RELATIONSHIP BETWEEN DIVIDEND AND VALUE OF FIRM

Transcription

1 RELATIONSHIP BETWEEN DIVIDEND AND VALUE OF FIRM 7 In a growing Indian economy, intense competition in every field of activity is being witnessed due to the reforms of 1990s. The tri-faceted reforms viz. globalization, liberalization and privatization together with the swift pace of information technology have revolutionized the decision practices of Indian companies. It is in such a scenario that the role played by financial managers becomes all the more imperative. The financial managers of the companies are required to work in such a scenario by focusing on the sole objective of wealth maximization for which they are required to take critical financial decisions. This is because the shareholders wealth maximization is the result of company s financial management policy and will result into maximising value of the company that is measured by the price of the company s common stock. Thus, the ultimate goal of corporate entities is to maximize the value of shareholders investment in the firm. Managers pursue this goal through their investment and financing decisions. Apart from these decisions, managers need to decide whether to distribute the earning among shareholders as dividend because the work of top management is to maximize the wealth of the firm s shareholders. The management is the representatives of the shareholders. In the process of running business, they have to keep in mind that the decisions they will take will impact the firm s shares. That s why share price is critical determinant of shareholders wealth. 260

2 Shareholders like cash dividends, but they also like the growth in EPS that result from ploughing back of earnings into the business (Khan and Jain, 1992) 1. The optimal dividend policy is the one that maximizes the company's stock price which leads to maximization of shareholders' wealth and thereby ensures more rapid economic growth (Maheshwari, 1992) DIVIDEND AND ITS IMPACT ON VALUE OF FIRM What are the reasons which determine and can affect the firm s value? There are many approaches in this area but some of them are: managerial style, ownership structure, political stability, dividend payout. Dividend policy among other factors can be regarded as a cause of variations in firm value. Dividends serve as an indicator of the firm s present and future performance and potential risk level by lending credibility to management claims, and as such may help determine the market price of the stock. Stability in dividend policy is often necessary to eliminate uncertainty and the potential poor market valuation by investors associated with unpredictable dividend payments, and a decrease in dividends often results in a negative market response as seen by a reduction in the price of the stock. The level of the decline in stock price is, however, often dependent upon the reason behind the dividend cut, be it poor earnings or future growth potential (Shapiro, 1990) 3. In an attempt to examine the relationship between dividend and value of firm, number of researchers has made significant contribution in the dividend literature. The contributions 261

3 have been made on the basis of linkage of dividend with the attributes of firm s value. The entire discussion has been divided in five parts: Basic Dividend Theories The attempt in the past has been made to extract the relationship between dividend and share prices through various models. One of the most commonly used models is the dividend model of share prices, based on earnings that the shareholder gains on his share (Koskela, 1984) 4. The model is based on discounted earnings when the shareholder s rate of return is changing (William, 1938) 5. It is presumed that private investors buy future dividends when they buy a share and then a share is worth only what an investor can get out of it. The market establishes share prices by discounting an anticipated stream of future dividends (Hickman and Petry, 1990) 6. Some of the models based on the same concept are: Walter s model (1956) 7 and Gordon s model (1959) 8. Further, Solomon s model (1963) 9 covered discounted dividends, earnings and investments made by discounted retained earnings. Other dividend-based models are Lintner s (1962) 10 propositions, Porterfield s (1967) 11 conceptions, as well as the models of Malkiel and Cragg (1970) 12 and Bower and Bower (1970) 13. These models presumed that the investor knows the stream of future dividends. Eades (1982) 14 also is credited for developing a dividend signaling model. Hagen (1973) 15 determined the market value of the stochastic process representing the company s dividend policy. 262

