dissertation 47 kim chi
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Dissertation 47 Kim ChiTRANSCRIPT
Dissertation title: Determinants of dividend pay-out
policy: The Effect of Firm and Corporate
Governance Characteristics
Student name: Tien Van Vu
ID number: U1369649
Supervisor: Professor Collins Ntim
2013-2014
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Abstract
This paper is an effort to reveal the insight dynamics for determination of determinants of
dividend pay-out policy with reference to retail companies listed in the London Stock
exchange from 2010 to 2013. In light of prior literature, key explanatory variables were
identified to disclose their relationship and effect on determination of dividend pay-out.
These variables are Firm Size, Financial Leverage, Cash flow per share, Return on Assets,
Board Size, Board Independent, CEO duality, Frequency of Board Meeting and Board gender
Diversity. Through observation, 66 such companies were identified from the listed retail
firms in the London Exchange that have been paying out dividend consistently for the past 4
years (2010-2013). Multivariate Linear Regression Analysis was identified as the most
appropriate tool for econometric analysis of the data. The descriptive statistics revealed the
data to be normal. Results revealed that Firm Size, Board Size, Cash Flow Per Share,
Financial Leverage has positive significant relationship with the dividend payment.
Especially, the Frequency of Board Meeting has shown the negative relationship with
dividend policy. Rests of the explanatory variables were found to be insignificant in context.
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Table Content
Abstract......................................................................................................................................2
Acknowledgement......................................................................................................................6
CHAPTER I: INTRODUCTION AND BACKGROUND........................................................7
1. Introduction and research motivation.................................................................................7
1.1. Research motivation....................................................................................................7
1.2. Introduction..................................................................................................................7
2. The research objects........................................................................................................8
3. The research questions.....................................................................................................9
4. The important of the study...............................................................................................9
5. Structure of the dissertation.............................................................................................9
CHAPTER II: BACKGROUND..............................................................................................12
1. Introduction....................................................................................................................12
2. Background....................................................................................................................12
3. Chapter summary...........................................................................................................14
CHAPTER III: THEORETICAL AND EMPRICAL LITERATURE REVIEW....................15
1. Introduction....................................................................................................................15
2. Dividend policy and its roles.........................................................................................15
2.1. Definition................................................................................................................15
2.2. The roles of dividend policy....................................................................................16
3. The theoretical literature................................................................................................16
3.1. Introduction.............................................................................................................16
3.2. The agency theory and dividend policy..................................................................17
3.3. Stakeholder theory in the relationship with dividend policy...................................18
3.4. Dividend signaling hypotheses and dividend policy...............................................20
3.5. Summary.................................................................................................................21
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4. Empirical literature........................................................................................................22
4.1. Introduction.............................................................................................................22
4.2. The corporate governance factors...........................................................................22
4.3. Firm’s characteristic.................................................................................................35
5. Chapter Summary..........................................................................................................43
CHAPTER IV: RESEARCH DESIGN....................................................................................44
1. Introduction...................................................................................................................44
2. Data and data resource...................................................................................................45
2.1. Data...........................................................................................................................45
2.2. Data resource............................................................................................................46
3. Sample and sample selection criteria............................................................................46
4. Variables and measures.................................................................................................47
4.1. Dependent variables..................................................................................................47
4.2. Independent variables..............................................................................................48
4.3. Control variables.....................................................................................................49
4.4. Variables’ measurement summary..........................................................................51
5. Regression model..........................................................................................................51
5.1. Simple Correlation..................................................................................................51
5.2. Multiple Correlation................................................................................................52
5.3. Multiple linear regression model............................................................................52
6. Potential limitation of the study....................................................................................54
7. Chapter summary...........................................................................................................54
CHAPTER V: EMPIRICAL RESULTS AND DISCUSSION...............................................56
1. Introduction....................................................................................................................56
2. Summary descriptive statistics and discussion..............................................................56
3. Bivariate correlation results and discussion..................................................................59
4. Multivariate regression results and discussion..............................................................61
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5. Chapter summary...........................................................................................................65
CHAPTER VI : SUMMARY AND CONCLUSION..............................................................66
1. Introduction....................................................................................................................66
2. Summary of findings.....................................................................................................66
3. Limitations of the study.................................................................................................66
4. Recommendations of the study......................................................................................67
REFERENCE...........................................................................................................................68
Appendix..................................................................................................................................77
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Acknowledgement
First of all, I would like to express my immense gratefulness for the untiring guidance of my
supervisor, Professor Collin Ntims, ever supportive and always arranging time to give me
invaluable instructions and feedbacks. His advises made it possible for me to finalize this
dissertation with satisfaction, and his inspirational researches have motivated me to pursue
this topic for my graduate dissertation.
Furthermore, heart-felt appreciation is also due towards my beloved family and friends in
Vietnam. Throughout the composition of this dissertation, the warmth of their encouragement
and support has bolstered my resolution to overcome all difficulties and strive my best
towards the completion of a comprehensive and meaningful research.
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CHAPTER I: INTRODUCTION AND BACKGROUND
1. Introduction and research motivation
1.1. Research motivation
Given the variety and change of modern applications of dividend payment, it has been
becoming progressively imperative to understand the factors contribute to the changing of
dividend policy.
Inspired by the agency theory, stakeholder theory and dividend signalling theory, number of
problems such as conflicts of managers and shareholders, the poor quality of corporate
governance, the controllable of cash flow, etc. has been solved (Hauser, 2013). Hence, in this
researched paper, study believes that these theories above have fully ability to explain the
factors causing the changing of dividend policy.
On the other hand, a number of researches, which have approached the factors affecting the
dividend policy, have mixed ideas with varied elements contributing the dividend payment.
For example: most of researchers such as Litai et al (2011), Gill & Obradovich (2012),
Mansourinia et al (2013), etc. confirmed the positive impacts of Board Size to the dividend
pay-out ratio. However, Ghasemi et al (2013) proved the negative association between
dividend payment policy and Board Size. It is obviously to realize that there are existed
different controversies regarding varied factors.
Recognizing the unlimited and difficult reasons affecting the dividend pay-out, in this
dissertation, researcher is going to examine two main aspects (Corporate governance factors
& firm characteristic) and measure the impacts of these factors to the trend of changing in
dividend policy. Moreover, combining with the theories above, this dissertation reveals the
efforts to find the unmentioned effects (which have not mentioned in very previous studies
such as the influence of the Board gender Diversity, or the effect of the Frequency of Board
meeting) on the dividend policy. Hence, this dissertation is motivated to seek the new
elements affecting the dividend policy, and it is hoped to be an initial research to develop the
other study in the future.
1.2. Introduction
Attempt the research by Al-kuwari (2010), until the end of the year, every publicly listed
company decides whether to return cash to their shareholders and, if so, how much they
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should return in the form of dividends. Recently, the issues, which have been arisen in every
business, are about dividend policy. Because, Kester and Robbin (2011) believed that an
effective dividend policy could appeal as much investors (external capital) as they can.
Therefore, the problem rose with a question about “how they could manage the dividend pay-
out policy effectively to gain the investment from investors or lenders” (Chen & Steiner,
1999). In order to solve these issues, individual manager of every company needs to
recognise critically the potential factors causing the changing of dividend payment policy. It
is obviously hardly to capture all the features making the changing dividend payment policy,
however; the managers or authorities must comprehend the internal possible issues
influencing the dividend policy. Accordingly, in this paper, researcher brings only two
significant sectors, which are Corporate Governance and Firm Characteristic issues, to
indicate the impact of them to the dividend payment policy.
This paper has analysed financial data of 66 listed companies in London Stock Exchange
during the period from 2010 to 2013. This researched paper has applied the multiple linear
regression model to analyse the data. As a result, the finding has indicated that the impact of
Firm Size, Board Size, Cash Flow per Share, and Financial Leverage are significantly
positive to the dividend payment policy. On the contrary, the Frequency of Board Meeting
has shown a negative association with the dividend pay-out ratio. Lastly, the other variables
(Return on Assets, Board Independent, CEO Duality and Board gender Diversity) have not
found the relationship with the dividend policy during the period of researching.
Hence, in the next parts and next chapters of this dissertation, researcher attempts to clarify
and measure the influencing of these factors to dividend payment policy. More particularly,
the next two sections, study illustrate the research objects and the research questions.
2. The research objects
The dividend payment policy has become a vital tool in the financial market and it has full
capacity to become a key element to capture investors’ attractions (Al-kuwari, 2010). In order
to get objectives of the topic, it is very important to understand clearly and seize the nature of
the matter. With the overall target of the research is to assess critically the factors
contributory to dividend payment policy in the retail industry in the UK from 2010 to 2013.
Hence, the specific objective of dissertation will mostly focus on:
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Investigate whether there are association amongst corporate governance variables,
firm characteristics variables and dividend pay-out policy in the retail industry in the
UK from 2010 to 2013.
3. The research questions
In order to achieve successfully the target of the study, this paper focus on analysing the
relevant previous theses, journals, books and some reputed websites of dividend and analyse
its characteristics.
Hence, the main question base on the target of the dissertation has been set up:
What are the factors influencing dividend pay-out policy in the UK?
Following the primary questions, there are some sub-questions follow:
What does corporate governance factors influence dividend pay-out policy?
What does firm characteristics affect dividend pay-out policy?
4. The important of the study
With the interests and enthusiasm in the determinants of the dividend issue, the dissertation
helps researchers and the readers understand function to the businesses in financial market.
Moreover, this dissertation is also a valuable opportunity for researcher to strengthen
critically knowledge about the degree of influence of Corporate Governance factors and Firm
Characteristic elements to the dividend payment policy. On the other hand, it also helps
management or authorities of companies understand critically factors contributing to their
companies, especially the corporate governance sectors, whereby they could adjust the
dividend payment policy. Accordingly, the topic “Determinants of dividend pay-out policy:
The Effect of Firm and Corporate Governance characteristics” has been selected for MSc
dissertation topic.
In order to bring a comprehensive structure to follow, the next section is created to serve with
only purpose is that it helps readers capture the outline of this dissertation.
5. Structure of the dissertation
The dissertation is organized in different chapters follow:
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Chapter 2: Background
In this chapter, this paper reviews the history of making dividend payment policy and
the impacts of dividend policy to the operating companies. Moreover, this part also
evaluates the impacts of dividend on companies and the shareholders as well as the
investors.
Chapter 3: Theoretical and empirical literature review
Prior researches, theories and its practices of dividend payment policy are revised in
this chapter. This chapter analyses and evaluates varied literatures relating to the topic
of the dissertations, e.g. dividend policy, the factors impact to the dividend policy, etc.
At the beginning, this section brings the clearly and latest definition of dividend and
illustrates the functions of paying dividend to the businesses.
After that, the most three theories (agency theory, stakeholder theory and dividend
signalling theory) are listed and analysed. In this part, study mostly focus on the
impacts of potential problems (agency problems, stakeholder conflicts, information
asymmetric, etc.) to explain changing of dividends policy. Then some hypotheses are
created, which are based on the previous researches, in order to assess the influence of
these reasons to the dividend payment policy.
Chapter 4: Research design
In this chapter, it describes and explains the research method of the study. In general,
it discusses how the study can analyse the factors affecting to the dividend payment
policy through ratios, indicators, and data collecting in the retail industry in the
United Kingdom from 2010 to 2013. It shows the research philosophies of the study
with the quantitative approach. Moreover, the measurement of each variable is also
mentioned. Lastly, the chapter also indicates the sample selection of the research and
the tools to collect data.
Chapter 5: Empirical results and discussion
This paper analyses the collected data to determine clearly the factors contributing to
the dividend policy mostly, the effects of Corporate Governance or Firm factors?
Besides, the analysed data is not only indicated from the statistics from the multiple
linear regression models, but it is also compared with previous researches. The
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purpose of comparing with previous researches is to seek the limitation of the last
result. Or in other word, study aims to avoid the potential mistake from prior scholars
(in the literature reviews).
Chapter 6: Summary and discussion.
This chapter discusses about the finding in data analysis and evaluate the result from
analysing the model. Then, the dissertation also discusses carefully about the
limitations of the research. Lastly, recommendations for further research are also
included in the chapter.
All in all, this dissertation gives a conclusion, which summarizes the answer for the
research question. It also shows the highlight of the limitations and makes suggestions
for companies. Based on that, the managers and authorities are able to adjust their
dividend policy effectively to achieve their planned objectives.
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CHAPTER II: BACKGROUND
1. Introduction
According to Al-kuwari (2010), he believed that dividend policy played an extremely
important role in financial management. Managers or authorities in companies would have to
adjust the dividend to satisfy the investors, shareholders. On the other hand, the dividend
payment policy must be suitable to the development of the companies in order to avoid the
loss in their profits eventually (Al-Malkawi et al, 2010).
Accordingly, in this chapter, this researched paper reviews the history of making dividend
payment and the influence of dividend policy to the companies. Moreover, the benefits of
dividend to the companies as well as the impact of dividend to investors are also mentioned
regarding previous researches.
2. Background
Dividends policy and its issues have a very great and long history. For last decades,
Frankfurter & Wood (1997) expressed that the dividends are stick with the advancement of
the corporate structure itself. Corporate dividends occurred at the early sixteenth century in
Netherland and Great Britain when the managers of sailing ships started trading financial
claims to stakeholders, which eligible them to share in the profits, if any, of the journeys (Al-
Malkawi et al, 2010). At the end of each one voyage, the benefits and the capital were shared
to speculators, investors, stakeholders and finished the venture’s life. Before the end of
sixteenth century, these fiscal entitlements started to be exchanged on the open market in
Amsterdam and were progressively supplanted by shares of ownership (Baker & Gary, 1999).
It led to a situation that investors would be willing to buy shares from more than one
management to separate the risk related with this category of business (Holder et al, 1998).
According to Juma'h and Pacheco (2008), the companies’ liquidation of the venture
guaranteed a division of the benefits to shareholders and helped to decrease the abilities of
fraudulent activity by authorities. Nevertheless, the progress of liquidation of the assets at the
end of each period became gradually inconvenient and costly because of the increasingly
profitability’s distribution from these ventures. Additionally, the successful of increasing
companies’ reputation made shareholders feel more safely when they put their investment in
the hand of managers (Reddermann & Graf, 2010). As the result, these businesses started
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trading as “going concern” and distributing only the benefits rather than the whole invested
capital (Frankfurter & Wood, 1997). The appearance of companies as a “going concern”
started the essential activities of enterprise to choose what amount of the companies’ income
(rather than assets) to distribute to investors and making a very first dividend payment
regulations (Al-kuwari, 2010),. Hence, it started to number of controversy around the
function of dividends and the influence of dividends to operating companies.
