7 th CLASS OF SEMINAR IN FINANCE DIVIDEND POLICY

1. 7th CLASS OF SEMINAR IN FINANCEDIVIDEND POLICY by: Caroline Eva Mursito 16943

2. Article from the CRP • Title: • The Effect of Asymmetric Information on Dividend Policy • Theory used: • Pecking Order Theory • Signaling Theory

3. Hypothesis: • From the Pecking Order theory: The higher the analyst following, the higher the dividends • From the Signaling Theory: The higher the analyst following, the lower the dividends • Method of analysis: • Tobit model / censored regression • Ordinary Least Square (OLS) • Robustness

4. Variables used in research: • Dependent variable: • Dividend yield (DIVYLD) • Independent variables: • Insider ownership variable • Analyst following • Growth opportunities (MTOB) • The cash flow measure (CFTOB) • The dummy variable • DIST

5. Result of the analysis: • Dividend Policy and Insider Ownership • Dividends are unrelated to the insider ownership variable. • The insider ownership variable contains no additional information when the level of asymmetric information is explicitly controlled with analyst following. • Dividend Policy and Equity Issues: A Further Test of the Pecking Order Theory • Firms that raise funds through external sources, other things equal, must use a higher amount of internal funds (or pay lower dividends) • The amount paid as dividends is negatively related to the amount raised (RELAMT) through the equity offering, which mean that firms that resort to external sources for funds attempt to first exhaust their internal funds by paying lower dividends. • Dividend Policy and Firm Size • Firm size is used as a proxy for asymmetric information and the specification is estimated using a Tobit model with analyst following replaced by firm size. • Size is positive and insignificant, analyst following is insignificant. The insignificance of analyst following are highly correlated, resulting in a substantial overlap between the explanatory powers of the two variables. • Dividend Policy, Asymmetric information, and Issue Costs • Only analyst following and unsystematic risk are significant in the regression, and after controlling for firm size, issue costs are negatively related to analyst following. It means that issue costs increase with the level of asymmetric information between the firm and its investors. • The level of asymmetric information adversely affects issue costs, which in turn are negatively related to dividend, and analyst following appears to have a separate effect on dividend policy apart from firm size and thus rule out a simple size-based explanation of dividend policy.

6. Conclusions: • Hypothesis 1 consistent because there are positive relation between dividends and cash flows, the negative relation between dividends and growth opportunities, and negative relation between dividends and the amount raised through equity issues. • Hypothesis 2 inconsistent

7. Article from Student • Title: • The Impact of Dividend Policy on Stakeholders’ Wealth • The reason to choose this article: • To study the relationship between dividend payout and shareholders' wealth in (Organic and Inorganic) Chemical Companies in India

8. Hypothesis: • There is no significant difference in average market value relative to book value of equity between dividend payers and non-payers of (Organic and Inorganic) chemical companies. • There is no significant impact of dividend policy on shareholders’ wealth in (Organic and Inorganic) chemical companies. • Method of analysis: • Multi-Stage Random Sampling Technique • Multiple regression method • Stepwise regression models

9. Variables used in research: • Dependent variable: • Market Price per Share (MPSit) • Independent variables: • Dividend per Share (DPSit) • Retained Earnings per Share (REit) • Lagged Price Earning Ratio (Pet-1) • Lagged Market Price(MPSit-1)

10. Results of the analysis: • Comparison of Shareholders’ Value between Dividend Payers and Non-Payers among Organic Companies • Comparison of mean values between dividend payer and non-payer under chemical sector (Organic and Inorganic) revealed that the wealth creation in each year does not show any significant difference. However, in the long-run, the difference is highly significant at 1 per cent level (t = 5.49, p < 0.01 for all years). • Relationship between Dividend Policy and Shareholders’ Wealth Dividend Paying Organic Chemical Companies • The impact of dividend policy on shareholders’ wealth of organic and inorganic chemical companies with adoption of dividend policy has been elicited using multiple regression analysis. There are some factors inherent in the market dominated over dividend policy when market has started considering RE and lagged MV of organic chemical companies under chemical sector. • Dividend Paying Inorganic Chemical Companies • The initiation of dividend payout has failed to influence the market value alone.

11. Conclusions: • Hypothesis 1 rejected because in the long-run, wealth of stakeholders of dividend paying chemical companies has increased significantly when compared to that of the dividend non-paying counterparts, which further shows the impact of dividend policy on wealth creation. • Hypothesis 2 rejected because the initiation of dividend payments by the Organic Chemical companies has significant positive impact on their shareholders’ wealth during the last decade.

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