4 Ohlson (1990) 16 analysed that security value is a function of expected dividends adjusted for their risk and discounted by the term structure of risk-free rates. Earnings are seen as an information variable that was sufficient to determine a security s payoff, price plus dividends (Ohlson, 1992) 17. He postulated that only expected dividends can serve as a generally valid present value feature of a security. Goetzmann and Jorion (1995) 18 concluded that dividend yields only displayed marginal ability to predict stock market returns in either country. Rees (1997) 19 suggested that earnings distributed as dividends have a bigger impact on value than do earnings retained within the firm Earnings Theories Another aspect of dividend and firm s value is the earnings of a company. Some researchers assumed that earnings influence the dividend and hence, share price, while some are against the same. In traditional earning theories, it was assumed that the market price of a share depends on the company s profits only. Dividends have no effect on the price of a share. Shareholders are presumed to expect the firm to invest capital so that it gives at least the rate of return, when the company keeps the profits and does not pay dividends. Dividend policy then does not affect the market price of the share. According to this theory, the value of the company can be regarded as the present value of its cash flows (Miller and Modiglani, 1961) 20. Advocates of the same viewpoint are: Friend and Puckett (1964) 21, Watts (1973) 22, Fama (1974) 23, Black and Scholes (1974) 24, Black (1976) 25, Rubinstein (1976) 26, Miller and Scholes (1982) 27 and Copeland and Weston (1988) 28. The classic work of Miller and Modigliani s demonstrated that the 263

5 firm s investment decisions and dividend decisions do not depend on one another. They found that a firm s taxes, growth and capital structure do not affect dividends. Thus dividend policy does not matter and hence, is irrelevant Dividends and Macroeconomic Factors There are a number of studies that made an attempt to explain the market price of a share by using various kinds of information. The information can be assumed as either within management s control or out of management s control. The information out of the management s control might be due to external effects like macro-economic factors. According to some past researches, macroeconomic factors are important determinants of stock returns. Dividends seem to include better information than earlier prices or macroeconomic factors but represent weaker information compared with some economic characteristics and earnings Clientele Effects and Ex-Date Effects of Dividends Clientele Effects When firms make their dividend decisions, one important question is how stock prices are affected by dividends. The researchers have opined a statistically significant relation between dividend yields and stock returns; but the explanation of this common empirical finding has been controversial. This problem can be divided into two various questions: (1) Do firms with higher dividend yields have higher stock prices and vice versa? (2) How do stock markets react to dividend announcements? The first question is called the clientele problem and the second is called ex-date effects on dividends. 264

6 Miller and Modigliani (1961) 29 originally has been credited for suggesting clientele effects. They argued that investors choose the corporations on the basis of corporate payout that tends to attract a class of investors, a clientele. The companies assumed that any clientele is as good as any other. If the firm changes its payout ratio, the result would be a change in the clientele, but that will not affect the value of the firm. Lease, Lewellen and Schlarbaum (1976) 30 concluded that the private investors preferred long-term capital gains, followed by dividend income and then short-term capital gains. Opposite views were presented by Hess (1982) 31 and Barclay (1987) 32, whose empirical evidence did not support clientele effects on asset prices. Booth and Johnson (1984) 33 examined the ex-dividend day behaviour of Canadian stock prices, but the ex-dividend day price ratios did not provide much evidence in support of dividend tax clienteles.this means that relevance or irrelevance of dividends may depend on investors' expectations. If retention is chosen, managers have full control on their actions and may be tempted to pursue personal objectives. If managers choose distribution of extra dividends and new shares are issued, shareholders' wealth is affected by investors' expectations. This is clearly stated by Jensen (1986, p. 323) 34 : Payouts to shareholders reduce the resources under managers' control, thereby reducing managers' power and making it more likely they will incur the monitoring of the capital markets which occurs when the firm must obtain new capital The problem is how to motivate managers to 265

7 disgorge the cash rather than investing it at below the cost of capital or wasting it on organization inefficiencies Ex-date Effects Ex-date effects of dividends mean that a share, purchased on its ex-dividend day, does not include a claim to a previously announced dividend. If the same share is purchased on the previous day, it includes the before-mentioned claim. Because of the price change of a share, it is possible to estimate the marginal valuation of dividends and capital gains in the market. Modigliani and Miller (1961) 35 stated that the market price of the share is irrelevant to dividends. Dividends should only include information on future earnings. If so, then the market price of the share should react to announcements on dividends and not to the payment of dividends. Empirically it has been found, however, that stock prices also fall based on payment of dividends. Traditionally, it was believed that stock prices should fall by exactly the amount of the dividends (Kaplanis, 1986) 36. However, empirical evidence does not support that conclusion (Barclay, 1987) 37. Elton and Gruber (1970) 38 presented their hypothesis to explain why on ex-dividend days stock prices could fall less or more than the amount of dividends. They showed that the price relative to dividends depends on marginal stockholder tax rates. Litzenberger and Ramaswamy (1980) 39 argued that the ex-date effect can best be explained by differential taxation of dividends and capital gains and, like Elton and 266