To begin with, regards to Kester and Robbin (2011) the dividend affected directly the
behaviour of those investors. It is easily to understand that why the attitude of shareholders
could change immediately during the change of the dividend policy. Furthermore, by having
the decisions of dividend policy, businesses might be able to use it as current means to
connect with both internal and external investors to appeal their free capital (Ergungor,
2004). In general, dividend payment policy is defined as the obligation of firms to pay a
particular amount of money annually or quarterly from profits to investors for their capital
contribution.
Additionally, it is more preferable in terms of profits gained if the management distribute the
interest to shareholders rather than re-invest all. In other words, management normally
assumes that re-investment in pursuit of high probability of growth as well as high
profitability ratios will not be as appealing to investors as allocation of dividends to
shareholders (Mackintosh, 2012). Besides, the stable of dividend payment policies of
companies also shows the strength of this business in the financial market (Ryan, 2014).
However, it is hardly to conclude that business might keep their wealthy in order to attract the
investor through dividend payment policy (Olshansky et al, 2007). By contracts, it seems
very extremely difficult to manager to give right decisions on allocating dividend to
investors. Authorities always have to deal with some problems involving to dividend policies
such as whether they should keep all the profit in order to re-invest or expand their businesses
or allocated part of interests to shareholder.
On the one hand, numerous external impacts have contributed directly to the dividend policy,
such as the fluctuation of the economic (e.g. the financial crisis, the fallen of share price in
the market, the competition pressure from the other businesses, inflations, etc.), or the
changing in political by government such as taxation (Jermann & Quadrini, 2012). On the
other hand, internal factors have also influenced profoundly the decision on paying dividend
to investors such as revenue, profitability, size of company, etc. (Juma'h & Pacheco, 2008).
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Corporate directors acknowledged early the vitality of dividend payments in fulfilling
shareholders desires. They regularly covered dividends over time accepting that dividend
decreases may have negative impacts on share price and, accordingly, dividends are used as a
tool to signal news to the financial market. Moreover, dividend policy is supposed to have
effects on share prices (Hauser, 2013).
However, since the 1950's, the impact of dividend payment on firm performance and
different issues of corporate dividend pay-out policy have been exposed to an incredible
controversial among scholars and economists (Al-Malkawi et al, 2010).
3. Chapter summary
Regarding financial management, dividend payment policy has been a vital tool for a very
long time. The dividend, according to Hauser (2013), reduces the agency problems and
resolves the stakeholders’ conflicts. Mover over, the dividend has helped the companies
appealing the free external capital from the investors. In the side of investors, dividends act as
a good signal to the performance of firm in this year. People, investors, are believed that the
dividend payment affected directly the share price and it greatly important to investor
decisions to invest or not.
Hence, the following chapter, writer considers varied arguments from theoretical and
empirical view to set up the hypotheses on the impacts to the dividend payment policy.
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CHAPTER III: THEORETICAL AND EMPRICAL LITERATURE
REVIEW
1. Introduction
This chapter is composed with the purpose of investigating several significant researches and
studies appeared recently about the dividend pay-out policy in the financial market
concentrating on the impacts of corporate governance factors and the firm characteristics. As
suggested by Saunders et al. (2009), the aim of literature review is to help researchers
enhance their ideas and questions, and it also provides readers with a critical understanding of
prior related researches, which have been analysed. Following this guidance of Saunders,
researcher has applied this method to this dissertation. Literature review has been used to
provide with general features of dividend’s definition, relevant theories (agency theory,
stakeholder theory and dividend signalling theory) and specific factors in the category of
Corporate Governance and Firm Characteristic. More importantly, based on literature, this
paper is able to compare and discuss his results with the findings in the previous related
researches. Accordingly, this chapter has been structured as followed. The first part is to
define the term ' Dividend’. The second part is to describe the general overview of theories,
which are used to analyse the effects of variables above. Then, the next part, this research
paper illustrates the involved factors which are allocated in two sectors are Corporate
Governance and Firm Characteristic. Additionally, some limitations in last researches are
also attached to avoid possible challenges in research methodology.
2. Dividend policy and its roles
2.1. Definition
Before investigating the effects of variables on dividend policy, it is necessary to understand
what dividend is? The definition of dividend varies among numerous experts and economists.
Dividends are regularly characterized as the distribution of profit (past or present) in real
assets among the shareholders of the firm in proportion to their ownership (Frankfurter et al,
2003). In other word, the definition of dividend could be expressed as a part of net profits
distributed to shareholders in proportion to their ownership of businesses shares (Juhandi et al
2013). Accordingly, in individual business, they have different payments in their dividend
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policy. The dividend policy, according to Hussainey et al (2011), is the allocation of income
to shareholders in the form of dividend and to the firms as re-investment.
2.2. The roles of dividend policy
It is obvious that the role of dividend in appealing investors and shareholders to businesses is
inevitable. A clearly evidence is that the changing in the dividend pay-out will effects directly
to the behaviours of most investors and shareholders (Al-kuwari, 2012). In the view of
investors, they believe that the changing in payment of dividend reflects the financial stable
of company (Baker & Wurgler, 2004). It might be considered as weaknesses and less stable if
the dividend is cut or reduced by the company, as a consequence, investors feel less
interested in investing on that company. Controversy, businesses are considers as strong and
stable business in the light of investors if their dividend is paid annually (Consler et al, 2011).
Therefore, investors and shareholders are more interestingly to put their money on the
company.
Hence, the functions of dividend in companies are deniable, therefore, firms need to control
and manage their dividend pay-out policy effectively. In order to archive effective plane in
managing dividend policy, the managers should understand the factors impact significantly to
the policy (Al-kuwari, 2012). Therefore, in the next section, study reviews different related
theories and researches to indicate elements influencing dividend policy. And, firstly, the
theoretical literature is vised with three main theories (agency theory, stakeholder theory and
dividend signalling theory).
3. The theoretical literature
3.1. Introduction
There are numerous theories, which explain the vital role of dividend payment policy in any
businesses sectors. It has contributed deeply to the attitude of investors as well as the lenders
(Al-Kuwari, 2010). Moreover, during the operating of business, dividend policy also plays an
important tool to help managers and authorities of a company to reducing some unwanted
cost and declining some internal problems (Chen & Steiner, 1999).
Hence, in order to understand critically how the dividend payment policy contributes to the
operating business, this study expresses the relationship between some theories with dividend
pay-out policy. In particularly, this paper introduces to the reader three main relationships
among agency theory, stakeholder theory, dividend signaling hypothesis and dividend
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payment policy. Due to that, the effects of each theory to the dividend payment are illustrated
and this paper applies it (as a part of fundamentalist knowledge) to create the hypotheses
(which is going to be used to assess the factors affect to the dividend policy).
3.2. The agency theory and dividend policy
To begin with, the principal - agency problem has relatively come to prominence in the area
of corporate governance and a strong body of work has built up around this concerned issue.
To illustrate, over the last decades, Easterbrook (1984) put forward the argument that
dividend policy plays an extremely useful role in restricting managers making use of the
firm’s earnings to cater for their own benefits. Explanation for this could be demonstrated in
that by distributing resources or internally generated cash in the forms of dividends, the
managers would not have much cash flow in hand to satisfy the needs of the organization
(Al-Malkawi, 2008).
As a consequence, the costs linked to the principal/agent relationship are diminished and
managers would have more incentive to call for more needed capital or resources (Skinner,
2012). Moreover, the organization is be benefited by realising more profit in the form of
dividend paid to the shareholders and investors Dalton (2014). Nowadays, comparatively
recent studies have made an attempt to mention the agency problem; for instance, Al-Taleb
(2012) places great emphasis upon “the agency problem analysis arisen from managers’
incentives to consume private benefit”, or Luhman & Cunliffe (2013) also affirm that
“Agency problems can also occur when executives or managers have a different attitude
toward risk from that of the owners or shareholders”.
In terms of agency problem, it is imperative to explicitly understand the meaning of “agent”
and its associated theory. This helps readers acquire preliminary knowledge to understand
how dividend policy could prove its effectiveness in addressing the agency problems. The
agency theory mainly identifies the relationship between agents and principal, where the
principal would delegate work to the agent (Dalton, 2014). The theory posits that agents
should follow the principals’ direction and act according to the best interest of the principal.
In the context of business world or company operation, the principals are known as the
owners of the firm while those who direct the daily business activities are the agents (Porta et
al, 2000). However, one of the problems has emerged is related the conflict of interest
between two parties. Shareholders or owners put pressure on directors who to run the
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business to operate in an effective way, which in effect helps maximize the value of
shareholders (Al-Taleb, 2012; Porta et al, 2000; Chen & Steiner, 1999).
Conversely, for some reason, the director might not act to the benefits of shareholders,
whether in the forms of misusing their power or taking risky decisions in order to serve their
own interest (Dobbin & Jung2010). Accordingly, in order to resolve the agency problem and
balance the interest between two parties, various economists and researchers have brought
about a diversity of effective solutions; the most effective remedy of which that could be
taken into consideration is deploying dividend policy within the corporation.
As stated by Al-kuwari et al (2010), the agency problem is influenced by the dividend policy,
which offers a rationale for determining how much they should pay to shareholders. He
clarified his statement by explaining the shareholders-managers relationship. Mangers, whose
compensation (pecuniary and otherwise) is contingent upon firm profitability and size, have a
keen interest in paying low dividend to shareholders (Dalton, 2014). As a result of low level
of dividend payment and a commensurate availability of resources, managers stand a better
chance of expanding the size of assets at their disposal (Shapiro, 2005). Moreover, low
dividend payment maximizes the flexibility of management in choosing the appropriate types
of investment while simultaneously limiting the need to turn to capital markets to finance
investments (Al-Taleb, 2012).
On the contrary, shareholders refer to resort to capital markets to finance investments. This is
due to the fact that they put their wish in managers to have effective investment decisions,
and additionally, the root cause is that shareholders want to restrict the discretionary cash in
hands of managers (Bonazzi & Islam, 2007). Consequently, shareholders would have an
incentive to force the managers to convert available cash to capital markets to fund
investments. Put simple, the answer for the agency problem is to restrict the available money
in hands of directors or to put in in another way, to distribute available cash to dividend
payment in an effort to appeal more investors and lenders (Heath, 2009; Luhman & Cunliffe
2013).
3.3. Stakeholder theory in the relationship with dividend policy
In the same situation vein with the term ‘agency problems’, substantial attention has been
directed towards stakeholder theory over throughout the history of business world. As a
matter of fact, stockholders put their money and property into firms and wish to obtain return
on their investment (Asher et al, 2005). However, the arisen conflict is that stakeholders
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might have feelings of aversion or unwillingness that the employees spend the resources of
company for their private business or personal cause (Dalton, 2014). As a result, this
unpleasant feeling may make them reluctant to venture into the firm and the business will be
adversely affected as a whole (Luhman & Cunliffe, 2013). As a vital part contributing to
reducing the agency problem, stakeholder theory has become the focal point of a great many
debates, it frequently serves as a point of reference in agents’ discourses (Branco &
Rodrigues, 2007). Accordingly, in order to understand how previous researches handle this
solution, it is important to understand the concept of Stakeholders and its theory. It is also
important to review relevant literature with regards to multiple solutions presented to deal
with stakeholders’ conflict. On that basis, reseacher identifies the relationship between the
stakeholders’ conflict and the dividend pay-out policy.
To begin with, the concept of stakeholders might be understood as a generalization of the
notion of stockholders, who themselves have some special claim on the firm (Pesqueux &
Damak-Ayadi, 2005). The central idea behind the stakeholder theory is that the success of
business is largely dependent on how well it manages the relationships with key categories of
stakeholders such as clients, employees, suppliers, the media, shareholders, and other groups,
who have an impact on achieving its objectives (Freeman & Phillips, 2002). The managers’
obligation is to keep and enhance the relationships with these groups, adjusting to their
interests, whilst in the mean time making the company a tempting destination where
investors’ interests can be maximized and sacrificed over time (Heath & Norman, 2004). To
be more specific, the organizations and its managers have special duties to guarantee that the
shareholders receive an acceptable return on their investment; however, the business also
needs to take responsibility to the other stakeholders, which sometime goes beyond those
required by law (Dalton, 2014). However, in some unwanted circumstances where the clash
of interests emerges, accomplishing basic obligations to other stakeholders is successful at
the expense of certain demands and requests of some stakeholders (including shareholders)
(Branco & Rodrigues, 2007).
Given the possible conflicts between the two parties involved (stakeholders and managers), a
growing body of research has been conducted to seek the resolution to this problem. Indeed,
conflict related to stakeholder theory has a same root cause with the agency problem in that
available cash flow is in hand of the directors (Asher et al, 2005; Dalton, 2014). When given
the chance, non-owner stakeholders will opportunistically take advantage of the dividend
policy to seize personal benefits. Therefore, firms controlled by non-owner insiders will pay
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lower dividends per unit of earnings and allocate correspondingly more to private benefits for
the non-owners than firms controlled by owners (Friedman & Miles, 2006). In contrast, the
substitution model indicates that non-owners will benefit later if they choose a dividend
policy that reduces potential conflicts with the owners. According to Ferrero et al (2014),
they mentioned that dividend pay-out increase with decreasing owner control supports the
substitute model, which posits that owner control and dividend pay-out are alternative ways
of disciplining the firm’s non-owners. Or in other words, it means that close monitoring and
low free cash flow are substitute.
3.4. Dividend signaling hypotheses and dividend policy
For decades, a battery of studies have reaffirmed that the dividend payment policy plays an
important role across firms due to the signaling effect that they have on the firm’s future
performance (Dalton, 2014). This is due to the fact that top managers of businesses obviously
have more information about the future plans and orientations of the firm, thus enabling them
to forecast future earnings of the company (Atmeh & Al-Shattarat, 2013). Hence, employees
who are currently employed by firms also have more information than the other investors,
which, in combination with handful information sources by managers themselves, lead to a
phenomenon known as information asymmetry (Li & Zhao, 2008). As a consequence,
companies are able to use dividends as a signaling mechanism to send the information to their
investors or shareholders. Based on some empirical finding of a number of authors, they state
that changed dividend payment is significantly related with the behavior of investors (Harada
& Nguyen, 2011). However, other empirical studies have failed to seek with the relationship
between dividends and customer behavior. For instance, Lie (2005), who found scare
evidence to prove the signaling effects on the dividends pay-out policy. In this section, the
writer will review the ideas to investigate the association between dividend policy and its
signal to the investors.
