!jective is to e3amine the relationship !et$een dividend payment, earning, firm4s

si5e and liquidity and to provide the evidence that the firms decision to$ards

dividend payments are closely related to changes in earnings, si5es and liquidity !ut

ho$ever the firms do not instantly e3clude dividends $hen the a!ove decreases#

125P&b$em St!teme"t

2$o major decisions $ill !e faced !y finance managers, the investment (or capital

!udgeting) and the financing decision# =apital !udgeting focuses on the assets that

the company should o!tain $hile financing focused on the method of financing the

assets to !e attained# third decision $ill !e presented once the company !egins to

generate profit $hich is the distri!ution of profit to the shareholders# s the main

o!jective of managers is to ma3imi5e the $ealth of the shareholders, managers need

to ta"e into consideration the possi!le effect of their decisions on the share price

(*ishop et al#, 1---)#

Previous empirical studies in the developed countries sho$ that, profita!ility can

correlate $ith dividend payout in either positive or negative correlation# *a"er and

Gandi (1--6), in their study on the perception of dividends !y =anadian managers

revealed that the higher the +&>, the larger is the company4s retained earnings for

reinvestment or the lesser is the dividend payment# nupam (1-1) in their study of

Eapanese companies for the year 1--< to 1-- also revealed that +&> has a negative

relationship $ith dividend payment# tudies on panish firms !y lonso (1--


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company4s performance and dividend payout# &liveres, =arlos (1--A) o!servation on

the financial factors influencing cash dividend policy !y U# manufacturing

companies esta!lished that the profita!ility ratios, liquidity ratios and si5e of

companies are the important determinants for dividend payout decision# ;e ho$ever,

revealed that companies $ith high liquidity, profita!ility and larger si5ed pays

greater dividend compared $ith companies $ith lo$er liquidity, profita!ility and

smaller in si5ed# %e$enter, et# al# (BBA) in their study associated dividend policies

of U# and Eapanese firms, !y investigating the correlation !et$een dividend

changes and stoc" returns and the hesitancy to change dividends# 2he results are

consistent $ith the joint suggestions that Eapanese firms faces fe$er information

asymmetry and fe$er agency conflicts than U## firms and those information

asymmetries or agency conflicts affect dividend policy# Eapanese firms e3perience

lesser stoc" price responses to dividend omissions and initiations, in other $ords

they are less hesitant to omit and cut dividends and that their dividends are more

receptive to earnings fluctuations#

>mpirical studies in the developing countries also sho$ that profita!ility can

correlate $ith dividend payout in either positive or negative correlation# 2aher

(1-1) in his study of the determinants of dividends !y *angladesh companies4 and

revealed that >P is negatively correlated against dividend payment# ;o$ever,

l"u$ar (1--B) discovered that company4s profita!ility seemed to have a positive

relationship and a very significant determinant of dividend payment in the Gulf

=ooperation =ountries#

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In Malaysia, there are several studies $hich e3amined the dividend policy and

!ehavior of companies, ?orhayati, (1--


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;e also concluded that $hen earnings decrease, the chances of dividend omissions

are much lo$er than the chances of decreasing the dividend# ;o$ever, the

companies $ill recourse to dividend omissions $hen their earnings are negative and

he esta!lished that the influence of industry on the payout ratios and $ill vary

considera!ly across time

2he study therefore addresses the question $hether profita!ility, liquidity and si5e

are important in determining the dividend payment in Malaysia and $hether it is the

same across the sectors classified in *ursa Malaysia# In other $ords, does the

decision to pay dividend is really influence !y the firms earning, liquidity, and si5e

and can !e concluded across the sectors

126 Rese!&'h Ob7e'ti*es

pecifically the o!jectives of the research are as follo$s

# 2o e3amine the correlations !et$een dividend payout and firm4 profita!ility,

and firm4s liquidity and firm4s si5e across various sectorsD and

1# 2o investigate the determinants in dividend payout in Malaysia#

128 Si0"i(i'!"'e ( the Study

2he study of the correlation of dividend determinant and the payout decision is

important in forecasting the future payment of a firm# @e decided to select >P,

+&>, net income, sales and shareholders4 equity as the determinants of this study, as

these determinants are easy to spot and calculate even !y non9finance educated

individual# 2he increasing popularity of unit trust that emphasi5e on capital gain and

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dividend payment ma"e it necessary even for them to understand on the !ehavior of

dividend payment decision#

%espite the many studies conducted pertaining to dividend payment in Malaysia,

hardly any of them investigate the effect of any of the determinants to$ards dividend

payment across the sectors classified in *ursa Malaysia# 2his study $ill reveal

$hether all the sectors are affected !y any of the determinants and $hether it is

consistent# 2his could help investor in ma"ing their investment decision, especially

during crisis that may have different effect on certain selected sectors#

129 S'#e !"d Limit!ti"s ( the Study

2his study is !asically e3amine on the relationship !et$een the earnings, liquidity,

si5e and dividend changes of only seven selected sector trading in the *ursa

Malaysia *erhad namely the =onsumer Product, =onstruction, Industrial Product,

Plantation, Properties, 2echnology and the 2rading and ervices from out of thirteen

sectors listed companies# 2his is due to the num!er of companies in the sectors that

$ere not selected is too small and might not reflect the statistical significance in this

study# 2he financial data of companies listed must !e a complete si3 years data that

present implication in terms of completeness of the data as some of the companies do

ta"e part in merger and acquisition e3ercise that resulted in changing of company4s

name and non9e3istence of the company itself# =ompanies that recorded 5ero

dividend payout for the consecutive si3 years selected period $ill also !e e3cluded#

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CHAPTER TO

LITERATURE REVIE

In this section, the paper $ill present a fe$ !asic areas of dividend research# It $ill

!riefly discuss a fe$ !asic concept and definitions of the various types of dividend

distri!ution and previous findings concerning dividend trends#

521 Ty#es ( Di*ide"d

%ividends can !e refers to allocations of earnings of firms, $hether those earnings

are made in the present or previous period (+oss et al# 1--.)# &nce a company

generates profit, they have to decide $hether to "eep the profit for capital

investment, e3pansion and etc# or should they pay out dividend to the shareholders#

2here are four types of dividends payout

# =ash dividend 9 the most commonD

1# toc" dividend 9 paid out of treasury stoc"D

8# plit dividend 9similar to stoc" dividendD and

:# hare repurchases 9 $hen company repurchases the stoc"#

=ash dividend means money paid to stoc"holders, usually out of the company4s

current earnings or accumulated profit# 2he !oard of directors must declare all

dividends and are ta3a!le as income to the receiver#

>c"!o, *# >spen and Cerma (BB:) discovered empirical proof sho$s $hen the

voting po$er of the o$ner increase, cash dividend decreases, and almost no dividend