8 Gruber (1970) 40, that the dividend effect is complicated by clientele effects. Kalay (1982) 41 showed that the marginal tax rates of stockholders cannot be inferred from the relative price drop and therefore, according to him, the documented ex-dividend day behaviour of stock prices is not necessarily evidence of a tax effect or clientele effect. Miller and Scholes (1982) 42 represented opposite views in the short-term traders hypothesis. They argued that, if the stock price drop on the ex-dividend day is different from the dividend amount, short-term traders who face no differential taxes on dividends versus capital gains could make arbitrage profits. Booth and Johnson (1984) 43 examined ex-dividend day behaviour of Canadian stock prices and found that ex-dividend day price was significantly different from zero or one. Kaplanis (1986) 44 found that the average expected fall-off inherent in option prices was around 55 to 60% of the dividend and was significantly different. Also the fall-off varied inversely with the dividend yield, which is consistent with the prediction of the tax clientele hypothesis Dividends and Signaling Effects The signaling effect of dividends assumes that dividends convey information about future earnings (Karanjia, 1990) 45. Changes of dividends give messages to investors about the firm s future cash flows. Miller and Modigliani (1961) 46 hypothesized that dividend reductions convey information that future earnings prospects are poor. Some studies then examined fundamentally how dividends affect future earnings, for instance, Lintner s (1956) 47 and 267

9 Watt s (1973) 48 propositions. A number of studies have been undertaken to examine the reaction of stock markets to dividend announcements. Empirical results have found the signalling effect of dividends especially on U.S. data (Watts, , Aharony and Swary, and Dann, ). Under signaling theory a price reaction to an unexpected change in dividend reflects the information content of dividends (Miller and Modigliani 1961) 52 : That is, where a firm has adopted a policy of dividend stabilization with a long-established and generally appreciated target payout ratio, investors are likely to (and have good reason to) interpret a change in the dividend rate as a change in management s views of future profit prospects for the firm. Aharony and Swary (1980) 53 found that when dividends decreased, the average stock price decrease was 3.76% and, when they increased, the stock price increased +0.72%. Both results were statistically significant. Vermaelen (1981) 54 found that a stock repurchase followed a significantly higher stock price response than a corresponding equivalent dividend increase. Kane, Lee and Marcus (1984) 55 found that the abnormal return corresponding to any earnings or dividend announcement depends on the value of the other announcement. Asquith and Mullins (1986) 56 argued that dividends and stock repurchases play different roles in signaling information to shareholders. Ofer and Thakor (1987) 57 proposed that 268

10 firms will repurchase stock only when they are largely undervalued and will pay dividends to correct minor stock mispricing. In doing so, they will signal good future investment prospects to the stock markets. As per Laux, Starks and Yoon (1998) 58, same dividend announcement can have diverse effects within the same industry. A huge theoretical and empirical research on dividend effects has been undertaken over the last several decades. Theoretically, cash dividend means giving reward to the shareholders which will be offset by the decline in stock value. In an ideal world without tax and any restrictions, dividend payments would have no impact on the shareholders value (Miller and Modigliani, 1961) 59. In the practical world, however a change in the dividend policy is often followed by change in the market value of stocks. The economic argument for investor preference to dividend income was offered by Graham and Dodd (1951) 60. Subsequently, Walter (1956) 61 and Gordon ( and ) forwarded the dividend relevancy proposition that current stock price would reflect the present value of all expected dividend payments in the future. 7.2 DIVIDEND PUZZLE: RELEVANCE VS IRRELEVANCE Does Dividend Policy matter? Almost everyone will say without any doubt Yes and many will be ready to cite various examples of how dividend policy plays out in the marketplace. Dividend Policy is a must-have alternative for all financial managers, finance students, institutional investors, boards of directors, and finance and economics 269