A theory that proposes business declarations of a growth in dividend payment act as an
indicator of the firm possessing robust future forecasts (Tsuji, 2012). This hypothesis stems
from the works of Lintner (1956) who found that not only were the dividend payment policy
reliant upon the amount of cash required to finance project temporarily, but it was also used
to represent management’s confidence in the sustainability of business earnings over the
long-term. Accordingly, the pay-outs only tend to increase on the condition that the managers
are of firm belief that subsequent earnings might be high and conversely, they would
decrease dividend pay-out when it is a pessimistic prediction.
20 | P a g e
On the other hand, the signaling theory also states that any subsequent decrease or
elimination of dividends would be viewed with extreme disfavor by the financial markets
(Benartzi, Michaely and Thaler, 1997). As indicated by signaling hypothesis, investor can
deduce data around a company's future earnings through the signal originating from dividend
proclamations, both regarding the steadiness of, and changes in, dividends. On the other
hand, regarding signaling hypothesis, managers have to, firstly, handle private and
confidential data about a firm’s prospects, and have incentives to transport this information to
the business (Douglas & Bernhardt, 2005). Besides, a signal must be reliability trial; that is, a
business with low level of future prospects should not have the capacity to depend on the
signal to differentiate among businesses (Bozos & Nikolopoulos, 2011). In the event that
these conditions are satisfied, the market would respond positively to the publications of
dividend increase and unfavorably otherwise.
In outline, a hypothesis attests that announcement of expanded dividend instalments by an
organization gives critical signs about the positive future prospects of the enterprise (Benartzi
et al, 1997). A proclamation of a growth in dividend payment is taken emphatically in the
business and helps constructing a splendid picture of the business with respect to the increase
prospects and stability in the future (Harada & Nguyen, 2011).
3.5. Summary
To sum up, the role of dividend payment policy in operating business is undeniable. It has
contributed aprat to the susscess or the failure of its company. During the period, number of
researchers and economists has evaluated the function of dividend payment policy due to
using various related theories. In this sector, write has used three most popular theories
( Agency theory, Stakeholder theory and dividend signaling theory) to evaluate the effects of
dividend payment to the company.
Overall, under the light of dividend payment, companies will be benefited greater than the
other businesses have non-dividend. Inaddition, by using dividend payment policy as their
advantage, they might plan the operation better for their organization in the future.
Despite the undeniable role of dividend payment policy in business, it might not fit to all
retail companies in the UK. Regarding numerous factors will affect to the dividend payment
policy, some business are not be able to pay dividend. It might cause from the board decision
(to keep interest to re-invest), or business has loss profit during the period. Hence, in next
section, this dissertation will introduce two primary factors which have contributed deeply to
21 | P a g e
the dividend payment policy. Firstly, write will introduce the firm characteristics and its
factors’ affects. After that, the corporate governance elements will be expressed lastly.
4. Empirical literature
4.1. Introduction
As it is mentioned above, this part evaluates two main factors, which are firms’ characteristic
and corporate governance, effecting to the dividend policy. Additionally, this paper assesses
critically sub-factors of two primary elements. In particularly, in term of firm’s characteristic
factors, this dissertation will evaluate the effect of firm size, net income, financial leverage,
cash flow per share and return on assets. Combination prior researches and expressed theories
above, write evaluates and creates hypotheses with each factor of firm’s characteristic.
Similarly, this dissertation makes a same progress regarding corporate governance elements.
Using both theories and last studies, researcher creates hypotheses on each variable of
corporate governance, which are Board size; Board Independent, CEO duality, Frequency of
Board meeting and Board gender diversity. Simultaneously, this paper also purposes the
limitation of previous researches and avoids it in my research.
4.2. The corporate governance factors
4.2.1. Board Size
To begin with, this sector reviews the connection between Board Size and dividend pay-out
policy. Firstly, Board Size has been measured by the number of Directors in the board in one
year of this company. The numbers of directors fluctuating gradually are depended on the
decision of Board and Chairman. According to the agency theory, it indicates that the
increasing of Board Size causing the increasing of quality in firm performance. Especially,
the increasing quality of Board Directors is significant. Moreover, regarding agency theory,
the increasing of Board Size has led to the over control managers then the conflicts between
shareholders and management are un-avoidable. Hence, the agency problems occurred as a
result. Therefore, in order to reduce this issue, agency theory suggests restricting free cash
flow in hand of manager by separating this money in the form of dividend to shareholders
and investors.
Hence, combining the agency theory and stakeholder theory, it suggests that the expanding of
Board Size is leading to the increasing of dividend payment policy.
22 | P a g e
In particularly, last decades, most of economist had demonstrated that number of directors in
Board might not be able to reduce the agency cost and the stakeholder conflicts effectively
(Lipton & Lorsch, 1992). However, recently, Mancinelli & Ozkan (2006) has indicated that
larger size of board would control the agency problems and stakeholder issues more
effectively. It had been stated that the more directors in the Board, the less ambiguous
information (evidence from 139 listed firms in Italy). According to stakeholder theory and
agency theory, the shareholders need third party to inspect the operating of companies,
therefore, Non-Executive Directors has played vital role in the systems of an organization.
In the understanding of researcher, when company pay cash dividend with the purpose of
reducing agency cost and stakeholder conflicts, they might not need the number of directors
in their structures (it might cost company amount of money for salary and related equipment).
Hence, the dividend policy is inversely proportional with the Size of Board. However,
recently, there are some researches regarding prior economist has found the positive
relationship between board size and dividend payment policy. Therefore, this sector reviews
some previous results and finds the motivation to create the first hypothesis.
Firstly, on the research of Mansourinia et al (2013), the group of authors indicated the
significant positive relationship between the Board Size and the dividend payment policy. It
meant that an organization had number of directors in their Board tend to pay more dividend
to shareholders. By using F-Limer and Hausman tests in 140 firms listed in Teheran Stock
Exchange from 2006 to 2010, the results, surprisingly, went against with the knowledge of
the this study. Hence, this paper might consider the other analyses to process the initial
hypothesis.
Following the research by Litai et al (2011), the researchers had assessed the impacts of
financial characteristic and corporate governance impacts on the dividend payment policy. It
found that the Size of Board is positively correlated with the trend to pay dividend policy of
organization. Adopted data from 1056 A-share listed businesses in Shanghai and Shenzen
stock exchange in 7 years (2001-2008), authors had used logit regression to test all factors
effecting to the dividend payment policy. The outcome was consistent with previous
researches by Khan (2006), Coles (2005), etc. The most amazing and reliable in this research
which convince readers is that authors had collected a huge numbers of companies in china
and assessing two main factors (corporate governance characteristic and financial factors)
with a very consistent result. Researcher finds a similar in that research with the purpose of
23 | P a g e
the dissertation; hence, this dissertation adopts this outcome as a motivation to produce the
first hypothesis.
On the other research of Ghasemi et al (2013), the result, which was analysed from 81 listed
enterprises in Teheran Stock Exchange from 2005 to 2011, demonstrated the meaningful
connection between corporate governance factors and dividend payment policy. Especially,
the authors indicated the negative significantly in the connection of Board size to the
dividend payment policy (after running multiple regression model). It meant that the
companies tend to pay cash dividend when they less directors in their Board. It is
interestingly when the results is similar with this dissertation’s assumption. However, the
authors also mentioned the reason for this result due to the Iranian’s firm ownership structure
was controlled by institutions, accordingly, it effects to the research outcome. Thus, study
finds that the result has not appropriated to the purpose of fifth hypothesis because of the
different economic pressure between UK and US. In the end, researcher does not consider
this result to make the primarily hypothesis for this research paper.
Approaching the research by Gill & Obradovich (2012), two economists researched the
factors effecting decision to pay dividend. Adopted 296 American firms listed on New York
Stock Exchange from 2009 to 2011, the result showed a positive relationship between the
Board size and dividend payment policy. The authors used the co-relational and non-
experimental research design to conduct the result. Although, the size of sample in this study
is not wisely and is limited in the American manufacturing industry, the result inspires
research to have more confidences to create the first hypothesis.
Thus, the first hypothesis is created as:
H.1: A significant relationship between decision to pay dividend and Board Size
4.2.2. Board Independence
Motivated by the agency theory, the stakeholder theory and dividend signalling theory, this
part approaches the second variables of Corporate Governance sectors: Board Independence.
In order to avoid the asymmetric of information and the transference during the operating,
this researched paper revises previous related studies, which assessed the relationship
between the Independence of Board and the dividend payment policy. The agency theory
suggests that the more independent Board, the less agency problems. Regarding the signalling
theory, the more NEDs in the board of directors, the information asymmetric is eliminated
24 | P a g e
effectively. Furthermore, the shareholder might not concern about potential conflict between
them and managers. Due to that, it seems the increasing of Board Independent might lead to
the decreasing of Dividend payment of companies in general. However, to clarify this point,
this part revises the previous results to conduct the second hypothesis about the relationship
between Board Independent and Dividend Payment Policy.
To begin with, How et al (2008) indicated the relationship between dividend payment policy
and the independence of board. Authors found that the larger independence of board, the
company tended to pay less cash dividend. They used the logit regression model to analyse
the collected data from 324 listed Hong Kong companies in one year 2005. Generally,
authors used suitable methodology to analyse the data, however, the period is only in one
year. It is hardly to express the effects a very comprehensive impact of board independence
on the dividend policy. Although, the study indicated the negative relationship between two
variables, it is not totally persuade readers as well as researchers. Hence, it seems study
should revise the other research to clarify the issue.
Catching the study of Al-Najjar & Hussainey (2009), two economists showed the negative
association between the outside directors (Independence of Board) and dividend payment
policy. They illustrated the paradox of dividend policy and Board independence, it meant
that firms tended to pay less cash dividend when they have higher hired outside directors in
their Board. The empirical result was built on the analysis of 400 non-financial listed
companies in London Stock Exchange during 1991 to 2002. The selection of methodology in
this study was reasonable with the results and it was consistent with their literature review.
On the other hand, the purpose of this paper was on the same track with the aim of this
dissertation (assessing the impact of board independence to dividend policy); hence, it
inspires researcher to create the second hypothesis.
Currently, Iqbal (2013) used Logistic regression and Probit regression to analyse the
collected data of 77 non-financial listed company in Pakistan from 2007 to 2011 and found
that the negative relationship between dividend payment policy and Board Independence. In
his paper, he also emphasised the available of Independent Board leading to no
announcement of dividend payment. It was believed that the more independence in Board,
the less cash dividend payment. The result seems appropriate with the used methodology and
it consistent with previous researches (in the literature review part). Researcher finds the
common way of analysis in this paper and the solutions for handling data, it appropriates for
25 | P a g e
this dissertation, and therefore, researcher considers this study by Iqbal (2013) as a vital part
to build the second hypothesis.
In the same year, Mansourinia et al (2013) surprisingly found that there is no significant
relationship between the board independence and dividend payment policy. Which mean that
the existence of Non-Executive Directors among Board members does not affect to the
decision on paying cash dividend to shareholders and investor. One of the reasons might
explain for their result is that the sample was collected in Iran where the loans and
investments are almost controlled by institutions, hence, it might effect to the result as a
whole (Ghasemi et al, 2013). Accordingly, this paper only considers this result as a small fact
to complete the second hypothesis.
Eventually, the sixth hypothesis is processed as:
H.2: A negative relationship between dividend policy and Board Independence
4.2.3 CEO duality
In the corporate governance categorise, CEO duality affects largely to the changing of
dividend payment (Abor & Fiador, 2013). Supporting by agency theory and dividend
signalling theory, the busy Board (when the united between two position of CEO and
Chairman) is hardly to control the agency problems. When the conflicts between managers
and shareholders occurred, the Board might consider paying dividend to shareholder to
restrict the free cash flow in the hand of manager (It is the most effective solution to reduce
the agency cost). Nevertheless, in order to have an answer correctly for this relationship, this
paper reviews previous results and seek the existed relationship between two variables.
A decade ago, Hu & Kumar (2004) researched the factors of Managerial Entrenchment on
dividend policy, and mostly, two authors assessed the contributory of corporate governance
factors on the dividend payment policy. Then, they found that there were some elements
associating with the dividend policy and some are non-related. By using Tobit and Logit
regression to analyse data (which was collected from 2081 North America firms from 1992 to
2000), researchers indicated the insignificant relationship of CEO on dividend payment
policy. It meant that the decision on paying dividend was not depended on the separation of
CEO and Chairman. One of the strongest advantages of this researched paper is that they did
not analyse only the dividend, but two economists also assessed the total pay-out (combining
share repurchase and dividends). Hence, the result might be affected and different with the
26 | P a g e
other outcome of the other researches. Therefore, this dissertation has to review the other
studies and consider this paper as a reference study to build the third hypothesis.
Approaching the research by Ghosh and Sirmans (2006), two authors assessed the
Managerial motives effect to the dividend payment decisions (in REITs London Stock
Exchange). Authors got the data from REITs of 236 cases in two year. (1999-2000), and used
the General (OLS) model to analyze. During the analysis, two authors found out the negative
relationship between CEO duality and dividend policy. In their regression, it estimated that
the companies, which had separation in the position of Chairman and CEO, tend to pay more
cash dividend to shareholders and reduce the conflict between agents and investors
effectively. On the other hand, the authors also emphasized the important of reducing agency
problems by paying dividend and isolating the position of Chairman and CEO. They said that
it had not only appealed investors and shareholders; it had also enhanced the firm’s named on
the financial market. Although, the result of this research paper is significant reliable,
researcher finds it inappropriate for this dissertation because of the difference environment
between Real Estate and Retail industry. Accordingly, researcher does not concentrate much
on this result.
On the research by Zhang (2008), researcher did not found the relationship between CEO
duality and decision on paying dividend. With the collected data from 123 listed companies
in Hong Kong during 1999-2003, author used Tobit regression to analyze these numbers and
found insignificant connection between CEO duality and dividend payment policy. However,
in this paper, the result was created base on the comparison between Hong Kong listed firm
and Midland Listed Firm. The empirical result indicated that in Midland companies tended to
pay less cash dividend with combined title of CEO and Chairman. However, author did not
give the evidence on the Hong Kong firms, hence; the result seems bias and contains the
ideas of author. Therefore, the third hypothesis is not created based on this result.