$ere declared $hen o$ner9managers have total voting po$er of the company#

1-


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stoc" dividend is a dividend payment made in the form of e3tra shares, rather than

cash payout# It is also "no$n as a Hscrip dividend4# 2hey are usually issued in

percentage to shares o$ned (for e3ample, for each 1-- shares of stoc" possess, -F

stoc" dividend $ill yield to 1- e3tra shares)

nderson, ;amish % (1--) in their study, analy5e =hina companies for BB191--A,

the mar"et pays more or only stoc" dividends since stoc" dividends seen as a

positive mar"et indicator compared to cash dividends# 2hey also esta!lish evidence

that $hen =hina general mar"et flounders, cash dividend decrease $hile stoc"

dividends increase considera!ly and non9trada!le shares are possessed !y t$o

dissimilar groups $ho have diverse incentives and therefore are li"ely to prefer

different dividend policies# =onsistent $ith that, they also discovered that state9

o$ned shareholders favor cash dividend, $hile legal9person shareholders favor stoc"

dividends#

hino5a"i et# al# (1--) studied Eapanese companies and suggested that companies

$ith stoc" dividends strategy $ill pay greater dividend9to9equity ratios and $ith

higher possi!ilities of dis!ursing or increasing dividends than firms that did not have

such plans# lso, companies considera!ly increase dividend payouts after stoc"

dividends adoptions and price9to9!oo" ratio is positively lin"ed $ith dividend9to9

equity ratio# 2heir results also suggested that in Eapan $here =lassic =orporation

pays lo$ dividends, high dividend payments add to the increased in stoc" prices#

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plit dividend means to split the outstanding shares of the company into a greater

num!er of units $ithout distur!ing the stoc"holder4s initial proportion participating

interest in the firm# 7or e3ample, in a 19for9 split, each stoc"holder $ill receives an

additional share for each share he or she holds#

i, iang, et# al#, (1--.) in their research discovered that +>I2s $ith dividend

fluctuations as the signaling mechanism prior to splits $ill have smaller price

reactions to the private information sho$n !y splits that those do not provide such

signals, consistent $ith the notion that dividends and splits are indeed information

su!stitutes#

hare repurchases means !uying of its o$n shares from the pu!lic !y a company

$ho4s the management !elieves that the shares are undervalued# Its o!jective is to

upturn the mar"et value of the shares !y reducing their num!er accessi!le for

acquisition#

hare repurchases are evidently a more ta3 efficient $ay to return capital to

shareholders !ecause there is no additional ta3 on !uy !ac"s shares# ;o$ever, there

are many !enefits of dividends cash to investors that are not availa!le through share

repurchases# 7or e3ample a cash dividend can !e enormously useful for a pensioner

$ho needed cash for their daily use# ome of the disadvantages of share repurchases

are that it may signal to their investors that the company4s investment are limited and

that the company may pay higher price to repurchases shares# *rav, et# al# (1--


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525 Di*ide"d P$i'y

If a company decides to pay dividend to their shareholders and investors, they $ould

either follo$ the high or lo$ method# 2here are three approached of dividend9paying

method, first is residual, sta!ility or a com!ination of the t$o policies#

52521 Residu!$ Di*ide"d P$i'y

2he residual dividend policy suggests that dividend payments should !e o!served as

residual, meaning that the amount availa!le after all accepta!le or positive ?PC4s

investment opportunities has !een underta"en (lli et# al#, BB8D 0eo$n et# al#,

1--1)# s a conclusion, companies using the residual dividend policy prefer to rely

on equities that are generated internally to finance ne$ prospects# +esulting from

that, dividend payment $ill !e made from the residual or leftover, after every

investments requirement are met and causing the dividend payment made to !e

unsta!le from years to years depending on availa!ility of ne$ investments

opportunities# 2hese companies $ill usually attempt to preserve !alance in their de!t

to equity ratios prior to announcing any dividend payments, $hich sho$s that they

$ill only decide on dividends if there is sufficient money availa!le after all operating

and e3pansion e3penses are met# In his study, Eensen (BA.) discovered that

investment opportunities are an important factor in dividend decision# =ompanies

$ith higher gro$th $ill need to maintain minimum payout, this $ill avoid e3ternal

financing cost (;older et# al# BBA) this policy minimi5es ne$ equity issues and

hence flotation and signaling cost#

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52525 Di*ide"d St!bi$ity P$i'y

2he insta!ility of dividends resulted from the residual policy noticea!ly distinguish

$ith the firmness of dividend sta!ility policy# +esearchers have studied on the

relationship of dividend sta!ility $ith the ris" factor# 2he sta!ility of the underlying

cash flo$ has !een points out !y sta!le dividend, e3plained onto lo$er level of

impro!a!ility and !usiness ris", $hile inconsistent dividend stream $ill cause the

fluctuation of cash flo$ in the hands of shareholders# @ith the sta!ility policy firms

may decide to choose a cyclical policy that sets dividend at a flat portion of quarterly

earnings, or it may choose a sta!le policy $here!y dividends are set at a part of

yearly earnings# >ither $ay, dividend sta!ility policy is a mean to reduce uncertainty

for investors and to gives them $ith a steady income from the dividend payment#

amad et# al#, (1--6) in their paper e3amines $hether there is a significant impact

lin"ing a sta!le dividend policy and firm performance of 1- stoc"s from seven

selected sectors in Malaysia from 1-- to 1--


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small fraction of yearly profits and can !e easily preserved# *eside the portions

mentioned, these companies $ill give an additional e3tra dividend that $ill !e paid

only $hen income surpasses the general levels# 2he disadvantage of this approach is

the potential for negative signaling# =ompany using this approach $ould usually pay

a predicta!le dividend every year $here!y in years $ith good earnings they $ould

pay their investors a !onus dividend#

526 Di*ide"d The&y

2his section $ill discuss the theories $hich e3plain certain !ehavior of dividend4s

payment !y firms# mong others, the most reno$ned theories are 2he 2a3

Preference 2heory, Irrelevancy 2heory, ignaling 2heory and 2he *ird in a ;and

2heory#

52621 T!4 P&e(e&e"'e The&y

"pomi, et# al# (1--A) study the impact of ta3es on dividend policy of ?igerian

!an"s and identified pattern of past dividends, $hich focused on preserving a target

capital structure, certain degree of financial leverage, shareholders desires for

dividend income# 2he analyses for the study sho$ a considera!le association

!et$een ta3es and dividend structure of the !an"s and also proposed that income is a

main determinant in the development of dividend policy of the organi5ations# 2he

study sho$s significant impact of income on dividend and a positive relationship

connecting profit, ta3 and dividend#

1.


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52625 I&&e$e*!"'y The&y

Merton Miller and 7ranco Modigliani (B.1) developed a theory called irrelevancy

theory dividend policy that sho$s that in perfect financial mar"ets meaning that

$hen there is no ta3es and no transactions cost e3ist the value of a firm $ill not !e

affected !y the dividends distri!ution# 2heir argument is that value is determined

only !y the future earnings and ris"s of its investments# In summary, Merton Miller

and 7ranco Modigliani argues that retaining earnings or paying investors and

shareholder dividends $ill not give impact to the firms value, its cost of capital and

also that dividend policy does not affect the required rate of return on equity#

;o$ever, if dividends do affect value, it is mainly !ecause of the information

content that signals the management4s future e3pectations# In their recent research,

%engelo and %engelo (1--.) underlined that Miller and Modigliani4s (B.1)

evidence of dividend irrelevance is !ased on the hypothesis that the amount of

dividends allocated to shareholders is equal or greater that the free cash flo$

produced !y the fi3ed investment policy# In their research, they also declared that if

retention is permissi!le, dividend policy is not irrelevant and that the "ey assumption

is not retention !ut is the ?PC of the additional funds (either retained or raised), if