11 academics. It is a long-standing position of well-known finance researchers that dividends are irrelevant, and they have no influence on the share price, given that the capital markets are perfect (Miller and Modigliani, 1961) 64. Some researchers have held a contrary position and considered that capital markets are not perfect and therefore, dividends do matter Dividend Relevance Arguments The dividend relevance argument has been supported by Gordon (1962) 65 and Lintner (1962) 66. They suggested that there is a positive correlation between a firm s dividend policy and the market value of this firm. They suggested the bird-in-the-hand argument which states that investors are generally risk-averse and dividends are valued differently to retained earnings in a world of uncertainty and information asymmetry. Because of uncertainty of future cash flow, investors will often prefer dividends to retained earnings. As a result, a higher payout ratio will reduce the required rate of return (cost of capital), and hence increase the value of the firm. Also, survey evidence shows that financial executives consider dividend policy is as important as investment policy (Brav, et al. 2005) 67. Similarly, company secretaries in the UK also responded that dividend policy is important in maximising shareholder value (Dhanani, 2005) Dividend Irrelevance Arguments Theoretically, it has been perceived that there exist varied relationships between dividends and share prices (Petty et al., 2000) 69. Practitioners believe changes in share prices result from announcements of dividends (Petty et al., 2000) 70. But the dividend 270

12 irrelevance argument has been suggested by Miller and Modigliani (1961) 71. These researchers claimed, in a perfect world, the value of a firm is unaffected by the distribution of dividends and is determined by the earnings ability of the firm and the risk of holding assets (Miller and Modigliani, 1961) 72. This argument suggests that firms preserve the market value of shares with a variety of combinations of assets, earnings and investment opportunities (Brealey and Myers, 2000, p.439) 73. They further stated that: Since dividend payments do not alter firm s net value as a whole when investment decisions are taken, dividend decision is just a by-product: Some firms pay low dividends because management is optimistic about firm s future and wishes to retain earnings for expansion. In this case, dividend is a by-product of firm s capital budgeting decision Another firm might finance capital expenditures largely by borrowings. This releases cash for dividends. In this case, the firm s dividend decision is a by-product of borrowing decision. The irrelevance of dividend policy to share prices exists even when some investor clienteles have a rational preference for dividends. As Black and Scholes (1974, p.2) 74 quoted: If a corporation could increase its share price by increasing (or decreasing) its payout ratio, then many corporations would do so, which would saturate the demand for higher (or lower) dividend yields, and 271

13 would bring about an equilibrium in which marginal changes in a corporation s dividend policy would have no effect on the price of its stock. If the firm pays dividends, each share will be worth less because new shares must be issued to finance the cash outflow. Also, investors can obtain cash by selling their shares in the market if the market is liquid or efficient (Miller and Modigliani, ; Brealey and Myers, ). Therefore, firms need not worry about their dividend policy (Brealey and Myers, 2000) 77. Dividend irrelevance theory as proposed by Miller and Modigliani has two assumptions. First is that investment and borrowing decisions will not affect the value of the dividend payment (Miller and Modigliani ; Petty et al ). Secondly, they assume that (1) investors can buy and sell stocks without incurring transaction costs and, (2) firms can issue shares without issuing costs and, (3) firms and investors are not taxed and, (4) all information about the firm is available to the public and, (5) there is no conflict of interest between management and stockholders and, (6) borrowing and lending are unlimited and, (7) there is no problem with liquidity (Petty et al. 2000) 80. Given these assumptions, Miller and Modigliani suggested that there is no relationship between a firm s dividend policy and the value of its shares (Miller and Modigliani ; Petty et al ). Modigliani (1980, p. xiii) 83 explained the irrelevance theorem as follows: 272

14 with well-functioning markets (and neutral taxes) and rational investors, who can undo the corporate financial structure by holding positive or negative amounts of debt, the market value of the firm debt plus equity depends only on the income stream generated by its assets. It follows, in particular, that the value of the firm should not be affected by the share of debt in its financial structure or by what will be done with the returns paid out as dividends or reinvested (profitably). As the assumptions required for dividend irrelevance do not exist in the practical world, there are typically three explanations offered for why firms pay dividends: (i) to convey private information about say, earnings (Miller and Modigliani ; Bhattacharya ; John and Williams ; Miller and Rock ); (ii) to distribute free cash flow (Jensen 1986) 88 or reduce agency costs (Easterbrook 1984) 89 ; and (iii) as a result of tax clienteles (Miller and Modigliani 1961) 90. However none of these explanations fully explained corporate payout behaviour and empirical tests also provided mixed results. 7.3 DATA ANALYSIS AND INTERPRETATIONS In an attempt to study and test the existence of relationship between dividend and value of firm, three independent variables considered were Dividend payout, Dividend per share to par value, Dividend per share to book value and Market value to book value and Market value to par value as two dependent variables for the study period H03 indicated that the there exist no relationship between dividend and value of firm in Indian companies and was tested using multiple regression analysis to test the existence 273