Approaching the research by Subramaniam & Devi (2011), on the way of assessing the
relationship between Opportunity Set and dividend policy, two authors found that the
insignificant connection of CEO duality and decision on dividend payment. Empirical result
was produce by analyzing the data, which was collected from 300 of the highest capitalized
companies listed on Bursa Malaysia from 2004 to 2006 (the multiple regression model was
used as a vital tool to analyze). The pros of this research are that they have assessed different
effects on the dividend payment policy in Malaysia, such as: financial factors, macro-
27 | P a g e
economic elements and corporate governance characteristic, etc. accordingly, the outcome of
this paper is comprehensive and helpful for further researches. However, the result of this
research might be only applicable for big company with large capital, because the data is
collected from 300 firms (which have big capital and high property). Hence, this result is not
appropriate with the purpose of this study. Researcher might not use this result to build
hypothesis for this part.
According to Sharma (2011), he found the negative relationship of CEO duality on the
propensity to pay dividend. The data of this research was collected from 944 public
companies listed on New York Stock Exchange in one year (2006), author used Binary
logistic regression to analyze the trend of dividend payment. He concluded that an
organization mange to pay less cash dividend when the level of busy directors increase and
not changing in the future. It meant that the united CEO and Chairman Position caused less
dividend payment in the future. The used regression model for analyzing seems reasonable
and persuades reader, but the period of research is quite short (only in one year). Thus, it
hardly assess comprehensive the changing of the economic factors to the dividend payment
policy. Moreover, due to the unstable characteristic of economic environment, investigating
the corporate governance factors by Sharma (2011) is inconsequence.
Recently, Abor & Fiador (2013) examined the corporate governance affecting to the dividend
payment policy in Sub-Saharan Africa, and they found the negative connection of CEO
duality to the decision on paying dividend (only on Nigeria). Evidence was built from the
analyzing data of 27 Ghanaian firms, 177 Nigerian businesses, 51 Kenyan companies, and
270 South African enterprises through the period 1997-2006. Generally, researchers brought
a complete analysis of the factors affecting dividend policy varied nations in Sub-Saharan
Africa. Its result indicated the company, which has separated position between CEO and
Chairman, tends to pay more cash dividend to investors. However, the result only mentioned
the negative impact of CEO duality to dividend payment in Nigeria, but the other countries
were not discussed. Using a simultaneous panel regression model to handle the data, this
dissertation is convinced by the accurately outcome, and then its result contributes deeply to
build the next hypothesis of this dissertation.
All in all, the third hypothesis is produced as:
H.3: A negative relationship between dividend payment policy and CEO duality.
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4.2.4. Frequency of board meeting
Last but not least, belonging to the category of corporate governance characteristic, the
influence of “frequency of board meeting” variable to the dividend payment policy is
undeniable. As a result, a number of researches have studied on the determinant of board
meeting. However, the study about the influence of Board meeting on the dividend policy has
not been mentioned much in academic research recently. Hence, in order to develop the
fourth hypothesis, researcher has to revise related studies, which discussed about the effect of
board meeting on the other categorise (such as: firm performance, management, productivity,
etc.). Combine with the signalling theory; this part might give a prediction about the
relationship between frequency of Board Meeting and dividend policy.
Firstly, signalling theory suggests that the increasing of Board Meeting helps reduce the
information asymmetric. It could be expressed as the Frequency of Board Meeting enables to
convey truly information to the manager and shareholders (due to the public information) and
it also increases the quality of work (Greco, 2011). As the decreasing of information
asymmetric, shareholders and employees are now getting the same amount of news. Hence,
the problems of imbalance in proving information between shareholders and managers might
not be concerned. Accordingly, the shareholders’ conflicts are hardly to occur; hence, the
dividend policy might not be used as a tool to restrict the agency problems. Thus, the
increasing of Board meeting might lead to the decreasing of dividend payment. Nevertheless,
in order to support and create the fourth hypothesis, varied literatures are reviewed to find the
potential relationship between dividend policy and frequency of Board Meeting.
To begin with, in the research by Ntim & Osei (2011), authors illustrated the effect of
corporate governance board meeting on firm performance (evidence from South Africa) and
found that frequent board meeting happened tend to produce greater financial performance.
The data was collected from 169 listed firms in South Africa during 2002 to 2007, and it was
analysed suitably by the combination of fixed-effects regressions and multiple regression.
Two researchers explained that, due to the frequency of board meeting, it had raised the
ability to efficiently guide, monitoring and discipline management. Accordingly, some
existed problems (fraud, information system asymmetric, agency cost, stakeholder conflicts
etc.) would be eliminated excellently. Supports from agency theory and dividend signalling
hypothesis, when agency problems are no longer a problems and the information asymmetric
is not existed between investors, shareholders and employee). Therefore, the dividend
29 | P a g e
payment policy might not be used as a tool to restrict the agency problem and stakeholder
conflicts.
The result of this research paper is significant impact to this paper’s idea. Because, regarding
agency theory, when a company has fully ability to stop the problems causing from the
benefits between two parties (shareholders, investors versus managers), that firm tends to not
pay dividend to appealing free capital from external source. Instead, they might use all the
profits to re-invest to their business. As a result, the dividend policy might not notice and it
has a negative relationship with frequency of board meeting variable.
On the categorise of assessing impact of Board meeting on the firm performance, Horváth &
Spirollari (2012) were not succeed on finding the relationship between Board meeting and
firm performance, but it, interestingly, found the positive influence of level of insider
ownership on the performance of firm. They explained the result through the analysis (which
was conducted from 136 random US firms from 2005 to 2009), and illustrated that the more
increased level of insider ownership, better financial performance (because it reduced the
agency problems during operating). Through this result, researcher realizes that the agency
problems have contributed largely effects to the benefits of companies generally. By
obstructing or eliminating the issues, the company can work smoothly and systematically. In
addition, this study also recognizes that in some cases, paying dividend is not the only
solution to reduce the agency cost; hence, it does not mean the decreased agency problem
leads to the increasing payment of dividend policy. In conclusion, this result might not help
this dissertation; therefore, researcher still remains the idea above which is suggested from
the results by Ntims and Osein (2011).
Approaching another research, Taghizadeh & Saremi (2013) found the negative connection
between the frequency of board meeting and firm performance. Or it might be understood
that more frequent board meeting, worse firm performance. In this researched paper,
researcher finds that authors did not mention any related theory; however, the finance crisis
was discussed. It is very interestingly at the time of research (2008) because it was the time of
global financial crisis. It might be a very sensitive time of analysing due to the unstable
changing of the world economic in generally and Malaysia’s finance in particularly.
Although, the regression model that was used to analyse is reasonable, the result (was
analysed from 150 public listed Malaysian firms in the year 2008) might not reflect correctly
the situation for a long period of companies operating.
30 | P a g e
In conclusion, the eighth hypothesis is motivated largely by the research of Ntim & Osei
(2011); hence, the fourth hypothesis is:
H.4: A negative relationship between Frequency of Board Meeting and Dividend
payment policy.
4.3.5. Board Gender diversity
Lastly, board gender diversity factor affecting the dividend payment policy is reviewed and
analyzed to develop final hypothesis. This variable measures the number of women in the
system of board and assesses the effects of that issue to the dividend payment policy. There
are huge differences between female and male. According to Croson & Gneezy (2009), they
indicated an interesting point that women were less risk taker than men. Accordingly, they
might have less aggressive approach choices and invest in more justifiable assignments
(Apesteguia et al 2012). Therefore, the number of women in Board affecting to dividend
policy has remained questionable. In the same situation with Board meeting, the relationship
between Board Gender diversifies and dividend pay-out policy has not discussed much
recently, therefore; this part has to re-assess related theory and literatures to find the
relationship between gender diversity and dividend policy.
To begin with, in the research by Carter et al (2003), the authors demonstrated the vital roles
of women in the board of directors and stated that the number of women in board cause the
increasing firm value during the operating. They mentioned that gender diversity at the top
was a better appreciative of the complications of the environment and more perceptive
choices. With the collected data from 797 US companies, author has used multiple regression
models to produce the final result. Although, in this researched paper still exists a limitation
(the period of research was not provided), it discloses to readers about the relationship
between two variables. It might cause Board to pay dividend to share holder because firm
values enhance the ability of firm to pay dividend to appeal more investors; or, it might pay
less dividend to lenders because the agency problems, the shareholder conflicts and
information asymmetry are eliminated and prevented.
Following the other research, Nguyen & Faff (2007), the group of authors indicated gender
diversity advertises shareholders' value as the existence of female director is connected with
higher company value. They explained that gender diversity permits a better understanding of
the commercial center; the more varied the commercial center, the more diversity is required
to include value in a corporate setting. In addition, they mention the diversity was connected
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with inspiration and invention; hence it probably produced more effective problem solving.
Beside, diversity strengthened the efficiency of corporate leadership and lastly diversity
encourages more operative global relationships. It is one of the facts might contribute to the
dividend payment policy. The result of this research was based on the analysis from 500
largest listed businesses in Australia Stock Exchange in two year (2001 -2002). Although,
authors were using a very appropriate methodology (Tobit regression) to analyze, the result
was bias to the large company with great capital. It might not fair to small and medium firms,
or it could be said that this is a limitation of this researched paper. However, due to their
analyses, this paper might have a trial hypothesis: a positive relationship between board
gender diversifies and dividend payment policy.
Catching the research by Taghizadeh & Saremi (2013), two authors investigated the impacts
of board gender diversity on performance and found that higher percentage of women
directors on the board caused a better firm performance, especially; authors mentioned the
increasing of ROE due to the high number of women in board directors. This research was
produced based on the collected data from Malaysian’s companies in the year of 2008. As it
has been mentioned above, this result was produced during the financial crisis. Therefore, the
data was not consistent and unstable. It might affect seriously to the result of the researchers.
Although, this study does not consider this result to develop the hypothesis, researcher still
finds the important role of woman in the system of Board and it might contribute, somehow,
to the dividend payment policy.
After revising three main studies, the final hypothesis of this dissertation is:
H.5: A positive relationship between Board gender diversity and dividend payment
policy.
4.2.5. Summary
After revising five corporate governance characteristics regarding different authors and economists,
this dissertation has developed completely five hypotheses and it has been summarized as the table
3.1.
This is the first review of this dissertation on the factors causing the changing of dividend policy (the
Corporate Governance characteristics). On the next section, this study is going to approach the second
category factors (Firm characteristic), which cause the changing of dividend policy. Simultaneously,
the next 4 hypotheses are also created based on the previous related studies.
32 | P a g e
Table 3.1: The association between Corporate Governance characteristics to dividend
payment policy
AuthorYea
rSamples
Perio
dMethodology Result Hypothesis
Board Size
Mansourinia
et al
201
3Iran
2006-
2010
F-Limer and
HausmanPositive
A significant
relationship
between
decision to
pay dividend
and Board
Size
Litai et al201
1
Shangha
i
2001-
2008Logit regression Positive
Ghasemi et
al
201
3Iran
2005-
2011
Multiple linear
regression modelNegative
Gill &
Obradovich
201
2
New
York
2009-
2011
Co-relational and
non-experimental
research
Positive
Board Independence
How et al200
8
Hong
Kong2005
Logit Regression
ModelNegative A negative
relationship
between
dividend
policy and
Board
Independenc
e
Al-Najjar &
Hussainey
200
9London
1991-
2002
Logit Regression
&Tobit
Regression
Negative
Iqbal201
3Pakistan
2007-
2011
Logistic
regressionNegative
Mansourinia
et al
201
3
German
y
1992-
1998
F-Limer and
Hausman
Insignifican
t
CEO duality
Hu & Kumar200
4
North
US
1992-
2000
Logit Regression
&Tobit
Regression
Insignifican
t
A positive
relationship
between
dividend
payment
policy and
CEO duality
Ghosh and
Sirmans
200
6London
1999-
2000
General (OLS)
modelPositive
Zhang 200
8
Hong
Kong
1999-
2003
Tobit regression Insignifican
t
33 | P a g e
Subramania
m & Devi
201
1Malysia
2004-
2006
Multiple linear
regression model
Insignifican
t
Sharma201
1
New
York2006
Binary logistic
regressionPositive
Abor &
Fiador
201
3
Sub-
Saharan
Africa
1997-
2006
Simultaneous
panel regression
model
Positive
Frequency of board meeting*
Ntim & Osei201
1
South
Africa
2002-
2007
Fixed-effects
regressions and
multiple
regression
Negative
A negative
relationship
between
Frequency of
Board
Meeting and
Dividend
payment
policy.
Horváth &
Spirollari
201
2US
2005-
2009
Ordinary Least
SquaresNot Effect
Taghizadeh
& Saremi
201
3
Malaysi
a2008
Multiple
RegressionNegative
Board Gender Diversity*
Carter et al200
3US n-a
Multiple
RegressionPositive
A positive
relationship
between
Board gender
diversity and
dividend
payment
policy
Nguyen &
Faff
200
7
Australi
a
2001-
2002Tobit regression Positive
Taghizadeh
& Saremi
201
3
Malaysi
a2008
Multiple
RegressionNegative
*Note: Recently, the academic analysis of the two factors impacting to the dividend
payment policy is limited. Hence, researcher, instead of, revise the previous literatures of
board meeting and board gender, researchers assesses the impacts of its on the firm
performance. Simultaneously, researcher combines with theories above to find and develop
two hypotheses for these variables.
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4.3. Firm’s characteristic
4.3.1. Firm size
To begin with, there are numerous variables having potential to effects a business’s dividend
payment policy. According to Osman & Mohammed (2010), they believe that big companies
have more advantages than small firms in the position in the capital markets. They explained
that a big company feels easy to increase external source and are, accordingly, less reliant on
internal funds. Besides, it is believed that a large company has lower insolvency probabilities
and, accordingly, they are more prone to pay dividends. (Osman & Mohammed, 2010).
However, this study were researched in Saudi Arabic, where companies distributed mostly
hundred percent of their profit in the form of dividends and the companies were not suffered
by income taxes, therefore, the results of its research might predict in advance.