?PC is 5ero, dividend irrelevance applies#

52626 Bi&d;i";the H!"d The&y

s a response to Miller and Modigliani4s dividend irrelevance theory, Myron Gordon

and Eohn intner suggested that shareholders and investors favor current dividends

and that a positive correlation lin"ing dividends and company4s mar"et value e3ist#

2he fundamentals supporting this theory is the !ird9in9the9hand argument $hich

16


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suggested that investors are usually ris"9averse and attach fe$er ris" to e3isting

dividends in comparison to future dividends or capital gains since e3isting dividends

have smaller ris", therefore investors prefers dividends# Under the !ird9in9the9hand

theory, stoc"s $ith high dividend payouts are sought !y investors and consequently

command a higher mar"et price#

52628 Si0"!$i"0 The&y

ignaling theory $as deduced !y squith and Mullins (BA8) that the positive stoc"

price move on a dividend initiation as a confirmation that managers use the ne$s as

a means of signaling their investors as $ell the shareholders# @atts (B68) studied

that the impact of dividends on !oth stoc" prices and future earnings to see $hether

dividends contained any information for investors# @atts found that after

conditioning on current and past earnings, dividends could not !e used !y investors

to relia!ly predict future earnings and thus concluded JK#in general, the information

content dividends can only !e trivialL# ;o$ever *hattacharya (B6B) argues that

!ecause a company4s future cash position is determined !y the quality of the projects

in $hich it invests today, the only $ay that it $ill commit to a high level of

dividends is if those projects are high quality# 2herefore, managers can signal their

optimism regarding project quality to investors !y declaring a sustaina!le and

prefera!ly high level of dividends#

In line $ith *hattacharya proponents are Miller and +oc" (BA


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dividend to its investors and shareholders# 2hus, in order for a company to !e

considered a credi!le signal of good ne$s, it must !e large enough so that only

company that has good prospects can afford to pay it# =ompanies do not $ant to cut

dividend, so they $ill not ma"e any decision to raise dividends unless they feels the

increase can !e sustain# ;ence, investors vie$ dividend increases as a signal of

management4s positive vie$ of the future earnings# If a firm4s stoc" price suddenly

increase at the time it ma"e an announcement of an increase in dividend payment,

these could reflect the e3pectations for a higher future earning, not a preference for

dividends over retentions and capital gains# In contrast, a cut in dividend $ould !e a

negative signal and reflects that the company is not confident of their future

earnings# 2he signaling impact constraint dividend decisions !y imposing huge cost

on a dividend cut and !y discouraging companies from raising dividends unless they

are sure a!out their future earnings# =ompanies tend to raise dividend only $hen

they are sure that their future earnings can comforta!ly maintain a higher dividend

level and they cut dividend only as last resort# ince those regular dividends can !e

used !y managers to provide signal or information a!out future prospects, thus in

practice, it is too e3pensive to signal $ith dividends# l9'ahyaee, et# al# (1--) on

their study results sho$ that announcements of dividend increases are usually

associated $ith the increased in stoc" prices, $hile announcements of dividend

decreases $ill cause the decrease in stoc" prices#

7e$ studies compare the mar"et reaction to different cash payout methods# =hoi and

=hen (BB6) sho$ results indicating that tender9offer repurchases elicit a more

positive stoc" price reaction upon announcement than increases in regular dividends#

More recently, and after controlling for payout si5e and the mar"ets e3pectation

1B


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a!out cash flo$ shoc"s, Guay and ;arford (1---) present results indicating a higher

positive mar"et response to dividend increases $hen compared to open mar"et

repurchases# ;o$ever, these studies involve essentially the treatment of only t$o

payout methods# n e3ception is ie (1---) $ho studies three payout methods !ut

on a distinct !asis2 7or firms paying large special dividends, he finds that their

announcement residuals are related to their e3cess funds and investment

opportunities# ;e o!serves a similar relation for self9tender offers and no significant

relation $hen increments in regular dividends are considered

7ran"lin and ntonio (BBA) argue that the clientele effect $as the very reason for

the presence of dividends# 2his paper designs an empirical $or" to investigate the

determinants of corporate dividend policy# It sho$s that companies pay dividend as

a signal to reduce agency cost and it also sho$s that liquidity and ta3 clientele effect

are related to dividend policy#

528 Di*ide"d Dete&mi"!"ts

Industry of different sectors applies a different dividend policy# In a classic study,

Eohn intner4s (B


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52821 P&(it!bi$ity

2he finding from intner4s (B


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associated $ith the dividend payout# 2hese sho$ that the companies invest in their

assets rather than ma"ing dividend payment# *a"er and Gandi (1--6) also

discovered the similar resultD they confirmed that the higher the company4s return on

equity, the greater the retained earnings# 2hus, the dividend payout ratio is lo$er#

nupam (1-1) studied Eapanese companies for the year 1--< to 1-- also

discovered that +&> has a negative relationship $ith dividend payout# &liveres,

=arlos (1--A) studied the financial factors influencing cash dividend policy !y U#

manufacturing companies confirmed that the profita!ility ratios, liquidity ratios and

si5e of companies are the important determinants for dividend payout decision# ;e

ho$ever, discovered that companies $ith high liquidity, profita!ility and larger si5ed

pays higher dividend compared $ith companies $ith lo$er liquidity, profita!ility

and smaller in si5ed# imilar empirical studies !y 0un i and =hung ;ua (1-1)

concluded that companies are more li"ely to raise their dividends payout if they are

profita!le# 2hey sho$ that profita!ility have a positive relationship $ith dividend

payout ratio# l"u$ar (1--B) in his research discovered that company4s profita!ility

ratio have a strong positive relationship $ith dividend payment# 2he correlation

inde3 is 1#AB, concluded that one unit increase in profita!ility $ould increase 1#AB

units in dividend payment# Upon studying the companies on audi ra!ia toc"

>3change, 2ur"i and hmed (1-8) discovered that >P has positive relationship

$ith %P# o $hen >P increase, %P $ill also increase# imilar study $as

conducted !y Mohammed and Mohammed (1-1) on Industrial =orporation listed in

mman toc" >3change discovered that >P has the most significant effect on %P#

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payment higher than the free cash flo$# 2his finding is the result of the ruling made

!y the security commission of =hina in 1--- $hich rules that listed companies must

pay cash dividend in the past three years# 2he shortage of cash $ill !e financed

through selling shares or right issue#

f5a (1--) in his study of -- companies listed at the 0arachi toc" >3change

(0>) found that managerial and individual o$nership, cash flo$ sensitivity, si5e

and leverage to have negative correlation# 7irms $ith high proportion of shares held

!y managers and individual are more reluctant to pay high dividends if to !e

compared $ith firms that have lo$ proportion of shares held !y managers and

individual# ;igh operating cash flo$s increases companies4 pro!a!ility to pay high

dividend# >ven though the sensitivity of cash flo$ resulting in the reduced of

dividend payoutD it is still among the determinants of dividend payment in Pa"istan#

=ompanies $ith profits that are unsta!le pay little cash dividendsD this is to maintain

cash in the company in order to avoid the cost of e3ternal financing, this has !een

concluded !y *a"er and @urgler (1--1)# 2hus, $ith the assumption that all the net

profit is reali5ed, $e can conclude that the change in net profit is consistence $ith

the change of cash flo$ in a company# hmed and Eavad (1--B) emphasi5e that

liquidity situation is a significant determinant of dividend payouts decision#

=ompanies $ith high liquidity are li"ely to pay dividends if compared $ith

companies that have lo$er liquidity# Payments of dividend depend highly on cash

flo$s $hich reflect the companyHs capa!ility to pay dividends# poor liquidity

situation $ill mean fe$er dividends due to lac" of cash# ;afee5 and ttiya (1--A)

discovered that the mar"et liquidity of the companies has a positive influence

8:


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to$ards dividend payout $hich confirms that companies $ith greater mar"et

liquidity pay more dividends

529 St!tisti'!$ Testi"0

Generally, in finding the results of our study $e used Pearson chi9square statistical

test to tell $hether our results are significant# chi9square test is used $hen $e

$ant to see if there is a relationship !et$een t$o categorical varia!les# lso,

Pearson chi9square is a!le to tell us $hether to reject or to accept the proposed null

hypotheses and alternate hypotheses# 2he null hypothesis states that there is no

considera!le dissimilarity !et$een the e3pected and o!served result# =hi9square is

the sum of the squared difference !et$een o!served and the e3pected data, divided

!y the e3pected data in all possi!le categories# Pandey (1--8) in his study used the

cross9ta!ulation method in e3plaining the relationship !et$een earnings and

dividend# =hanges of earnings $ere categori5ed as increases, decreases and negative,

$hereas changes in dividend categori5ed as increases, no change, decreases and

omission# ?orhayati et# al# (1-) employed the correlation test to study the

relationship of %P, >P, +&> and =7P#

&n the other hand, multinomial logit model is the suita!le approach in determine the

relation of earnings changes and dividend changes# Eolls (BBA) considers a model

!ased on multinomial logit approach in her research of the importance of stoc"

options in the choice !et$een repurchases stoc" and increase dividends# ;er findings

sho$ that companies $ith e3ecutive4s stoc" option are more li"ely to su!stitute stoc"

repurchase than to increase dividends# 0ama"ura =orporation (1--) in their

8


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research confirmed that multinomial logit is a po$erful tool for the simulation of

mutually e3clusive events $hich can !e driven !y common casual factors# @ith the

lac" of understanding of this model, multinomial logit $ill not !e used in this

research#

52= Hy#theses ( the Study

*ased on the discussion on the literature revie$ of studies pertaining to the

determinants of dividend payment, the follo$ing hypotheses are developed for this

study#

;o %ividend payout is positively correlated $ith profita!ility of a firm#

;1o %ividend payout is positively correlated $ith liquidity of a firm#

;8o %ividend payout is positively correlated $ith si5e of a firm#

;:o 2he correlations of dividend payout and profita!ility, liquidity and si5e are

similar across all industries#

;P and +&> representing profita!ility

of a firm to prove ;o is true# ales and hareholder equity used to represent si5e in

order to prove that ;1o is true and net profit to represent liquidity to prove that ;8o

is true#

8.


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%ividend Payment

Profita!ility

+&>

>P

7irm4s i5e

aleshareholder4s >quity

iquidity

?et Profit

Independent Caria!les %ependent Caria!les

52> C"'e#tu!$ F&!me/&.

*ased on the discussion on the dividend4s determinant, 7igure 1# !elo$ sho$s the

illustrated representation of the conceptual frame$or" of the study# 2he underlying

theory for this study is the signaling theory, $here!y firms $ill send signal to the

shareholders of the firm4s future prospect# 2he determinants of dividend payment are

as discussed in the hypotheses section earlier, namely, profita!ility factor, si5e of the

firm factor, and liquidity factor#

6igure /#&:

Conceptual framewor7 of t)e study

86


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CHAPTER THREE

RESEARCH METHODOLO%Y

2his =hapter discusses the research method to !e carried out in order to test the

hypotheses of this study# 2his study $ill employ quantitative research method

$here!y data $ere collected and analy5e using P version 1-#

621 D!t! Des'&i#ti" !"d S!m#$e C"st&u'ti"

In the study on the dividend !ehavior of Malaysian companies trading in the *ursa

Malaysia *erhad, financial data of companies listed on the *ursa Malaysia *erhad

$e!site $ere used# 2he financial data of the sample companies $ere do$nloaded

from *ursa Malaysia *erhad $e!site for the research purposes# 7or each sample

company, the si3 years financial data $ere compiled and earnings per share (>P),

return on equity (+&>), sales, shareholders4 equity, net profit and dividend per share

(%P) $ere used#

2a!le 1#

Sample %escription

ector ?um!er of =ompanies

=onsumer Product A-

=onstruction 1<

Industrial Product


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ll companies in the financial sectors, trusts and closed9end funds $ere e3cluded as

these companies are generally governed !y different rules and practices $ith regard

to earnings management# ny dividend to !e declared !y financial institutions must

first !e approved !y =entral *an" of Malaysia (*?M)8 as stated in the *an"ing and

7inancial Institutions ct BAB (*7I)# 2he same provision is also stated in the

ne$ly enacted 7inancial ervices ct 1-8 (7) that came into force in 8- Eune

1-8:#s for the rest of the sector, there are no specific rules governing the

distri!ution of dividend# =ompanies can freely decide the distri!ution of dividend#

2he =ompanies act B.< only mentioned that dividend should !e distri!uted from

profit !ut does not mentioned $hether it is from current or accumulated profit# 2he

selected companies should !e continuously !een listed on the *ursa Malaysia

*erhad and have their financial audited data pu!lished on the *ursa Malaysia *erhad

$e!site for the consecutive si3 years#

625D!t! A"!$ysis

2he research o!jective of this study is to o!serve the !ehavior of the Malaysian

companies trading in the *ursa Malaysia *erhad in terms of their earnings, liquidity

and si5e changes and change on dividend payments across sectors# 2he purpose of

this study is to investigate these relationships using structural change methodology

that adjusts for a situation in $hich the variance of the dependent varia!les varies

across the data# 7urthermore, to e3amine theoretically the mechanism !y $hich

dividend payments serve as an indication of changes on company4s earnings# >P

8 Under *7I BAB, ection


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changes are categori5ed into increases, decreases and negative earnings# +&>

changes are categori5ed into increases, decreases and 5ero changes# ?et profit

changes are categori5ed into decreases, increases, maintain and negative# *oth sales

and shareholders4 equity are categori5ed into increases and decreases# =hanges in

dividend are categori5ed into increase, no change, decrease and omission#

2here are many factors influencing the changes of dividends payments# &ne of the

factors is the effect of ta3 reduction# *ased on many past researchers, it $as found

that there $as a statistically significant increase in the num!er of companies raising

their dividends due to the effect of ta3 reduction# %e$enter, 0athryn # and @arther,

Cincent (BBA) in their study compared dividend the policies esta!lished !y the

U# and the Eapanese firms, !y e3amining the association !et$een the dividend

changes and stoc" returns and the un$illingness to adjust dividends payout# 2he

results o!served are constant !y means of the shared hypotheses that Eapanese firms

faced a lesser amount of information asymmetry and lesser agency arguments than

U## companies and those information asymmetries or agency arguments have an

effect on dividend policy# Eapanese companies face lesser stoc" price responses to

dividend e3clusions and initiations, as a conclusion they are less hesitant to e3clude

and cut dividends and that their dividends are quic"er to respond to earnings

changes#

2his study $ill e3amine ho$ firms4 decisions to change dividend payment are

affected !y changes in earnings, liquidity and si5e# =hanges in earnings and

liquidity can !e categori5e in three different $ays, $hich are increases, decreases