15 of relationship between dividend payout and value of company model in Indian industries under study. The variance inflation factor (VIF) was used to assess the multi-collinearity. Threshold values of tolerance above.10 (Hair et al., 1998) 91 and VIF scores of less than 10, suggest minimal multi-collinearity and stability of the parameter estimates (Neter et al., ; Dielman, ). The entire discussion has been divided in three parts with first two parts on dependent variable basis and last part on grouped data basis Relationship between Dividend Decision and Value of Firm with Market Value to Book Value as Dependent Variable A) Engineering Industry The variance inflation factor (VIF) scores, as shown in Table 7.1 ranged between and

16 Table 7.1: Collinearity Diagnostics for Engineering Industry with Market Value to Book Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Book Value In all the years under study, i.e , the significant relation was derived between the market value to book value and three explanatory variables viz. dividend payout ratio, dividend per share to par value and dividend per share to book value. 275

17 Table 7.2: Regression Results for Dividend and Value of Firm for Engineering Industry Market Value to Book Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR *** *** *** (6.380) (-1.592) (2.260) (-.494) *** *** *** (5.988) (-.820) (.637) (1.132) *** *** *** (5.334) (-.815) (-.498) (2.640) *** *** *** (4.452) (-1.941) (.237) (2.542) *** *** *** (2.691) (.102) (1.007) (1.473) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the influence of explanatory variables D/P ratio (dividend payout), DPS to PV t ( dividend per share to par value) and DPS to BV t (dividend per share to book value) on the dependent variable MV/BV t (market value to book value) in all the 5 years under study at 10% level of significance. It is thus concluded that in Indian Engineering industry, there exists the relationship between dividend and value of firm. 276

18 B) FMCG Industry The variance inflation factor (VIF) scores, as shown in Table 7.3 ranged between and Table 7.3: Collinearity Diagnostics for FMCG Industry with Market Value to Book Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Book Value In all the years under study, i.e , the significant relation was derived between the market value to book value and three explanatory variables viz. dividend payout ratio, dividend per share to par value and dividend per share to book value. 277

19 Table 7.4: Regression Results for Dividend and Value of Firm for FMCG Industry Market Value to Book Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR ** *** * (1.752) (-3.012) (-.402) (14.223) *** *** * (3.225) (-2.804) (.793) (9.073) *** *** * (2.550) (-1.928) (1.430) (9.805) *** *** * (1.635) (-.559) (1.858) (12.485) ** *** * (2.338) (-2.375) (1.099) (8.845) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the influence of explanatory variables D/P ratio (dividend payout), DPS to PV t (dividend per share to par value) and DPS to PV t (dividend per share to par value) on the dependent variable DPS/BV t (dividend per share to book value) in all the 5 years under study. The values of D/P t were significant at 5% in the years 2004 and 2008 and at 10% level in the years 2005, 2006 and The values of DPS to PV t in 278

20 all the years were significant at 10% level. The values of DPS to BV t in all the years were significant at 5% level. Thus, explanatory variables have significant relationship with the dividend in Indian FMCG industry with DPS/BV t being a major explanatory variable. It is thus concluded that in Indian FMCG industry, there exists the relationship between dividend and value of firm. C) IT Industry The variance inflation factor (VIF) scores, as shown in Table 7.5 ranged between and Table 7.5: Collinearity Diagnostics for IT Industry with Market Value to Book Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Book Value 279

21 Table 7.6: Regression Results for Dividend and Value of Firm for IT Industry Market Value to Book Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR *** * *** (4.699) (-1.755) (4.290) (2.828) ** * * (4.500) (-3.133) (6.004) (4.140) ** * * (5.978) (-2.439) (5.710) (4.111) *** ** *** (3.857) (-.856) (3.113) (1.977) *** ** * (5.412) (.084) (3.180) (4.525) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level In all the years under study, i.e , the significant relation was derived between the market value to book value and three explanatory variables viz. dividend payout ratio, dividend per share to par value and dividend per share to book value. The analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the influence of explanatory variables D/P ratio (dividend payout), DPS to PV t (dividend per 280