On the other research into the relationship between dividend payment policy and firm size
has also resulted significant (Rafique, 2012). In his research, he also mentioned the results
from previous research by Lloyd (1985) and Vogt (1994) is that the bigger company has a
tendency to be more mature and, therefore, have easier access to the capital market, which
decrease their reliance on inside produced subsidizing and takes into consideration higher
dividend pay-out ratio. The empirical result of his study on 53 non-financial companies has
indicated that firm size was a variable which have a remarkable effect to the dividend policy
in Pakistan. On this research, Rafique (2012) selected wisely the year for his research (6
years, from 2005 to 2010). Because, one business cycle1 was covered in the study, therefore,
the result of this study is significant notice. Furthermore, although 53 companies is not a big
number of companies, it brought a very consistent dividend payment ratio and transparent
data during the period. Due to that, the calculation of his research is highly accurate and the
error term is minorities.
In a different research, Kim & Jiraporn (2011) has also purposed the significant impact of
total asset on dividend payment. In their result, they mentioned the positive association
among firm size and dividend payment decision. As agency theory has been mentioned
above, larger company, larger agency conflicts. Kim and Jiraporn have also used cleverly
agency theory to explain for their results. They expressed that managers in a big company
tended to benefit for their private purpose first when they have huge cash flow in hand.
Therefore, the solution for this conflict was that the business converted the available cash into
1 One business cycle is usually completed in five- seven years.
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the form of dividend and distributed them to the shareholder as a bonus. Due to that, Kim and
Jiraporn (2011) emphasized that larger companies would control easy the external source and
had more advantages than small companies by paying dividend.
Although in their research, Kim & Jiraporn (2011) spent more time on the relationship of
dividend pay-out and corporate governance quality, the results of their model is undeniable.
By using multi regression model to set up an analysis for more than 16000 observations of
non-financial companies from 2001 to 2004, authors had persuaded readers with justifiable
models.
Whereas largely economist and researcher found the positive relationship between dividend
payment and firm size, Juhandi et al (2013) failed to find the association between two
variables. This study was based on 55 companies with 330 observations from 2005 to 2010 in
Indonesia. During the analysis, authors did not find the relationship among dividend payment
and firm size. Although, their study did not provide detail information and some table of
correlations (descriptive table, correlation’s matrix, etc.), the result of them has questioned
numerous researches about the failure in the way to find the relationship between firm size
and dividend policy. However, the limitations of this study are that it provided very limited
information and the source for collecting data was not mentioned. Hence, this research paper
does not consider this study as a debate for this relationship between firm size and dividend
pay-out policy.
Thus, after considering some previous researches, the sixth hypothesis is:
H.6: The firm size has a positive association with the dividend payment ratio
4.3.2. Financial Leverage
As stated by Jensen (1986) about the agency theory of debt, debt has a role in forming a
disciplinary force levied upon directors. Companies, whose excess cash flow cannot be put
into investment profitably, for fear of the threat of takeover, will take on debt so that cash
could be reallocated to their shareholders rather than wasted. Given that circumstance, this
will possibly result in either companies paying high dividends to their shareholders, or will
play a critical role in the company’s dividend policy decision.
According to Aivazian et al (2003), company's leverage has been assuming a key part in
clarifying company's dividend pay-out. Leverage is negatively related to dividends; implies
that organizations with low obligation degrees are ready to pay more dividends. In contrary,
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companies with high leverage proportions have high transaction costs are not willing to pay
dividends to avoid the cost of external financing.
Recently, there are some researchers have found that the level of financial leverage has
contribute negatively to the dividend payment policy. Following the study of Al-Shubiri
(2011), he stated that the impact of financial leverage on the dividend pay-outs is
insignificantly. His evidence was based on 60 industrial firms listed on the Amman stock
exchanges from 2005 to 2009. In addition, by using logit2 regression analysis and tobit3
regression analysis, his random effects tobit/logit models are more scarified than the pooled
model. This dissertation assesses this result as a good catalyst to build second hypothesis.
Overall, using appropriate methodology combine with refined data, this research has
convince readers about his outcome, “…financial leverage has negatively significant impacts
on dividend payment policy...” (Al-Shubiri, 2011).
Considering another research, Emamalizadeh et al (2012) had also researched on the impacts
of financial leverage on the dividend pay-out policy. Group of authors had collected the data
of 33 food firms listed in Tehran Stock Exchange with 242 data from 2003 to 2010. In this
research, authors listed a number of previous researches which conclude the negative effects
of financial leverage on the dividend payment policy. For example: they purposed the studies
of Higgins (1972), McCabe (1979) and Rozeff (1982) with the conclusion of insignificant
impacts of leverage on dividend pay-out ratio. Then in their results, they found the similar
findings with previous researches above.
However, his result might not appropriate with this study. Because, the data was collected in
food industries, where the policy and the operating was not similar the retail industry;
besides, the period of researching was on long time (from 2003 to 2010), the policy and the
management system changed to fit with the economic at that time; accordingly, the dividend
payment fluctuated significantly as a whole (especial world’s financial crisis time) and it
might affect to the result of this study. In addition, the comparative environment in food
2 Logistic regression, or logit regression, is a type of probabilistic statistical classification mode; it is used to predict a binary response from a binary predictor, used for predicting the outcome of a categorical dependent variable (i.e., a class label) based on one or more predictor variables (features).3 The tobit model is a statistical model proposed by James Tobin (1958) to describe the relationship between a non-negative dependent variable and an independent variable.
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industry is much different the retail industry. Therefore, this result is considered as a
reference data. This researched paper might consider it as a small part to build a hypothesis.
On the study of Rafique (2012), he also pointed out the negative effects of financial leverage
on the dividend payment policy. The empirical result of his research was based on 318
observations of 53 companies listed on Karachi Stock Exchange from 2005 to 2010. As it is
mentioned above, the data of Rafique’s research was very consistent and transparently, then
the result from regression model of his research is highly accurate.
Following the research by Afza & Mirza (2011), authors found that the leverage degree is
emphatically statistically remarkably and negatively related with the dividend pay-out policy
and that this additionally decreases the transaction costs. He clarified that the explanation
behind this negative connection is that greatly leveraged firms convey a substantial issues of
transaction costs from exterior financing. However, in this study, the empirical result of this
study was based on 763 dividends change announcement in Germany from 1992 to 1998. The
data seems quite long time ago and it might not appropriate with the policy of dividend
payment at the present.
In conclusion, combine previous researches with the agency theory; this dissertation purposes
the seventh hypothesis is that:
H.7: The financial leverage impacts negatively to the dividend pay-out ratio
4.3.3. Cash flow per share
Related directly to the agency cost, cash flow has played a significant role in controlling the
agency problems. As the agency theory suggested, the more free cash flow in hand of
manager, the more agency issues arisen (Jiraporn et al 2011) or in other word, companies
with more cash flow are easily to be vulnerable to the agency conflict. Its theory also
explained that manager, when they have more free cash in hand, would priority serve their
private purpose before thinking of maximizing the benefits of companies as well as the
shareholders. Hence, the companies need to manage or restrict the free money in hand of
manager by paying a dividend. Accordingly, it is reasonable to look at the empirical results of
previous studies to enhance the evidence of agency theory.
In the research of Consler et al (2011), authors indicated the significant positive relationship
between the cash flow per share to the dividend payment policy. By adopting greater than
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1900 dividend payment from 2000 to 2006 and using a linear mixed effects model4 to
compose the result, researchers seems convince the readers with their outcome. Group of
authors compared the prediction in dividend payment between earning per share and cash
flow per share. They gave a number of critical evidences to states that earning per share has
strongly relationship with dividend pay-out. However, in their study, they indicated that even
the cash flow per share had stronger relationship with dividend payment ratio rather than
earning per share; which mean that cash flow per share predict the changing in dividend more
effectively than earning per share. In this situation, the cash flow per share has strongly
positive relationship with the dividend payment policy. Standing at the position of readers,
this result is fantastic and persuadable. Although, the research still exist a small limitation
(they did not mention how better cash flow is as a predictor of dividend payment policy), it is
still good evidence to for this dissertation to create the eighth hypothesis.
Regarding the research of Rafique (2012), he mentioned that whenever the cash flow is
greater than zero (positive), companies decided to dive profit in the form of dividend to the
shareholder and if it was smaller than zero (negative), firms decided to issue shares. He also
revealed that great dividend pay-out decrease inner cash flows, driving managers to seek
outer financing, and accordingly, making them liable to capital suppliers, hence, lessening
agency costs. Then he inferred that dividend payments depend largely on cash flows, which
reflect the organization’s capacity to pay dividends, than on recent earnings, which are less
intensely impacted by accounting practices.
Generally, the analysis of Rafique’s research is completely persuaded to the readers.
However, researcher finds problems regarding “cash flow” part. Firstly, Rafique was only
based on previous results of the other researches and the calculations were not expressed on
this part. Moreover, in the regression model section, he had not mentioned the effect of the
cash flow per share on the dividend payment ratio mostly. Accordingly, this result is
inappropriate to create the eighth hypothesis of this dissertation.
In the research of Al-Taleb et al (2012), by analysing the data achieved from 56 industrial
companies listed Amman Stock Exchange from 2005 to 2009, author concluded that a
strongly and statistically significant impacts of cash flow per share on dividend payment
4 Mixed-effects models describe a relationship between a response variable and some of the covariates that have been measured or observed along with the response. In mixed-effects models at least one of the covariates is a categorical covariate representing experimental or observational “units” in the data set
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ratio. In his multi-regression model, he emphasized the big impact of leverage as well as the
free cash flow to the dividend payment policy. According to Al-Taleb et al (2012), larger
companies with great free cash flow tended to use leverage to solve the agency problem,
however; it did not work effectively as cash flow did. He believed that companies tend to
increase the free cash flow per share would make the decrease of the agency problem
perfectly, which meant increasing the cash flow per share cause increasing the dividend
payment. Accordingly, this result affects largely to the decision of making eighth hypothesis.
Accordingly, combination between the agency theory and previous researches, the eighth
hypothesis has been set up:
H.8: Cash flow per share is positive connected with the dividend payment ratio.
4.3.4. Return on Assets
A number of most researches recently consider return on assets (ROA) factors as a symbol of
profitability. Instead of assessing impacts of profitability on dividend payment ratio, they
would test the impact of ROA on the dividend pay-out. By analysing that, researchers general
assess the impact of bot profitability and net income on dividend pay-out.
Firstly, in the impact of ROA on dividend payment ratio, Ouma (2012) had indicated the
significant impact of ROA on dividend policy. In their research, he generally assessed the
effect of dividend policy to firm performance (including profitability). The regression model
was analysed with the collected data from 41 listed companies in the Nairobi Securities
Exchange from 2002 to 2010. However, the result was not completely persuaded. The
analysis on the impact of ROA to dividend payment is frugality. Instead, the analysis on the
effect of dividend to the firm performance is over-focus. Hence, it makes the readers hardly
to understand the results as a whole. Thus, this paper considers this result as a little impact to
making the last hypothesis in this dissertation.
Approach the other research, Amidu (2007) examined the relationship among ROA, dividend
policy and grows in sale. By using Ordinary Least Squares model to estimate the regression
equation (data was collected from 25 firms listed on Ghana stock exchange in 8 years), author
indicated the positive association between policy of dividend payment and ROA. It was
surprisingly when he found that larger companies on the GSE act less with respect to ROA,
accordingly, his result state that negative associations between ROA and dividend pay-out
ratio. However, according to Amidu and Abor (2006), the existed problem of researches on
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Ghana was that the researches largely depended on small sample. Hence, it might
inappropriate to compare this result to the other researches. Thus, it might not help to conduct
the last hypothesis of this dissertation.
Following the research by Eng et al (2013), authors measured the relationship between the
profitability and dividend policy. They collected 26 banks from Bank Scope in Malaysia. The
result of their study indicated that ROA has no significant relationship with dividend payment
ratio. It might be explained that authors collected the data from a very small range of banks
(26 banks) hence it would affect to the results. In conclusion, it hardly motivates to process a
ninth hypothesis by their result.
Recently, Matusin and Pamela (2014) indicated the positive relationship between the
dividend policy and ROA through their research. Collected data from 44 manufacturing firms
listed in Indonesian Stock Exchange for period from 2008 to 2012 was analysed to clarify the
factors, which have the most effects on the dividend policy. In this paper, they assessed six
elements by using multiple linear regressions to seek the impacts. The result, as it was
conducted, significantly motivates this dissertation to produce the ninth hypothesis, due to
similar methodology with a nearly same period, and common purpose. However, there is a
different point in their scholar is that Matusin and Pamela (2014) researched the impacts on
the manufacturing industry on Indonesia, whereas, this dissertation reveal the effort to
analyse the effects on the retail industry in the UK. Therefore, the result might be different in
the end.
Thus, the last hypothesis is produced:
H.9: ROA is significantly related with the policy of dividend pay-out.
4.3.5. Summary
All to all, to assess the effect of Firms Characteristic (Firm Size, Financial Leverage, Cash
Flow Per Share, ROA) to dividend payment policy, this study has reviewed previous
researches. It is summarized as the table below (table 3.2).
Table 3.2: The association between firms characteristic to dividend payment policy
Author Year Samples Period Methodology Result
Firm Size
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Osman &
Mohamed2010 Saudi Arabic 1989-2004 Tobit Regression Positive
Rafique 2012 Pakistan 2005-2010 Multiple Regression Positive
Kim &
Jiraporn2011 US 2001-2004
Two- stage least
squaresPositive
Juhandi et al 2013 Indonesia 2005-2010 Multiple Regression Insignificant
Financial Leverage
Al-Shubiri 2011 Jordan 2005-2009Logit Regression &
Tobit RegressionNegative
Emamalizadeh
et al2012 Iran 2003-2010
Logit Regression
&Tobit RegressionNegative
Rafique 2012 Pakistan 2005-2010 Multiple Regression Negative
Afza &Mirza 2011 Germany 1992-1998 Multiple Regression Negative
Cash Flow Per Share
Consler et al 2011 US 2000-2006 Linear mix effectsStrongly
positive
Rafique 2012 Pakistan 2005-2010 Multiple Regression Not-mention
Al-Taleb et al 2012 Jordan 2005-2009 Multiple Regression Positive
Return on Asset
Ouma 2012 Kenya 2002-2010 Multiple Regression Positive
Amidu 2007 Ghana 1997-2004Ordinary Least
Squares
Negative and
Positive
Eng et al 2013 Malaysia 2001-2010 Multiple Regression Not Effect
Matusin &
Pamela2014 Indonesia 2008-2012
Multiple Linear
RegressionPositive
After reexamined from distinctive prior researches, it has built more comprehensive
knowledge about the association between the dividend payment policy and firm
characteristic. Besides, it has sought varied methodologies, which might server for the
purpose of this study through various previous researches. This part has brought different
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controversial about the connection between Firm characteristic variables and Dividend
payout ratio.