:-


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and negative earnings or liquidity $here!y changes in si5e can only !e categori5e

into increase and decreases#

In testing the relationship the changes, statistical tests in the form of correlation and

regression $ere conducted to determine $hether profita!ility, si5e and liquidity give

impact to the distri!ution of dividends across the sectors in Malaysia# In their study

in analy5ing the determinants of dividend payment for the top 1-- companies listed

on the Malaysian share mar"et, ?orhayati et al (1--


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*ased on I#M# Pandey researched on Malaysia firms from year BB8 to 1--- $e

hope to compare $ith this research findings and to confirm that the pattern on the

relation of earnings changes and dividend changes are still the same for the year

1--6 to 1-1# =onsequently, the dependent varia!le is represented !y dividend

payment changes measuring the relationship to$ards the changes on earnings, si5e

and liquidity and the independent varia!les is the changes on earnings, changes on

si5e and changes on liquidity#

:1


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CHAPTER FOUR

RESULTS AND FINDIN%S

821 I"t&du'ti"

In the previous chapter, the research methodology used in this study has !een

discussed# 2his section discusses the findings of this research# 2he organi5ation of

this chapter is as follo$s# ection :#1 descri!es the overall position of the dividend

payment !y companies across the selected sectors !ased on dividend9paying versus

non dividend9paying companies# ection :#8 discusses the results of cross ta!ulation

among all the varia!les used in this study# ection :#: presents the correlation

analysis of all the varia!les !ased on the sectors in the stoc" mar"et and section :#<

provides the conclusion of the chapter#

825 Pe&'e"t!0e ( P!ye&s !"d N";P!ye&s

In this section present the overall position of the dividend payment !y companies

across the selected sectors !ased on dividend9paying versus non dividend9paying

companies# comparison of percentage of payers to non9payers $as analy5ed on a

yearly !asis from availa!le data#

:8


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2a!le :#

Percentage of Payers and 'on(Payers for t)e Selected Sectors

Se't& 5??> 5??@ 5?? 5?1? 5?11 5?15 A*e&!0e

C"sume&

P&du't

Payers A


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826 C&ss T!bu$!ti" Resu$ts

2his section presents the aggregate frequencies of dividend changes against earnings

changes, liquidity changes and the changes in si5e for the 816 companies in the

sample of the study for . years (1--691-1) through a cross ta!ulation testing# =ross

ta!ulation is a type of descriptive, !ivariate analysis of $hich $e can evaluate the

relationship !et$een t$o varia!les in a ta!le9!ased format# =hi9square test is used as

a determinant $hether there is a statistical significance !et$een the o!served and the

e3pected cases#I#M# Pandey (1--8) in his researched, uses the cross ta!ulation

method and discovered that the pro!a!ility of Malaysian firms omitting dividend

payments is very high $hen they e3perience negative earnings and also that the

firms $ould usually increase %P $hen >P increases# ;e also noted that $hen

earnings decrease, the chances of dividend omissions are much lo$er than the odds

of decreasing the dividend#

82621 EPS !"d DPS

2a!le :#1 is the aggregate frequencies of %P and >P changes of the companies in

the sample of the study for the period of 1--6 to 1-1# 7rom the cross9ta!ulation of

>P and %P changes for the entire sectors selected, it may !e o!served that $hen

>P increase, there are a!out P decrease,

only 86#F cases reduce dividends and a!out A#P fall# 66#P are negative#

:


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2a!le :#1

Cross Tabulation of +PS and %PS

EPS Se't&

DPS

De'&e!se I"'&e!se M!i"t!i" Omissi"

%ecrease

=onsumer ProductNN 8B#21 5?2>

?egative

=onsumer ProductNN -F 6#8F -F B1#6F

=onstructionNN -F


48/114


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dividends and a!out A#F omit dividends# In more than :6F cases, companies

either increase or maintain dividends $hen +&> fall# 6A#F cases of dividend

omission $ere recorded $hen +&> are 5ero#

82626 S!$es !"d DPS

2a!le :#:

Cross Tabulation of Sales and %PS

S!$es Se't&DPS


%ecrease

=onsumer Product 1.#.F 1B#:F #BF 81#F

=onstruction 1.# 1=26 5529

NN-#- level of significance

2a!le :#: is the cross ta!ulation for the changes of sales and %P, o!servation for the

entire sectors sho$s that more than :-F companies either increases or maintain

dividend payment $ith the decrease of sales# 11#


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highly correlated against sale in this sector# 7or the technology sector, even $ith the

increase in sales, :-#:F cases of dividend omission $ere o!served, the highest

compared to other sector#

82628 Sh!&eh$de&s E+uity !"d DPS

2a!le :#<

Cross Tabulation of S)are)olders0 +1uity and %PS

Sh!&eh$de&s

E+uity

Se't&DPS


%ecrease

=onsumer Product 1-F 86#


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82629 Net P&(it !"d DPS

2a!le :#.Cross Tabulation of 'et Profit and %PS

Net

P&(itSe't&

DPS


%ecrease

=onsumer ProductNN :-#AF 1:#.F 6#6F .#BF

=onstructionNN :6#1F A#8F 8-#.F 8#BF

Industrial ProductNN 1.#1F 18#:F 8#AF A#6F

PlantationNN 5?2@

?egative

=onsumer ProductNN -F 6#


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82821 C&&e$!ti" Testi"0 (& A$$ Se't&

2a!le :#6 sho$s the correlation matri3 among all the varia!les used in this study for

all companies in the sample of the study# 2he findings indicate that there are

significant positive correlations !et$een %P and >P, >P and +&>, >P and

shareholder4s equity, %P and net profit, and +&> and net profit# 2his supports the

hypothesis that profita!ility and liquidity are positively correlatedto dividend

distri!ution policy# ;o$ever, the strength of the relationship varies# 2he relationship

of %P and >P, and net profit is $ea"er that the relationship of %P and +&>#

2a!le :#6

Correlation Matri for 2ll Sectors

DPS EPS ROE S!$esSh!&eh$de&s

E+uityNet P&(it

DPS

EPS #18NN

ROE #.


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DPS

EPS #


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DPS

EPS #


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EPS #-.A

ROE #-A #81N

S!$es #


57/114

profita!ility, liquidity and si5e are related to dividend distri!ution policy in the

plantation sector cases# ;o$ever, the strength of the relationship still varies#

8282= C&&e$!ti" Testi"0 (& P&#e&ties Se't&

2a!le :#1

Correlation Matri for Properties Sector


E+uityNet P&(it

DPS

EPS #.:N

ROE #-88 #6A-NN

S!$es #-6 #8A1NN #:1


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correlation reading is small# 2his support the hypothesis that profita!ility and

liquidity is positively correlated to dividend distri!ution policy# 2he strength of the

relationship varies $ith the relationship of %P and +&> $ea"er than the

relationship of %P and >P and %P and net profit#

2a!le :#8

Correlation Matri for Tec)nology Sector


E+uityNet P&(it

DPS

EPS


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ROE #:66NN #.8-NN

S!$es 9#-B #-.: 9#- and net profit are important in

predicting the dividend policy !ehavior of the sectors e3amined# @ith the e3ception

of industrial product sector, >P is an important indicator in all other sectors#

=orrelation !et$een %P and +&> could not !e esta!lished in the industrial product

and properties sector, $here!y the correlation !et$een %P and net profit could not

!e esta!lished !y only consumer product# 2his concludes that profita!ility and


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liquidity is !oth the significant indicator related to dividend distri!ution policy !y

companies in Malaysia#

829 Re0&essi" A"!$ysis

7urther test is needed to positively identify that profita!ility, si5es and liquidity are

determinants of dividend distri!ution policy# Pooled regression analysis $as

conducted to e3amine $hether such a relationship e3isted# 2he result of the

regression is sho$n in 2a!le :#.#

2a!le :#.