22 share to par value) and DPS to PV t (dividend per share to par value) on the dependent variable DPS/BV t (dividend per share to book value) in all the 5 years under study. The values of D/P t were significant at 5% in the years 2005 and 2006 and at 10% level in the years 2004, 2007 and The values of DPS to PV t in all the years were significant at 5% level in the years 2005 and 2006 and at 10% level in the years 2004, 2007 and The values of DPS to BV t were significant at 10% level in the years 2005 and 2007 and at 1% level in the years 2004, 2006 and Thus, explanatory variables have significant relationship with the dividend in Indian IT industry with DPS/BV being a major explanatory variable. It is thus concluded that in Indian IT industry, there exists the relationship between dividend and value of firm. D) Textile Industry The variance inflation factor (VIF) scores, as shown in Table 7.7 ranged between and In all the years under study, i.e , the significant relation was derived between the market value to book value and three explanatory variables viz. dividend payout ratio, dividend per share to par value and dividend per share to book value. 281

23 Table 7.7: Collinearity Diagnostics for Textile Industry with Dividend Payout as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Book Value The analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the absence of influence of explanatory variables D/P ratio (dividend payout), DPS to PV t (dividend per share to par value) and DPS to PV t (dividend per share to par value) on the dependent variable DPS/BV t (dividend per share to book value) in all the years under study. 282

24 Table 7.8: Regression Results for Dividend and Value of Firm for Textile Industry Market Value to Book Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR *** (2.289) (-.790) (1.253) (1.817) (2.462) (-.472) (.101) (1.114) *** *** ** (1.437) (-1.755) (1.762) (2.741) *** ** (-1.814) (-.390) (1.934) (3.253) (1.294) (.440) (.495) (.774) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The values of D/P t were significant at 5% in the years 2005 and 2006 and at 10% level in the years 2004, 2007 and The values of DPS to PV t were significant at 10% level in the years 2006 and 2007 and were insignificant in all other years. The value of DPS to BV t was significant at 10% level in the year 2005 and at 5% level in the years 2006 and 2007 and was insignificant in the years 2005 and It is thus concluded that in Indian Textile industry, there exists a minimal relationship between dividend and value of firm. 283

25 7.3.2 Relationship between Dividend Decision and Value of Firm with Market Value to Par Value as Dependent Variable A) Engineering Industry The variance inflation factor (VIF) scores, as shown in Table 7.9 ranged between and Table 7.9: Collinearity Diagnostics for Engineering Industry with Market Value to Par Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Par Value 284

26 In all the years under study, i.e , the significant relation was derived between the market value to book value and three explanatory variables viz. dividend payout ratio, dividend per share to par value and dividend per share to book value. Table 7.10: Regression Results for Dividend and Value of Firm for Engineering Industry Market Value to Par Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR *** * * (6.461) (-1.561) (5.597) (-3.647) * * (5.957) (-.361) (5.997) (-3.469) (4.020) (-1.335) (.884 (.426) * * *** (3.922) (-4.226) (5.221) (-2.679) * (2.359) (.037) (3.740) (-1.582) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the 285

27 coefficients, all signified a minimal influence of explanatory variables D/P ratio (dividend payout), DPS to PV t ( dividend per share to par value) and DPS to BV t (dividend per share to book value) on the dependent variable MV/BV t (market value to book value) in all the 5 years under study. The values of D/P t were significant at 10% in the year 2004 and at 1% level in the years 2007 and in other years, it was found to be insignificant. The values of DPS to PV t were significant at 1% level in the years 2004, 2007 and 2008 and were insignificant in the other years. The values of DPS to BV t were significant at 1% level in the year 2004, 2005 and at 5% level in the year 2007 and were insignificant in other years. Thus, explanatory variables have minimal relationship with the value in Indian Engineering industry with DPS/PV t being a major explanatory variable. It is thus concluded that in Indian Engineering industry, there exists the partial relationship between dividend and value of firm. B) FMCG Industry The variance inflation factor (VIF) scores, as shown in Table 7.11 ranged between and

28 Table 7.11: Collinearity Diagnostics for FMCG Industry with Market Value to Par Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Par Value In all the years under study, i.e , the partial significant relation was derived between the market value to par value and three explanatory variables viz. dividend payout ratio, dividend per share to par value and dividend per share to book value. Further analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the minimal influence of explanatory variables D/P ratio (dividend payout), DPS to PV t (dividend per share to par value) and DPS to PV t 287