Dividend policy includes tremendously vital financial decisions, which serve as a premise of
various theories. On the other hand, these theories have been produced in distinctive areas,
and as indicated by some evidences this policy remains some embarrassment in the financial
cycles of corporation.
5. Chapter Summary
The literature review is composed with the aim of examining varied examines about dividend
payment decision in the financial market focusing on the influence of Corporate Governance
factors and Firm characteristic.
In general, this chapter has been divided into three main parts (definition of dividend
payment policy, the theoretical literature and empirical literature) with a main purpose of
providing great deals of researches, which involved the interaction among dividend pay-out
policy, Firm characteristic and Corporate Governance factors. As Saunders et al (2009) stated
that the aim of literature review is to help researchers enhance their ideas and questions, and
it also provides readers with a critical understanding of prior related researches. Moreover,
three main theories (agency theory, stakeholder theory and dividend signaling hypothesis)
have also illustrated to help researcher as well as readers could understand the effects of each
variables on the dividend payout. Due to that, this paper has been successfully archived
creating nine hypotheses. This is a very essential process. Due to this part, researcher is able
to compare the results on Chapter V (Empirical results and discussion) with the previous
researches to find the rationalization.
In order to answer dissertation questions, the next chapter is going to explain the
methodology approach and deliver the results of the relationship among dividend payment
policy, Firm characteristic and Corporate Governance factors. In particularly, the
methodology, research design and variables’ measurement are going to discuss critically.
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CHAPTER IV: RESEARCH DESIGN
1. Introduction
As it mentioned above, in this chapter, the methodology approach and research design are
brought to explain the operation of this dissertation. Accordingly, this chapter is divided into
three main sections (Data, variables measurement and regression model). However, firstly,
brief of the meaning and function of research design and research methodology is going to be
introduced.
To begin with, research methodology has a vital part in every research and subsequently
should not be neglected in any research operation. Research method and research
methodology must not be misunderstood with the other. Because, according to Dhawan
(2010), research method discusses all approaches or practices used in the time of researching,
meanwhile, the degree of research methodology extents far more extensive than that of
research method (which is only consider a minor part that establishes research methodology).
Hence, research methodology is supposed as a methodical method to explain examination
problems, a skill of conducting literatures (Kothari, 2004). In research methodology, the
different steps executed in the specific study will be exhibited alongside the rationale behind
them (Saunders et al 2009). It is fundamental for scholars to have an understanding of
research methodology in order to perceive which methods or strategies are fitting and
relevant inside the setting of the issues in study, which are not (Zikmund et al 2013). The
researcher's decision of research methodology is impacted by numerous variables. It has been
verified that there is an interrelationship between epistemology, hypothetical stance, and
methodology and research methods accepted by the scholar (Kothari, 2004). According to
Dhawan (2010), the researcher's perspective of epistemology will impact the hypothetical
point of view and accordingly the favored research methodology. As a result, it is paramount
to have an epistemological point of view in any analysis because the philosophical
understanding of a study supports incredibly in selecting the most suitable research design
(Blumberg et al, 2014).
On the other hand, regards to Saunders et al. (2009), research design is the suitable approach
to reflect research idea and purpose in the researched paper. Beside, research design is made
with the motivation for clarifying the reasons why this particular research design has been
selected. Hence, according to Ghauri & Gronhaug (2002), they indicated that the outcome
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and quality of the empirical research are essentially influenced via research design. In
addition, Saunders et al (2009) also pointed out that three essential types of research, which
are appropriate to used, are exploratory study, descriptive study, and explanatory study. On
every study likewise gets its own particular points of advantages, contingent upon the
motivation of the researcher. For example, exploratory studies are created to seek the
occurred problems, new insights, to question and assess a phenomenon in a new light. On the
other hand, while descriptive studies describe a situation, person or events; explanatory
studies create the connection between variables (Saunders et al 2009). Therefore, this
researched paper mostly uses the last study (explanatory study) to explain clearly for the
relationship amongst Firm characteristic variables, Corporate Governance variables and
dividend pay-out policy in the retail industry in the UK.
2. Data and data resource
2.1. Data
Regarding the selection of research design, this is reasonable and suitable to use the
secondary data to analyze. Regards to Ghauri and Gronhaug (2002), they indicated the
usefulness of secondary data in helping researchers answering research question and archive
the objectives.
Regarding Saunders et al (2009), he illustrated two main categories of secondary data, which
are raw data and compiled data. Accordingly, in this researched paper, researcher priority
uses the compiled data (which is collected from FAME for Firm Characteristic and from
annual reports for Corporate Governance factors) including the variables of UK retail firm,
which paid dividend during 2010 to 2013. Therefore, in order to support the chapter V
(empirical result, finding) effectively, this dissertation uses secondary data only.
The reason for this selection might be explained by some advantages as followed: Regarding
Zikmund et al (2013), by using secondary, researcher take less time to collect documents than
primary data. Besides, the other advantages of secondary data is that it is existed enduringly
and easily to re-check (Blumberg et al, 2014). Moreover, due to the availability of the
document on the Internet or some reliable source (some website contained a free academic
discussion and writing), the secondary data is much more flexible and easier to use. On the
other hand, Saunders et al (2009) also indicated that the limitations and unwanted outcome of
previous studies could be found in the secondary data. Due to that, this dissertation practices
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mostly with the published data. Therefore, the inadequate or limited results are discovered.
Based on state, this study can eliminate and avoid the potential mistakes during researching.
However, abusing the secondary data is not wisely solution, because it, sometimes, hardly
meets the needs of specific questions and situation in the research (Sekaran and Bougie,
2010). Accordingly, this study in particularly and researchers in general, should collect data
suitability and consistent with the aim of the research paper. Especially, this paper focuses on
only two variables (Firm Characteristic and Corporate Governance factors) to find the
impacts of that on the dividend payment policy as well as avoiding possible errors.
2.2. Data resource
According to Zikmund et al (2013), the consequence of collecting data from unreliable
sources affects seriously to the research as a whole. It obviously leads to wrong outcome. In
order to reduce these potential problems, the Firm Characteristic variables (included: Total
assets, Total Debt, Dividend, the number of common share, Net income, Cash flow) were
downloaded from the FAME source (which is available via the summon of University of
Huddersfield) and the Corporate Governance variables were collected from the annual report
from 2010 to 2013 (the annual reports was downloaded from Perfect Information which is
also available in summon of Huddersfield University). Accordingly, the statistic involving
the factors, which affect to the dividend payment policy, is easily downloaded without
charging any fee. Furthermore, all the information is reliable and consistent.
3. Sample and sample selection criteria
The selection of data was collected from 66 companies listed on the London Stock Exchange
during the period 2010 - 2013. These companies must satisfy two categories of standards to
be collected. Firstly, these companies must belong to retail industry in UK, and listed in the
London Stock Exchange. Secondly, these businesses have to pay dividend to shareholders
and investors from 2010 to 2013. According to Waters (2008), the increasing of the
observations lead to the more accurately of the results. Nevertheless, it depends on the
availability of data.
The reason for choosing period 2010 to 2013 is avoiding the global financial crisis in 2008
and late 2009. During this time, a number of factors contribute to the changing of the
dividend policy (not only internal factors, it might be affected by external factors such as:
macro-economic factors, regulator’s governance, etc.). By avoiding crisis time, the volatility
in paying dividend has not happened frequently, it stays stable during the year of research.
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According to Ghauri & Gronhaug (2002), two authors indicated that it must be at least 36
observations for simple & multiple regression models to analyze reliable empirical result.
This study adopted the data of 66 companies in 4 years, and then the total is 264
observations. Accordingly this dissertation has fully ability to run the multiple linear
regression model regarding the standard by Ghauri & Gronhaug (2002).
However, before adopting the regression model, the variables’ measurement should be
expressed in the next section. It is a vital process before analyzing because it helps readers
understand the meaning of each variable and the way these variables are calculated.
4. Variables’ measurement
In this section, this study indicates the measurement of three categorizes variables (dependent
variable, independent variable and control variable). Each category, this paper introduces
briefly how to measure these factors. Simultaneously, researcher links these measurements
with that in the other research to seek the similarity, differences and unwanted results. Based
on that, this dissertation is able to eliminate the potential limitation during the calculating.
4.1. Dependent variables
Dividend policy is main independent variables in in all regression of this research paper and
it is calculated by dividing dividend of this company in that year to the common share. The
result is renamed: Dividend per share, and it represented for the dividend policy of the
company in the period of researching. In the same line with previous researches by Gill &
Obradovich (2012), Mansourinia et al (2013) and Arshad et al (2013), the measurement of
dividend payment policy was based on the dividend per share ratio. Thus, dividend policy is
calculated by the division of dividend to common share in the year of researching.
On the line with Aivazian et al (2003), Osman & Mohammed (2010), etc. the Independent
Variables are assigned to the Corporate Governance factors and the Firm Characteristic
belongs to Control Variables. Therefore, in the next part, the methods of measuring these
variables are purposed.
4.2. Independent variables
4.2.1. Board size
Firstly, enterprises with higher number directors in Board tend to pay more cash dividend
(Ghasemi et al, 2013; Mansourinia et al, 2013). In the line with previous research, the Board
47 | P a g e
Size is measured by the number of directors in the board of company in the year research.
Most of previous research found that the dividend pay-out ratio is proportional with the
Board Size; therefore, this study expects the same trend between Board Size and Dividend
payment ratio.
4.2.2. Board independent
A noticeable point in the system of Board is that the changing in the number of NEDs.
According to UK Governance Code (2012), if any companies are compliant with UK
Corporate Governance code, NEDs in that company are working no longer than five year.
Hence, this affects directly to the second variable: The Board independent. The changing in
the number of NEDs affects straight to the Board independent variable. On the same
measurement with Arshad et al (2013); Litai et al (2011), this factor is calculated by the
dividing the number to NEDs to the total Director in Boards. Regards to previous researches,
the increasing of NEDs in the Board leads to the decrease of the payment dividend (How et
al, 2008; Al-Najjar & Hussainey, 2009; Iqbal, 2013). Thus, the hypothesis is set up to show
the paradox of Board Independent and Dividend pay-out ratio.
4.2.3. CEO duality
In the variables’ measurement progress, CEO duality is collected differently with the other
variables (Dummy variables). Regarding with previous researches (Zhang, 2008;
Subramaniam & Devi, 2011; Sharma, 2011; Abor & Fiador, 2013), researcher has the same
method of measurement. Which mean that if the position of Chairman and CEO is isolated;
the CEO duality variable is assigned 1. On the contrary, if the title of Chairman and CEO is
hold by a Director or person, this variable is assigned 0. Mostly, all authors in previous
researches found the isolation of CEO and Chairman Position cause the increasing in
dividend pay-out ratio. Hence, in this dissertation, the hypothesis is set up with the expected
of increasing dividend payment ratio caused by the separation in the position of CEO and
Chairman.
4.2.4. Frequency of board meeting
As it has been mentioned above, the academic discussions about the influences of board
meeting and dividend payment policy have not been exploited. However, researches about
the relationship between this variable and firm performance are widely found out. Regarding
Ntim and Osei (2011), there are varied ways to measure the firm performance (by ROA,
Board Meeting, Tobin Q, dividend payment, etc.). Therefore, this study has revised related
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researches about the effect of Frequency of Board meeting to the Firm Performance. Based
on that, assumption and the hypothesis have been set up. In the line with Horváth and
Spirollari (2012), Frequency of Board Meeting is calculated by the total of Board’s meetings
in the year research. Regards to the research by Ntim and Osei (2011), they found that the
increasing of board meeting tend to increase the Firm’s value. On the other hand, according
to Beiner et al (2006), he stated that large company had to have a good Governance
mechanism ( to create higher Corporate Governance performance and Firm’s value) to
control effectively the agency problems. Accordingly, the relationship between dividend
policy and Frequency of Board Meeting might be negatively connection.
4.2.5. Board gender diversity
In the same situation with Frequency of Board Meeting variable, Board Gender Diversity has
not had academic writing about the influences of that variable on the dividend payment
policy yet. However, researches on the effects of Board Gender Diversity on Firm
Performance might be found straightforwardly. Hence, on the same track with Nguyen and
Faff (2007), the Board Gender Diversity is calculated by dividing the number of directors
(who are women) to total number of directors in Board in a year. Mostly, all the researchers
found that the Diversity in Board brought number of advantages which enhance the
company’s value (Taghizadeh & Saremi, 2008). Combine the support from agency theory
and stakeholder theory, another assumption has been set up is that the increasing of women in
Board causes the increasing dividend payment policy.
4.3. Control variables
4.3.1. Firm size
Secondly, for the starting of control variables, Firm size is the first factor, which is measured,
has a positive relationship with the dividend payment ratio regarding Osman and Mohamed
(2010), Rafique (2012), Kim and Jiraporn (2011), etc. In the same measurement with mostly
listed authors above (in the literature review), the Firm size is measure as the natural
logarithm of the total asset in a year of researching. Combining Agency theory, stakeholder
theory and dividend signaling hypothesis with numerous studies researching on the impact of
Firm size on dividend payment policy, a hypothesis (the increasing of dividend payment ratio
has positive association with the Firm size) has been set. Or in other word, lager Firm size
tends to pay more cash dividend.
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4.3.2. Financial leverage
On the next ratio, the financial leverage is measured by dividing the total debt to total assets
in a year. Through the literature review, large economists indicate that the increasing
financial leverage ratio causes the decreasing of dividend pay-out (Al-Shubiri, 2011;
Emamalizadeh et al, 2012; Rafique, 2012; Afza &Mirza, 2011). Therefore, the paradox
between financial leverage and dividend pay-out ratio is possible occurred. Thus, hypothesis
is discussing about the negative relationship between dividend policy and Financial Leverage.
4.3.3. Cash flow per share
Motivated largely by the agency theory and stakeholder conflicts, cash flow is believed that
the primary reason leads to the agency problems. On the line with Consler et al (2011), the
impacts of cash flow is represented by the cash flow per share which is measured by dividing
the cash flow to the common share in a year. According to, AlTaleb (2012), the decrease of
cash flow lead to the rising of dividend pay-out ratio; therefore, this dissertation set the
hypothesis on the same track with reviewed literatures above.