Pooled -egression 2nalysis

Coefficientsa

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig. 95.0% Confidence Interval for

B

B Std.

Error

Beta Lower Bound Uer Bound

!

"Constant# $!.!&& .&59 $'.'!5 .00! $&&.() $5.()9

*+E .(!( .0&! .5(9 '.0&! .000 .)(5 .(5,

E-S .0'' .005 .!!, ).9)& .000 .0& .0'

L Sales .0! .'! .&&! !0.((0 .000 '.00! .''(

L S/ares $.!0, .(( $.!(5 $,.)&0 .000 $5.0' $'.!(

et -rofit .00)! .000 .09' .),, .000 .000 .000

a. eendent 1aria2le3 -S

Model Summary

Model * *

S4uare

d6usted

* S4uare

Std. Error

of t/e

Esti7ate

C/ange Statistics

* S4uare

C/ange

8

C/ange

df! df& Sig. 8

C/ange

! .)99a .,, .,( !,.&!) .,, '(&.9'0 5 !95) .000

a. -redictors3 "Constant# et -rofit *+E E-S L S/ares L Sales

7rom the regression results in ta!le :#., it can !e o!served that the adjusted + 1 is

:A#6F, implying that together, all the five independent varia!les selected for the

.-


61/114

study are a!le to e3plain, on average, :A#6F of the variation in the dividend

payments of the firms in the sample of the study# ll the five independent varia!les

are significant in influencing the dividend payments of the firms in the sample of the

study#

2he result of the regression analysis also sho$s that shareholder4s equity have a

negative relationship and the other varia!les have positive relationship $ith dividend

payment# ccording to Mitton (1--:), si5e and gro$th have !een proven to have a

positive relationship $ith dividend payouts# 2his has !een supported !y i and ie

(1--.) that have also concluded that dividends $ill !e cut if the firms have poor

operating income, lo$ cash !alances and lo$ mar"et to !oo" ratio# >riotis (1--


62/114

e3cept for technology sector that recorded only for a!out P, +&> and net profit# &nly

industrial product sector did not sho$ any significant correlation !et$een %P and

+&> and !et$een %P and >P# 2his result is further verified !y the cross

ta!ulation analysis, $here!y the changes in earnings in the industrial product sector

do not significantly cause the changes in %P# 7or e3ample, $hen decrease in >P

$ere recorded 1:#8F and 8-#.F cases still increases and maintain %P# >ven $ith

the negative >P, .#6F cases still maintain the %P $ith 18#8F cases decreases the

%P !ut still made dividend payout#

.1


63/114

2he regression analysis further analy5es the determinants of dividend distri!ution !y

companies in Malaysia# 2he result sho$s that profita!ility, si5es and liquidity are the

determinants $ith the indicators studied e3plain :A#6F of the dividend payments#

.8


64/114

CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

2his section discusses the major findings of the research !ased on the research

o!jectives developed earlier in the study# ection


65/114

>3change (*ursa Malaysia), Pandey discovered that the companies appear to !e

reluctant to decrease or omit dividend $hen earning decreases# 2his might !e

consistence $ith the !ird9in9the hand theory, $here!y investors value dividends

more than capital gains# =ompanies still retain the dividend payment, even $ith the

decrease in earning in order to attract more investors#

2he correlation analysis sho$s that liquidity and profita!ility significantly and

positively correlated $ith dividend payout policy in Malaysia# Most of the sectors

studied sho$ that %P is highly positively correlated $ith >P, +&> and net profit

$ith only industrial product sector did not sho$ any significant correlation !et$een

%P and +&> and %P and >P# 2his concludes that the correlation !et$een %P

and the other varia!les varies across the selected sectors# In their study in analy5ing

the determinants of dividend payment for the top 1-- companies listed on the

Malaysian share mar"et, ?orhayati et al (1--


66/114

statistical testing for si5e varies greatly across the sectors# @e failed to accept ;:o,

$here!y the correlations of dividend payout and profita!ility, liquidity and si5e are

similar across all industries# 2his is due to the fact that the correlation of the

determinants varies across the sectors studied#

7rom the regression analysis o!servation, >P, +&>, sales, shareholders4 equity and

net profit are significant determinants of dividend payments# :A#6F of dividend

payment of companies in Malaysia $as e3plained !y these determinants# In this

regards, this study accept ;riotis (1--


67/114

925 Re'mme"d!ti"

In this study, $e could not esta!lish the relationship !et$een si5e and dividend

payout decision# Payers and non9payers can !e distinguished !y their profita!ility,

investment opportunities, and si5e of the firms according to 7ama and 7rench (1--)#

>vidence from their study suggested that the three main fundamentals mentioned

a!ove are the factors in the decision to pay dividends# Payers usually are large,

profita!le firms, $hile non9payers are smaller firms that are generally less profita!le#

?evertheless, smaller firms have more investment opportunities, and their

investment e3penses are much larger if compared $ith their earnings# ccording to

Mitton (1--:), si5e and gro$th has !een proven to have a positive correlation $ith

dividend payouts# In this regards, future studies to determine the effect of si5e

to$ards dividend distri!ution should !e conducted $ith the selection of appropriate

varia!les# In this study, $e have chosen the changes in sales and shareholders4 equity

as the independent varia!les representing si5e, $hich may not !e appropriate#

In representing liquidity, $e have chosen net profit as the independent varia!les,

!ecause of time constrain and the net profit of companies is easily availa!le# >ven

$ith the relationship esta!lished !et$een net profit and dividend payout, this might

!e false as net profit is related to profita!ility of the company# @e might $ant to use

cash flo$ to represent liquidity in future study as !eing used !y ?orhayati et# al#

(1--


68/114

Re(e&e"'es

nderson, ;amish %#, =hi, Eing,Ing9aram, =hayot and iang, u(1--) toc"

%ividend Pu55les in =hina# Massey U# =ollege of *usiness +esearch Paper ?o# .#

!dulrahman (1--6), %ividend Policy and Payout +atio >vidence from 0uala

umpur toc" >3change, T)e8ournal of -is7 6inance, Col# A ?o# : pp# 8:B9

8.8#

lon*rav, Eohn +#Graham, =amp!ell +# ;arvey and +oniMichaely (1--:), JPayout

Policy in the 1st =enturyL#

lonso, 7inancial decisions and gro$th opportunities a panish firms panel dataanalysis# 2pplied +conomic 9etters, 1--


69/114

*a"er, M# @urgler, E# (1--1)# catering theory of dividends# 8ournal of 6inance,

?ovem!er 6, 9.#

*rav, lon, ;arvey, =amp!ell +#, Graham, Eohn +# and Michaely, +oni(1--3planation of the 2rends in ggregate =orporate Payout Policy#