29 (dividend per share to par value) on the dependent variable DPS/BV t (dividend per share to book value) in all the 5 years under study. Table 7.12: Regression Results for Dividend and Value of Firm for FMCG Industry Market Value to Par Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR * (2.232) (-1.457) (-.008) (3.131) *** (3.055) (-1.623) (-.109) (1.819) (2.327) (-1.084) (-.016) (1.178) (2.737) (.900) (.349) (1.160) ** (3.168) (-.712) (-.187) (2.266) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The values of D/P t and DPS to PV t in all the years were insignificant. The value of DPS to BV t was significant at 1% level in 2004, 10% level in 2005 and at 5% level in 2008 and was insignificant in other years. Thus, explanatory variables have minimal relationship with the dividend in Indian FMCG industry with DPS/BV t being a major 288

30 explanatory variable. It is thus concluded that in Indian FMCG industry, there exists the minimal relationship between dividend and value of firm. C) IT Industry The variance inflation factor (VIF) scores, as shown in Table 7.13 ranged between and Table 7.13: Collinearity Diagnostics for IT Industry with Market Value to Par Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Par Value 289

31 In all the years under study, i.e , the significant relation was derived between the market value to par value and three explanatory variables viz. dividend payout ratio, dividend per share to par value and dividend per share to book value. Table 7.14: Regression Results for Dividend and Value of Firm for IT Industry Market Value to Par Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR * (1.808) (-.058) (33.414) (-1.082) * * (2.596) (-4.566) (22.858) (.646) ** * (2.487) (-2.608) (15.196) (-1.002) * ** (2.274) (-.984) (19.245) (-2.428) * ** (3.086) (-1.235) (26.079) (-2.327) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the influence of explanatory variables D/P ratio (dividend payout), DPS to PV t ( dividend per share to par value) and DPS to PV t (dividend per 290

32 share to par value) on the dependent variable DPS/BV t (dividend per share to book value) in all the 5 years under study. The value of D/P t was significant at level in 2005 and at 5% in the years 2006 and was insignificant in other years. The values of DPS to PV t in all the years were significant at 1% level. The values of DPS to BV t were significant at 5% level in the years 2007 and 2008 and at were insignificant in all other years. Thus, explanatory variables have partial significant relationship with the dividend in Indian IT industry with DPS/PV t being a major explanatory variable. It is thus concluded that in Indian IT industry, there exists the partial relationship between dividend and value of firm. D) Textile Industry The variance inflation factor (VIF) scores, as shown in Table 7.15 ranged between and In all the years under study, i.e , the significant relation was derived between the market value to book value and three explanatory variables viz. dividend payout ratio, dividend per share to par value and dividend per share to book value. 291

33 Table 7.15: Collinearity Diagnostics for Textile Industry with Market Value to Par Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Par Value The analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the absence of influence of explanatory variables D/P ratio (dividend payout), DPS to PV t (dividend per share to par value) and DPS to PV t (dividend per share to par value) on the dependent variable DPS/BV t (dividend per share to book value) in all the 5 years under study. 292

34 Table 7.16: Regression Results for Dividend and Value of Firm for Textile Industry Market Value to Par Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR * *** (1.492) (-.698) (10.883) (-1.725) * *** (2.336) (-.585) (4.725) (-1.866) *** * (1.883) (-2.121) (6.799) (-.632) * *** (-1.620) (-.515) (4.208) (1.771) ** (1.073) (.543) (2.724) (-.480) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The values of D/P t were insignificant in all the years under study except in the year 2006 where it was significant at 10 % level. The value of DPS to PV t was significant at 1% level in all the years except 2008 where it was significant at 5% level. The value of DPS to BV t was significant at 10% level in the years 2004, 2005 and 2007 and was insignificant in all other years. Thus, explanatory variables offer only an average relationship with the value in Indian Textile industry. 293

35 7.3.3 Relationship between Dividend and Value of Firm for Grouped Data A) Grouped Data with Market Value to Book Value as Dependent Variable The variance inflation factor (VIF) scores, as shown in Table 7.17 ranged between and Table 7.17: Collinearity Diagnostics for Grouped Data with Market Value to Book Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Book Value 294