4.3.4. Return on assets
Largely, most economists and researchers use ROA as a presence of profitability. Instead of
using profitability to seek the influence of that on the other factors, studies mostly use ROA.
And contrary, rarely researches, researchers used profitability instead of ROA to assess the
impacts of that on the other elements. In particular, regards to Eng et al (2013), the authors
used the profitability to assess the factors of its on dividend payment policy. However, they
did not found the relationship between the dividend payment policy and the profitability. On
the other hand, on the same track with Matusin & Pamela (2014), Amidu (2007), ROA is
measured by dividing the net income to total asset. Increasing ROA indicator is supposed to
make the higher ability of paying dividend. Therefore, the last hypothesis discusses about the
positive relationship between ROA and dividend pay-out ratio.
4.4. Variables’ measurement summary
All in all, the Dependent variable, Independent variables and Control variables’ measurement
could be summarised as a table below (Table 5.1):
Table 5.1: Variables’ Measurements
Variables name Symbol How to measure
Dependent Variables
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Dividend Payment Policy (payment
of dividends ratio)DP Dividend/ Common Share
Control Variables
Firm size FS Natural logarithm of total assets
Financial Leverage FL Total debts / total assets ratio
Cash Flow Per Share CF Cash Flow / Common Share
Return on Assets ROA Net income to total assets ratio
Independent variables
Board Size BSMembers existed in the board of
company
CEO Duality CDChairman = CEO: 0
Chairman varied CEO: 1
Board Independent BI NEDs/ Board of Directors
Frequency of Board Meeting BM Board Meeting in a year
Board Gender Diversity BDWoman of board Director/ Board
Director
5. Regression model
5.1. Simple Correlation
In this dissertation, with the aim to test the influence of two primary variables (Firm
Characteristic and Corporate Governance) on the dividend payment policy, correlation
coefficient (r) helps the appraisal of the strength of a couple of ranked or numerical variables
(Saunders et al, 2009). The range of correlation coefficient fluctuates between -1 and +1
regarding different meaning. With the “+” symbol stand in front of “r”, it indicates the
positive relationship and contrary, the “–” illustrated the paradox between two variables. Two
variables are considered as a perfectly independent when and only when the result is equal 0.
However, it is hardly to seek a perfect connection between variables. In this researched paper,
correlation coefficients are used to evaluate the association among dividend payment ratio
(Dependent variable), Firm characteristic (Control variables) and Corporate Governance
(Independent variables).
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5.2. Multiple Correlation
The purpose of using multiple correlation coefficients (R) is that it uses to re-check the
reliable of he relationship between dependent variable (Dividend pay-out) and group of two
variables (Firm and Corporate Governance characteristic). By having multiple correlation
coefficients, it indicates the coefficient of multiple determinations (R-square). R-square
presents to the extent of variability in the dependent variable could be overall clarified from a
gathering of independent variables. According to Saunders et al (2009), he clarified that the
adjusted R-Square is likely favorer because of the way that it could evade number of errors
relating to the procedure of studying the regression equation.
5.3. Multiple linear regression model
Lastly, the last method, which is the primary to use to analyse the factors in this dissertation,
is the multiple linear regression model. The purpose of using this method is to explain the
value of dependent variable (dividend pay-out ratio). According to Ghauri and Gronhaug,
they stated that the multiple regression model use to control for the variables, and clarify
critically the differences in the independent variable. In the line with authors in literature
review chapters, they also chose the multiple linear regression model such as Subramaniam
and Devi (2011); Ghasemi et al (2013), etc. In addition, the multiple linear regressions model
indicates the connection of each independent variable in the prediction of the dependent
variables. (Sekaran & Bougie, 2009). Hence, taking the written multiple linear regression
model by Ghauri & Gronhaug (2002), the initial equation for this methodology might be
produced as:
Dividend pay-out ratio = β0 + ∑i
n
βi(Firm Characteristic )+ ∑i
n
βi(Corporate Governance) +
ε
Or it might be written as follow:
DP = β0 +(β1 x FS) +(β2 x FL) +(β3 x CF) +(β4 x ROA) +(β5 x BS) +(β6 x CD) +(β7 x BI) +
(β8 x BM)+(β9 x BD) + ε
Where: The parameters β0 is assigned as constant coefficient, β1 to β9 are slope coefficients. In
addition, the ε symbol is known as the standard error in the model. The function of using the
multiple linear regressions model expresses how much the value of dependent variable is
impacted by the changes of the other variables (Firm and Corporate Governance variables).
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Hence, due to that, this dissertation might check the hypothesis above and make a conclusion
about empirical results.
On the other hand, the reliable of the results which was collected from the simple correlation
and multiple regression analysis, must be tested the likelihood of the association between
variables happening by chance alone (it is called Significance testing through the degree of
freedom (df)) (Saunders et al, 2009). During this test, the likelihood of relationship among
variables occurring by chance alone is exhibited by p-value. According to Sekaran & Bougie
(2010), if the p-value is higher than 0.05, the researcher is able to conclude that the
relationship between two variables is statistically insignificant. By contrary, if the p-value is
equal or less than 0.05, author can eliminate the researching hypothesis and conclude the
contrariety hypothesis. Furthermore, according to Saunders et al (2009), F-test should be
applied “…to test the relationship represented by your regression analysis having occurred
by chance…” This move is named analysis of variance (ANOVA).
For example, this researched paper is seeking the relationship between corporate governance
elements and dividend pay-out ratio and the p-value show the result is 0.051 (>0.05). It leads
immediately to the conclusion that the corporate governance has no impacts on the dividend
payment policy in retail industry in the UK during period from 2010 to 2013.
Lastly, the last step, which should be done to accept the empirical results from multiple
regression analysis, is called “Multicollineraity”. Regards to Waters (2008) indicate the
important of this step was to re-check the strength connection between each (pair) of
independent variables in generally. The main aim of this move is to ensure non-existed strong
connection between independent variables as well as control variables. According to Water
(2008), if the correlation coefficients are lower than + 0.7 and greater than – 0.7, the result is
acceptable.
6. Potential limitation of the study
This study was just focused on investigating the effects of interiors factors on dividend
payment in the retail business in the UK from 2010 to 2013. It implies that there are some
different components that could additionally have effects on dividend payment. These major
variables may originate from external components such as macro-economic, inflation, politic,
etc. Moreover, during the research, regarding to some companies has not publishes their
annual report, hence the corporate governance variables in some companies is “not-
available”. Accordingly, the result may not end up with exactly expectation.
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On the other hand, the sample of this dissertation has not comprehensive. The potential issues
might cause the different results with the same topic but different industries or in other
nations. This study has fully concentrated on the reasons causing the dividend payment policy
of retail industry in the UK. The outcome might be on the same line with previous
researchers, or it might not. Accordingly, it is might hardly to explained and fulfil the gap of
prior researches.
7. Chapter summary
To investigate the 9 variables identified in this study associated with the impact on dividend
pay-out ratio of 66 retail companies in the UK; this study undertakes an empirical testing of a
linear regressions model with the following contracture framework:
Firgure 1: The contracture framework.
There are 9 hypotheses which are established and a set of connected proxy variables are
clarified. The chosen variables found the general model to be tested in order to control the
elements that might affect dividend policy.
Hence, in the next chapter, this study comes to show the descriptive tables as well as the
empirical results to compare with previous research and found the factors, which contribute
the most impacts to dividend payment policy.
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Dividend pay-out.
Firm size
Financial leverage
Cash flow per share
ROA
Boar sizeBoard
Independent
CEO duality
Frequency of Board
meeting
Board Genders Diversity
CHAPTER V: EMPIRICAL RESULTS AND DISCUSSION
1. Introduction
In this part, the study is performing out-come obtained from the yield of SPSS programming.
The duty in this part is to identify and explain the meaning of the numbers (it came from the
descriptive statistics, simple correlation analysis and multiple linear regression models).
Moreover, researcher has to link the empirical results with the previous researches in the
literature review to compare and contrast with this. The primary determination of this part is
to reply the given questions at the beginning “which factors have contribute largely to the
dividend payment policy”. The data was collected from 66 companies during 2010 to 2013,
which made totally 264 observations.
2. Summary descriptive statistics and discussion
Firstly, the table of descriptive statistics about all variables in the model is demonstrated
below. The primary purpose of this table is to deliver overall view in the performance of
variables during the periods (from 2010 to 2013).
The table 6.1 indicates generally descriptive statistics from dataset. It is attached with
minimal, maximal performances and the mean as well as standard deviation of each variable.
In addition, the range of each variable is also added.
As it has shown in the tables, there are only 158 observations in the table. The reasons for
losing more than 100 observations are that during the refining data, there is some companies
have not published their information. Therefore, some variables belonging to corporate
governance are missing. Besides, the FAME source also provides some “not-available”
figures of Firm characteristic (mostly at the dividend per share variable); hence, researcher
has to eliminate the rest of related variables in the time of research. On the other hand,
according to Field (2014), he also stated that the needed condition to compare standard
deviation is that both dataset must have the same mean. If this condition is not satisfied, the
comparison is meaningless. Hence, the purpose of this chapter is not to compare with the
previous results to find the differences or similarity, but it only to describe the numbers in
this dissertation with that numbers in previous results.
On the Firm size variable, the standard deviation is quite low (1.9641). It means that the
degree of scatter between values is 1.9641. According to Field (2014), greater of standard
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deviation, the less value similarities. Contrary, if the deviation is low, the degree of
similarities among value is high. In the same line with researches by Osman and Mohamed
(2010), Rafique (2012), these researches had also very small deviation (which is 0.7677 and
1.590017 respectively).
In term of Financial Leverage, this variable witnesses the same situation with Firm size,
where the standard deviation is quite low (1.8451). Hence, the level of separation between
values is really great. It is also in the same track with previous research by Rafique (2012)
where the standard deviation is only 1.197193. It might be explained by the same
methodology and same method in using multiple linear regressions between this dissertation
and Rafique (2012). Additionally, the sample in the researched paper by Rafique (2012) and
this dissertation is quite similar (both have small selections researched companies and short
period).
Next, cash flow per share also shows a very small fluctuation in the value, where the
deviation is quite small (only 0.2255). It could be easily to explain during the range (2.1730)
between max (1.2360) and min (-0.9370) is not too high in comparing with the other
variables. Therefore, the level of scatter among values is not great.
Regards to ROA variables, the range between the maximal and the minimal is pretty high and
the standard deviation (18.6373) is greatly larger than the other Firm characteristic variables.
It is quite different where the separation’s level is too far then it is also not on the right track
with previous researches by Matusin & Pamela (2014) and Amidu (2007) (where the value of
standard deviation is 0,0969681 and 0.2577, respectively).
In term of Corporate Governance, this dissertation strongly focus on the two new variables
are Frequency of Board Meeting and Board Gender Diversity. The other variables have a
very same track with previous researches. Where all Board size, board independent and CEO
duality get a very high value’s similarities.
Approaching the frequency of board meeting variables, the result on the table 6.1 of standard
deviation is not quite high ( 2 ). It seems quite fit with previous researches by Ntim & Osei
(2011) and Horváth & Spirollari (2012). The standard deviation (in the paper by Ntim &
Osei, (2011)) was 2.18 (there is a very small different is that in the research by Ntim and Osei
(2011), Board Meeting is measured by natural logarithm number meeting of board in year).
The value of maximum and the minimum of this variable are not remarkable high and not
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significant low; hence the range is not really a large number (12). Moreover, the value
between range and mean (9) is nearly close.
Table 6.1: Descriptive statistics
This table shows firm characteristic and corporate governance variables of 66
companies-year observations from 2010 to 2013. Firm characteristics are collected
from FAME source and Corporate Governance variables are collected from annual
report
Obs Mean Range Maximum MinimumStandard
Deviation
Firm Characteristic
Firm Size 15814.544
79.5580 19.3366 9.7785 1.9641
Financial
Leverage158 2.6803 15.4696 16.4286 0.9589 1.8451
Cash Flow Per
Share158 0.0034 2.1730 1.2360 -0.9370 0.2255
Return on
Asset158 8.3010 229.4499 39.1167 -190.3332 18.6373
Corporate Governance
Board Size 158 8 11 15 4 2
Board
Independent158 0.5105 0.5778 0.7778 0.2000 0.1072
CEO duality 158 1 1 1 0 0
Frequency of
Board Meeting158 9 12 16 4 2
Board Gender
Diversity158 0.1158 0.4000 0.4000 0.0000 0.1074
Lastly, the Board Gender Diversity variable witnesses a significant small deviation (0.1074).
In the same line with previous studies, Nguyen & Faff (2007) explained the reason for a very
small number in standard deviation was that the diversity (especially the gender diversity)
was not really mentioned in mostly companies. Mostly, the companies, sometime, focus on
the productivity of working and wipe out the advantages from the diversity.
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Hence, in order to clarify how much the degree of scatter in the value of each variable, the
next section discusses about the correlation between each variables. Then, this dissertation
expresses the empirical results, which are analysed from the multiple linear regressions
model.
3. Bivariate correlation results and discussion
Firstly, in order to find the relationship between pair of independent variables, writer
considers the association among each independent variable to the dividend payment policy.
Through the scatter plot (see more in appendix 1), each variable has it own trend to the
dividend payment (dependent variable) and hardly to find out the relationship among
independent variables. Hence, in order to seek the connection between the variables, author
considers the matrix correlation. The first purpose is to find the relationship between
independent variables and the second aim to seek the “Multicollineraity” (if any) to eliminate
one of these variables.
Table 6.2: Correlations Matrix
*Note: The up half right of the table indicates the correlations coefficients, *, ** express
that correlation is significant at the 0.05 and 0.01, respectively. The firm characteristics
include FS, FL, CF, ROA (which is Firm Size, Financial Leverage, Cash Flow per share,
Return on Assets, respectively). The corporate governance variables involve BS, BI, CD,
BM, BD (which is Board Size, Board Independent, CEO duality, Frequency of Board
Meeting and Board gender Diversity).
FS FL CF ROA BS BI CD BM BD
FS 1 .179* 0.089 .255** .531** .255** -0.002 -0.021 -0.014
FL 1 0.143 0.117 0.152 0.083 0.003 0.047 0.029
CF 1 0.063 0.121 0.012 0.037 0.008 0.056
ROA 1 0.046 -0.092 -0.021 -0.125 0.004
BS 1 .158* 0.108 0 0.145
BI 1 0.074 -.326** 0.06
CD 1 0.101 0.103
BM 1 -0.032
BD 1
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During the table above, there is a clear point is that there is not existed two variables which
have a strongly relationship with the other. Hence, writer has not to eliminate any variables.