%e$enter, 0athryn # and @arther, Cincent # (BBA), %ividends, symmetric

Information, and gency =onflicts >vidence from a =omparison of the

%ividend Policies of Eapanese and U## 7irms# 8ournal of 6inance, Eune BBA#

>c"!o, *# >spen and Cerma, avita, Managerial hareo$nership (BB:), Coting

Po$er, and =ash %ividend Policy# 8ournal of Corporate 6inance, Col# , pp#

889.1, BB:#

>layan, 7aye5 #, i, Eennifer, %onnelly, Maureen ># and 'oung, llister @# (1--B),

=hanges to Income 2rust 2a3ation in =anada Investor +eaction and %ividend=lientele 2heory# 8ournal of usiness 6inance < 2ccounting , Col# 8., ?os#


70/114

Eose Manuel *en5inho (1--:), J2he %ividend Policy of 2he Portuguese

=orporations >vidence from >urone3t is!onL 8ournal of International

Conference of +conomics Policies in t)e 'ew Millenium#

0eo$n, # E#, Martin, E# %#, Petty, E# @# cott, %# 7# (1--1)# 7inancial

management Principles and applications (Bthed#)# ?e$ 'or", ?E Prentice ;all#

0un9i # =hung9;ua # (1-1) 2he Impact of =orporate Governance on the

+elationship !et$een Investment &pportunities and %ividend Policy n

>ndogenous $itching Model pproach# 2sia(Pacific 8ournal of 6inancial

Studies (1-1) :, 1I2 plits and %ividend =hanges

2ests of ignaling and Information u!stituta!ility# 8ournal of -eal +state

6inance and +conomics, Col# 8, ?o# 1, 1--.#

Marsh, 2# # and +# =# Merton(BA6), J%ividend !ehaviour for the aggregate stoc"

mar"etL, 8ournal of usiness .-, 9:-#

Mahad$artha, Putunom (1--8), Predicta!ility Po$er of %ividend Policy and

everage Policy to Managerial &$nership in Indonesia n gency 2heory

Perspective# 8urnal+7onomidanisnis Indonesia, Col#A, ?o#8, 1--8#

Magni, =arlo l!erto (1--6), +elevance or Irrelevance of +etention for %ividend

Policy Irrelevance (?ovem!er :, 1--6)# International -eview of 2pplied

6inancial Issues and +conomics, Col# 1, ?o# 1, pp# 18191:6, 1--#

Mohammed # and Mohammed M (1-1) 7actors ffecting %ividends Policy

%ecisionsD n >mpirical tudy on Industrial =orporations isted in mman

toc" >3change# 8ournal of Contemporary -esearc) in usinessCol :, ?o <

?orhayati et al# (1-), >mpirical nalysis of %eterminants of %ividend Payment

Profita!ility and iquidity, ccounting +esearch Institute, University

2e"nologi M+, Malaysia#

?orhayati, M# (1--3perience# IIM @or"ing Paper ?o# 1--99-#

6-


71/114

Pierce, %# # and # %# ;augh(B66), J=ausality in temporal systems

=haracteri5ations and a surveyL, 8ournal of +conometrics vidence from *ursa

Malaysia# /t) 2ustralasian 6inance < an7ing Conference /* #

hino5a"i, hinya and Uchida, 0onari (1--), %o toc" &ption +e$ards Increase

%ividend Payments ?e$ >vidence from Eapan#

2aher # (1-1) %eterminants of dividend payout policy >vidence from *angladesh# International 8ournal of +conomic Practices and T)eories, Col# 1,

2ur"i # hmed (1-8) %etermination of %ividend Policy 2he >vidence from

audi ra!ia# International 8ournal of usiness and Social Science Col# : ?o#

Urrutia, Eorge # (BB


72/114

A##e"di4

A##e"di4 1

EPS * DPS Cross Tabulation for Consumer Product

ividend er S/are :otal

decrease increase 7aintain o7ission

E-S

decrease

Count 5, ', &( & !(

% wit/in E-S '9.5% &5.9% !,.% !).'% !00.0%

% wit/in -S )!.!% &(.'% 5.0% &).% '9.&%

% of :otal !5.5% !0.!% (.&% ).% '9.&%

increase

Count ') 9( &' &9 !,5

% wit/in E-S !9.5% 5&.% !&.% !5.(% !00.0%

% wit/in -S '(.9% )9.,% ).0% '!.9% 9.'%

% of :otal 9.)% &5.9% ).!% (.(% 9.'%

7aintain

Count ! ! 0 0 &

% wit/in E-S 50.0% 50.0% 0.0% 0.0% !00.0%

% wit/in -S !.!% 0.(% 0.0% 0.0% 0.5%

% of :otal 0.'% 0.'% 0.0% 0.0% 0.5%

negative

Count 0 ' 0 ', !

% wit/in E-S 0.0% (.'% 0.0% 9&.(% !00.0%

% wit/in -S 0.0% &.&% 0.0% !.,% !0.9%

% of :otal 0.0% 0.,% 0.0% !0.!% !0.9%

:otal

Count 95 !'9 50 9! '(5

% wit/in E-S &5.'% '(.!% !'.'% &.'% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%

% of :otal &5.'% '(.!% !'.'% &.'% !00.0%

Chi-Square Tests

1alue df s;7. Sig. "&$

sided#

-earson C/i$S4uare !9.&),a 9 .000

Li


73/114

Chi-Square Tests


sided#

-earson C/i$S4uare !5'.9&a 9 .000

Li


74/114

increase

Count 0 !0! &( '& &00

% wit/in et -rofit &0.0% 50.5% !'.5% !).0% !00.0%

% wit/in -S &.!% (&.(% 5.0% '5.&% 5'.'%

% of :otal !0.(% &).9% (.&% ,.5% 5'.'%

7aintain

Count & ' 0 0 5

% wit/in et -rofit 0.0% )0.0% 0.0% 0.0% !00.0%

% wit/in -S &.!% &.&% 0.0% 0.0% !.'%

% of :otal 0.5% 0.,% 0.0% 0.0% !.'%

negative

Count 0 ' 0 '( 0

% wit/in et -rofit 0.0% (.5% 0.0% 9&.5% !00.0%

% wit/in -S 0.0% &.&% 0.0% 0.(% !0.(%

% of :otal 0.0% 0.,% 0.0% 9.9% !0.(%

:otal

Count 95 !'9 50 9! '(5

% wit/in et -rofit &5.'% '(.!% !'.'% &.'% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%

% of :otal &5.'% '(.!% !'.'% &.'% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare !.),'a 9 .000

Li


75/114

increase

Count )) !0( '( 5) &))

% wit/in Sales &.,% 0.&% !'.9% &!.!% !00.0%

% wit/in -S )9.5% ((.0% (.0% )!.5% (0.9%

% of :otal !(.)% &,.5% 9.9% !.9% (0.9%

:otal

Count 95 !'9 50 9! '(5

% wit/in Sales &5.'% '(.!% !'.'% &.'% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%

% of :otal &5.'% '(.!% !'.'% &.'% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare ).),5a ' .0,'

Li


76/114

A##e"di4 9

No of Shares * DPS Cross Tabulation for Consumer Product



o of

S/ares

decrease

Count '& )0 &) & !)0

% wit/in o

of S/ares&0.0% '(.5% !).&% &).&% !00.0%

% wit/in

-S''.(% '.&% 5&.0% ).&% &.(%

% of :otal ,.5% !).0% ).9% !!.&% &.(%

increase

Count )' (9 & 9 &!5

% wit/in o

of S/ares&9.'% ').(% !!.&% &&.,% !00.0%

% wit/in

-S)).'% 5).,% ,.0% 5'.,% 5(.'%

% of :otal !).,% &!.!% ).% !'.!% 5(.'%

:otal

Count 95 !'9 50 9! '(5

% wit/in o

of S/ares&5.'% '(.!% !'.'% &.'% !00.0%

% wit/in

-S

!00.0% !00.0% !00.0% !00.0% !00.0%

% of :otal &5.'% '(.!% !'.'% &.'% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare 5.',0a ' .!)