36 In all the years under study, i.e , the significant relation was derived between market value to book value and three explanatory variables viz. dividend payout, dividend per share to par value and dividend per share to book value. Table 7.18: Regression Results for Dividend and Value of Firm for Grouped Data Market Value to Book Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR * * * (6.930) (-4.569) (4.376) (9.657) *** * * (4.797) (-1.564) (7.281) (7.101) * * * (7.087) (-5.161) (4.662) (10.986) * * * (5.251) (-5.993) (3.905) (9.951) *** *** * (4.360) (-1.006) (1.385) (10.614) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the influence of explanatory variables D/P, DPS to PV t and DPS 295

37 to BV t on the dependent variable MV to BV t in all the 5 years under study. The values of D/P were significant at 1% in all the years except 2005 and 2008 where it was significant at 10% level. The values of DPS to PV t were significant at 1% level in all the years except for 2008 where it was significant at 10%. The values of DPS to BV t were significant at 1% level in all the years indicating significant relationship with the value of the firm in Indian industries. B) Grouped Data with Market Value to Par Value as Dependent Variable The variance inflation factor (VIF) scores, as shown in Table 7.19 ranged between and In all the years under study, i.e , the significant relation was derived between market value to par value and three explanatory variables viz. dividend payout, dividend per share to par value and dividend per share to book value. 296

38 Table 7.19: Collinearity Diagnostics for Grouped Data with Market Value to Par Value as Dependent Variable Model Dividend Payout Year Collinearity Statistics Tolerance VIF Dividend Per Share to Par Value Dividend Per Share to Book Value Dependent Variable: Market Value to Par Value Further analysis of the regression coefficients indicates that values of R 2 (coefficient of multiple determination), R 2 (adjusted coefficient of determination) and F value of the coefficients, all signified the influence of explanatory variables D/P (Dividend Payout), DPS to PV t ( dividend per share to par value) and DPS to BV t (dividend per share to book value) on the dependent variable MV to PV t in all the 5 years under study. 297

39 Table 7.20: Regression Results for Dividend and Value of Firm for Grouped Data Market Value to Par Value as Dependent Variable MODEL a b1 b2 b3 R 2 R 2 F D/P DPS/PV DPS/BV YEAR *** * * (4.414) (-2.723) (39.448) (-4.201) *** * *** (-.612) (-.713) (19.089) (-2.031) *** * *** (1.916) (-1.763) (19.077) (.207) * * *** (1.041) (-9.808) (17.781) (-.755) *** * *** (2.241) (-.677) (12.534) (.870) Note: Figures in the bracket show t-values of the coefficient *Sig at 1% level **Sig at 5% level ***Sig at 10% level The values of D/P were significant at 10% in all the years except 2007 where it was significant at 1% level. The values of DPS to PV t were significant at 1% level in all the years. The values of DPS to BV t were significant at 10% level in all the years except in the year 2004 where it was significant at 10%. Thus, explanatory variables have significant relationship with the value of the firm in Indian industries. 298

40 7.4 MAIN FINDINGS The present chapter has covered the examination of the relationship between dividend and value of firm with independent variable Dividend been represented by dividend payout (D/P), DPS to par value (DPS/PV) and DPS to book value (DPS/BV) and dependent variable value of firm as market value to book value (MV/BV) and market value to par value (MV/PV). A significant relationship has been discovered between dividend and value of firm. In case of relationship of MV/BV with three explanatory variables, the significant relationship existed in Engineering, FMCG and IT industries but in case of Textile industry, the relationship was found to be significant at minimal level. In case of relationship of second dependent variable MV/PV with three explanatory variables, a partial relationship has been found in all the years for all the four industries under study. For the grouped data with MV/BV and MV/PV as dependent variables, significant relationship was identified between dividend and value of the firm, thus, indicating the existence of relationship between dividend and value of firm in Indian industries with dividend being a major factor influencing the value of firm. REFERENCES 1 Khan, M.Y. and Jain, P.K., 1992, Financial Management: Text and Problems, Tata Mc- Graw Hill Publishing Company 2 Maheshwari, S.N., 1992, Financial Management: Principles and Practice, Sultan Chand and Sons, New Delhi 3 Shapiro, A. C., 1990, Modern Corporate Finance, New York: Macmillan Publishing Co. 4 Koskela, M., 1984, Osakkeen Kassaperusteinen Arvonmääritys, The Helsinki School of Economics, A43 5 Williams, J.B., 1938, The Theory of Investment Value, Cambridge, Mass 299