On the other hand, the table 6.2 indicates that there are some significant relationships
between some variables. The highest relationship between two independent variables is 0.531
(between BS and FS). However, it has not reached to the limit point (0.7), therefore, writer is
able to reject the availability of “Multicollinearity” in this papers.
Firstly, the positive relationship between Firm Size and Financial Leverage is clearly
indicated in the table. In the line with study by Rafique (2012), he also found that lager
companies has positive with financial leverage, whereas different authors disagreed with this
idea. Regarding AL- Shubiri (2011), Mansourinia et al (2013), two authors supported the
negative relationship between two independent variables is Firm size and Financial leverage.
On the other hand, the coefficient correlation among FS, ROA, BS, BI is significant positive
(which is 0.255, 0.531, 0.255 respectively). It indicates the increasing of FS would make the
rising of ROA, BS and BI as a whole. On the same agreement, Mansourinia et al (2013), Litai
et al (2011) also showed the positive relationship between FS and BS. They believed that the
increasing of BS enhance the strength of FS.
On the other hand, the BI has a negative significantly association with BM (-0.326). Which
meant that the number of NEDs in Board increasing lead to the decreasing of Board meeting
in this year. To be honestly, writer has not found successfully any discussions on this
relationship between these two variables. However, regarding Kim and Jiraporn (2011), they
mentioned that the increasing of corporate governance quality would eliminate the agency
problems and strengthen the management mechanism. By increasing the number of NEDs in
Board system, the quality of Board Directors is, some how, increased. Hence, the Board
meeting might be happened frequently to catch up the operating of companies. Hence, it
should be a positive relationship between BI and BM.
However, all these relationship between independent variables impacting to the dividend
payment strongly or not is the largest problem, which is concerned. This section is only
severed with the aim checking the ability of Multicollinearity.
Thus, move to the next part, writer run the multiple regression model to get the empirical
results. Based on that, researcher has fully ability to make conclusion, which factors has
contribute to the changing of dividend payment policy.
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4. Multivariate regression results and discussion
To begin with, writer demonstrates the model summary and illustrated the significant
variables impacting on the dividend payment policy.
Table 6.3: Multiple linear regression result.
Variables βStandard
Error
Standardized
Coefficientst Significant
Constant-
0.1560.278 -0.559 0.577
Control Variables
FS 0.047 0.017 0.229 2.726 0.007
FL 0.032 0.015 0.146 2.062 0.041
CF 0.485 0.124 0.273 3.928 0
ROA 0.002 0.002 0.084 1.191 0.235
Independent Variables
BS 0.032 0.015 0.178 2.14 0.034
BI-
0.4090.286 -0.11 -1.429 0.155
CD-
0.0730.102 -0.05 -0.717 0.474
BM-
0.0280.013 -0.155 -2.084 0.039
BD-
0.4570.261 -0.123 -1.754 0.082
*Note: R square= 0.308, Adjusted R Square = 0.266 (see more in appendix 2). This table
illustrated the factors have impacted to the dividend payment policy. In this table, control
variables include Firm size, Financial Leverage, Cash flow per share, Return on assets.
Independent variables include Board Size, Board Independent, CEO duality, Frequency of
Board Meeting and Board gender Diversity.
From the table 6.3, the R square is 0.308; it means that 30.8 % changing in dividend payment
policy has been affected by nine variables in this model. The standardized coefficients in this
model have been drawn and it has showed that Firm Size, Financial Leverage, Cash flow per
60 | P a g e
share, Board size and Frequency of Board Meeting has significant impact with the dividend
payment policy.
5.1. Firm size
On the line with Osman & Mohamed (2010), Kim & Jiraporn (2011) and Rafique (2012),
writer finds that the increasing of firm size cause the increasing of dividend payment, which
meant that there is a positive connection between dividend payment policy and firm size. It
might be explained by the fact that, the bigger of firm size might lead the increasing of the
managers to control and contribute work in every venture. Regarding to agency theory, when
the manager take control and work for the benefit of shareholder, the agency problem would
be occurred obviously. On the other hand, regards to stakeholder theory, the shareholders
prefer to have the best server for their business from managers and contrary, managers are
likely satisfy their demand rather than making benefit for the stakeholders. Hence, the
conflicts between two parties are created as a whole.
Accordingly, the need for large business reducing the agency problem and the stakeholder
conflicts is to contributing the free cash flow to the shareholder in the form of dividend.
When the managers have not had much free cash flow in their hand and the shareholders has
received more money from their investment, the agency problem and the conflicts has been
resolve.
In conclusion, the empirical result on the proportional between dividend payment policy and
Firm size is reasonable and it is also supported by two popular theories (Agency theory and
Stakeholder theory).
5.1. Financial Leverage.
Interestingly, the empirical result in this researched paper of Financial Leverage has gone
totally against the previous results. It is really stunning writer and readers, because all of
literatures review of the relationship between Dividend payment policy and Financial
Leverage indicate the negative impact.
However, the result in this researcher paper indicates the increasing of Financial Leverage
causing the increasing Dividend payment policy. It might be explained that, according to
Denninger (2012), the enterprise, mostly, use debt to finance their operation. Because of
doing like this, this firm raises their leverage as they can invest in their business without
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using their equity. Due to that, the companies might have a chance to increase the firm value
and enhance the wealth for investors and lenders.
It is obviously that leverage helps both shareholders and companies invest or keep operating.
And it brings along with a remarkable risk: a company might use leverage to generate
shareholders wealth; however if this company failed on their business, the interest expense
and credit risk of default will destroys shareholder value (Denninger, 2012).
Nevertheless, companies tend to use the investment from the investors and lenders to create
the benefits. In order to appealing free external capital, Al-kuwari et al (2010) emphasized in
the role of dividend payment that it is a signal to investors about the stable of company’s
finance during the operating. Accordingly, when the financial leverage increase, it has led to
the rising of dividend payment policy.
On the other hand, when the companies increasing their capital by having investment from
external source, the companies, or the manager and authorities have in hand their amount of
free cash flow. It definitely, theoretically, invests or keeps company operating in order to
enhance the wealthy of shareholders and return the interest annually. However, the agency
problem is hardly not happened, because it is impossible to ensure that manager would spend
all of the capital to make shareholder value. Therefore, the agency problem is unavoidable.
Therefore, the most effective way to restrict the agency issues is that paying dividend to
shareholders and investors. By doing that, firms are getting more and more external
investment. In conclusion, the Financial Leverage increases the ability to pay dividend of
firm.
4.3. Cash Flow Per Share
Cash Flow Per Share is the most obviously factor contribute directly to the dividend payment
per share. As it has mentioned by Consler et al (2011), the cash flow per share has strongly
relationship with the dividend payment ratio, and it predicts the changing of dividend pay-out
policy more effectively than earning on equity.
In the line with Al-taleb, increasing cash flow per share is the same meaning with reduce free
cash flow, it generates more shareholder value and restrict the controlling cash of managers.
Moreover, supported by agency theory and stakeholder theory, the more cash flow in hand
managers, the more conflicts of stakeholder and managers.
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4.4. Board Size
Witness the same situation with Firm size; Board size also has strongly positive relationship
with dividend payment policy of retail companies in the UK. On the same track with Litai et
al (2011), Gill & Obradovich (2012) and Mansourinia et al (2013), they all found the
significant relationship of the ability paying dividend and the Size of Board. Litai et al, was
motivated by the agency theory indicated that larger size of board lead to the global
development of company; hence, the agency problem occurred unavoidable.
Explained for the result, writer believes that the increasing of Board Size helps to reduce the
agency problems and reduce the conflicts between two parties (shareholders and managers).
Because according to Mancinelli & Ozkan (2006), two authors had emphasized that the
quality of corporate governance was increased due to the rising in the number of Directors in
Board mechanism. Accordingly, the operating as well as the strategy of companies would be
upgraded continuously and paying dividend to appealing external resource would be in their
plan.
Standing in the light of agency theory, the board size increasing is the same meaning with
that the companies are expanding their position in the financial market. Hence, the directors
cannot control all of these subsidiaries. Hiring a manager to run their business is the most
effectively way to generate greater income. However, as it mentioned by many researchers
above, the agency problem is the worst thing concern. Therefore, the applicable solutions for
this issue is that pay more money to investors in the form of dividend.
4.5. Frequency of board meeting.
The hypothesis of writer has predicted correctly, with the negative relationship between
Board Meeting and dividend payment policy. As it mention above, this hypothesis was larger
inspired from the research by Ntim & Osei (2011). Group of authors have shown the
increasing of board meeting causing the increasing of firm performance.
The company performance might be measured by different factors, such as (ROA, ROE,
dividend pay-out, capital structure). In this situation, when the board meetings are happened
more frequently, the quality of board mechanism has been also upgraded leading to disappear
of agency problem and information asymmetric. Supports by agency theory and signalling
theory, when the two main problems are solved, the dividend payment is bringing only one
meaning: appealing the investors’ investment.
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Hence, in this case, when the board meeting more than usual in a year, it will lead to the
falling in the dividend payment of that year research.
4.6. Final Regression Model
After got the empirical result from regression analyse, the final model is set up as:
DP= - 0.156 + (0.047xFS) + (0.032x FL) + (0.485x CF) + (0.032x BS) + (- 0.028x BM) +
0.278
5. Chapter summary
In conclusion, after running the multiple linear regression model, writer found the positive
relationship of Firm Size, Financial Leverage, Cash Flow per share and Board Size to the
dividend payment policy. Only Board Meeting has shown the negative association with the
payment of dividend.
The most interestingly in this part is that writer has found two things in which previous
researches did not. Firstly, the Financial Leverage increases the ability of paying dividend,
which is totally opposite with mostly researchers. Secondly, writer also is find the
relationship between dividend policy and frequency of board meeting variables, which has
been not discussed in academic analysis.
Thus, in the next chapter, writer illustrated the conclusion and the limitation of this study.
Base on that, the recommendation for further study is created.
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CHAPTER VI : SUMMARY AND CONCLUSION
1. Introduction
In this chapter, writer is going to summarize briefly the process of making this dissertation.
Moreover, researcher also adds the limitation of this study and creates the recommendation
for further study.
2. Summary of findings
This study aims to examine the relationships among dividend payment variables and the
factors contributing to the changing of its in the retail industry in the UK during period from
2010 to 2014 .In this period, the dividend payment policy has witnessed varied factors
impacting to the ability of paying dividend, including firm characteristic factors and
corporate governance characteristic. There are number of different researching on these
factors effect significantly to the dividend payment policy. However, in this research, author
only considers nine main variables, which are divided into two group, involving Firm
Characteristic variables and CG elements. Obviously, these variables cannot describe all the
factors contributing impact to dividend payment policy.
After revising 66 retail companies listed in London Stock Exchange during 2010-2013,
author finds the positive significant relationship among Firm Size, Cash Flow per share,
Financial Leverage, and Board Size to the dividend payment policy. The only negative
association to the dividend pay-out is the frequency of board meeting. The other variables
(ROA, Board Independent, CEO duality and Board gender Diversity) have no relationship
with the dependent variables (dividends).
3. Limitations of the study
During the process of doing this dissertation, the researcher has had to face with several
limitations and difficulties that have not been solved yet although the researcher has
attempted to avoid them from previous researches. They can be listed as follow:
Firstly, this dissertation was only concentrated on analysing the impacts of internal factors
variables on dividend payment in the retail industry in the UK from 2010 to 2013. It can be
seen from the findings above that nearly 38% changes in dividend payment policy can be
explained by these nine variables. It means that there are some other factors that could also
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have impacts on dividend payment. These fundamental factors may come from external
factors like macro-economic, inflation, politic, etc.
Secondly, the chosen sample of this dissertation was only in the retail industry in the UK due
to the lack of availability data in some other sector of industry.
Another limitation of this dissertation is involving to the barrier of language. As an
international student and being required to write an English academic dissertation, the
researcher was unable to use English as mother language. Thus, some sentences or grammar
structures used in this dissertation were not really accurate and academic. To solve this
problem, the author has contacted to some LDG tutors for helps but it may still make some
mistakes in this dissertation.
4. Recommendations of the study
Further study could improve the quality of research by having some moves:
1st: Expand the environment of researching, the dividend payment could be also researched
on EU, South Africa, South East Asia, etc. Researchers should not narrow the sample of the
research
2nd: The period of research was not long enough to see the changing of dividend post- and
after the financial crisis. It is very interesting topic but it is also sensitive period for research.
3rd: Researchers should prepare for yourself a very good knowledge of SPSS or some related
statistics software in order to work the most effective.
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Appendix
Appendix 1: The scatter plots between each independent variable to dividend payment ratio.
Figure 6.1: Scatter plot for dividend per share and cash flow per share.
Figure 6.2: Scatter plot for dividend per share and financial leverage
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Figure 6.3: Scatter plot for dividend per share and Board Independent
Figure 6.4: Scatter plot for dividend per share and CEO duality
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Figure 6.5: Scatter plot for dividend per share and Board Gender Diversity
Figure 6.6: Scatter plot for dividend per share and Firm Size
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Figure 6.7: Scatter plot for dividend per share and Board Size
Figure 6.8: Scatter plot for dividend per share and cash flow per share
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Figure 6.9: Scatter plot for dividend per share and Frequency of Board Meeting.
Appendix 2: Model Summary and ANOVA (adopted from SPSS program)
Model SummaryModel R R Square Adjusted R Square Std. Error of the
Estimate
1 .555a .308 .266 .342923480402284
a. Predictors: (Constant), Frequency of Board Meeting, Board Size, Cash Flow Per Share, Return on Total Assets, CEO Duality, Board Gender Diversity, Financial Leverage, Board Independent, Firm size
ANOVAa
Model Sum of Squares df Mean Square F Sig.
1
Regression 7.744 9 .860 7.317 .000b
Residual 17.404 148 .118
Total 25.148 157
a. Dependent Variable: Dividends Per Shareb. Predictors: (Constant), Frequency of Board Meeting, Board Size, Cash Flow Per Share, Return on assets, CEO Duality, Board Gender Diversity, Financial Leverage, Board Independent, Firm size
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