Li


77/114

A##e"di4 =

EPS * DPS Cross Tabulation for Construction



E-S

decrease

Count &0 5 !! 5 !

% wit/in E-S ,.,% !&.&% &).,% !&.&% !00.0%

% wit/in -S (.!% !&.5% (.,% !.'% '&.,%

% of :otal !).0% .0% ,.,% .0% '&.,%

increase

Count 5 ' !! ! )

% wit/in E-S (.,% 5'.!% !(.&% &!.9% !00.0%

% wit/in -S !,.5% ,5.0% (.,% 0.0% 5!.&%

% of :otal .0% &(.&% ,.,% !!.&% 5!.&%

negative

Count & ! ! !) &0

% wit/in E-S !0.0% 5.0% 5.0% ,0.0% !00.0%

% wit/in -S (.% &.5% .'% 5.(% !).0%

% of :otal !.)% 0.,% 0.,% !&.,% !).0%

:otal

Count &( 0 &' '5 !&5

% wit/in E-S &!.)% '&.0% !,.% &,.0% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%% of :otal &!.)% '&.0% !,.% &,.0% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare )).,&a ) .000

Li


78/114

A##e"di4 >

ROE * DPS Cross Tabulation for Construction



*+E

decrease

Count &0 , !& 5 5

% wit/in *+E .% !(.,% &).(% !!.!% !00.0%

% wit/in -S (.!% &0.0% 5&.&% !.'% ').0%

% of :otal !).0% ).% 9.)% .0% ').0%

increase

Count 5 '! !0 ! )0

% wit/in *+E ,.'% 5!.(% !).(% &'.'% !00.0%

% wit/in -S !,.5% ((.5% '.5% 0.0% ,.0%

% of :otal .0% &.,% ,.0% !!.&% ,.0%

zero

Count & ! ! !) &0

% wit/in *+E !0.0% 5.0% 5.0% ,0.0% !00.0%

% wit/in -S (.% &.5% .'% 5.(% !).0%

% of :otal !.)% 0.,% 0.,% !&.,% !).0%

:otal

Count &( 0 &' '5 !&5

% wit/in *+E &!.)% '&.0% !,.% &,.0% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%% of :otal &!.)% '&.0% !,.% &,.0% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare 59.()a ) .000

Li


79/114

A##e"di4 @

Net Profit * DPS Cross Tabulation for Construction



et -rofit

decrease

Count !( ' !! 5 ')

% wit/in et -rofit (.&% ,.'% '0.)% !'.9% !00.0%

% wit/in -S )'.0% (.5% (.,% !.'% &,.,%

% of :otal !'.)% &.% ,.,% .0% &,.,%

increase

Count , ') !! ! )9

% wit/in et -rofit !!.)% 5&.&% !5.9% &0.'% !00.0%

% wit/in -S &9.)% 90.0% (.,% 0.0% 55.&%

% of :otal ).% &,.,% ,.,% !!.&% 55.&%

negative

Count & ! ! !) &0

% wit/in et -rofit !0.0% 5.0% 5.0% ,0.0% !00.0%

% wit/in -S (.% &.5% .'% 5.(% !).0%

% of :otal !.)% 0.,% 0.,% !&.,% !).0%

:otal

Count &( 0 &' '5 !&5

% wit/in et -rofit &!.)% '&.0% !,.% &,.0% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%

% of :otal &!.)% '&.0% !,.% &,.0% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare )'.&(a ) .000

Li


80/114

A##e"di4

Sales * DPS Cross Tabulation for Construction



Sales

decrease

Count !' 9 9 !, 9

% wit/in Sales &).5% !,.% !,.% ').(% !00.0%

% wit/in -S ,.!% &&.5% '9.!% 5!.% '9.&%

% of :otal !0.% (.&% (.&% !.% '9.&%

increase

Count ! '! ! !( ()

% wit/in Sales !,.% 0.,% !,.% &&.% !00.0%

% wit/in -S 5!.9% ((.5% )0.9% ,.)% )0.,%

% of :otal !!.&% &.,% !!.&% !'.)% )0.,%

:otal

Count &( 0 &' '5 !&5

% wit/in Sales &!.)% '&.0% !,.% &,.0% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%

% of :otal &!.)% '&.0% !,.% &,.0% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare (.(,a ' .05!

Li


81/114

A##e"di4 1?

No of Shares * DPS Cross Tabulation for Construction



o of

S/ares

decrease

Count , !5 ' !& ',

% wit/in o

of S/ares&!.!% '9.5% (.9% '!.)% !00.0%

% wit/in -S &9.)% '(.5% !'.0% '.'% '0.%

% of :otal ).% !&.0% &.% 9.)% '0.%

increase

Count !9 &5 &0 &' ,(

% wit/in o

of S/ares&!.,% &,.(% &'.0% &).% !00.0%

% wit/in -S (0.% )&.5% ,(.0% )5.(% )9.)%

% of :otal !5.&% &0.0% !).0% !,.% )9.)%

:otal

Count &( 0 &' '5 !&5

% wit/in o

of S/ares&!.)% '&.0% !,.% &,.0% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%

% of :otal &!.)% '&.0% !,.% &,.0% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare .,5a ' .&!

Li


82/114

A##e"di4 11

EPS * DPS CrossTabulation for ndustrial Product



E-S

decrease

Count &, &( ' && !!!

% wit/in E-S &5.&% &.'% '0.)% !9.,% !00.0%

% wit/in -S 5).0% &,.!% 55.(% '.9% !.!%

% of :otal !0.% !0.0% !&.)% ,.!% !.!%

increase

Count !5 )) &5 &' !&9

% wit/in E-S !!.)% 5!.&% !9.% !(.,% !00.0%

% wit/in -S '0.0% ),.,% !.0% ').5% (.,%

% of :otal 5.)% &.% 9.'% ,.5% (.,%

negative

Count ( ' & !, '0

% wit/in E-S &'.'% !0.0% ).(% )0.0% !00.0%

% wit/in -S !.0% '.!% '.'% &,.)% !!.!%

% of :otal &.)% !.!% 0.(% ).(% !!.!%

:otal

Count 50 9) )! )' &(0

% wit/in E-S !,.5% '5.)% &&.)% &'.'% !00.0%

% wit/in -S !00.0% !00.0% !00.0% !00.0% !00.0%

% of :otal !,.5% '5.)% &&.)% &'.'% !00.0%

Chi-Square Tests


sided#

-earson C/i$S4uare 5!.'a ) .000

Li

dividend behaviour final

Documents