IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v21y2011i20p1515-1524.html
   My bibliography  Save this article

Are dividend and investment decisions separable?

Author

Listed:
  • P. S. Sanju
  • P. S. Nirmala
  • M. Ramachandran

Abstract

In this study, we address an econometric issue which has so far been neglected by the empirical studies on separation principle. The earlier studies largely applied Granger causality test by differencing the data if they are integrated time series. Such an approach produces specification bias if integrated variables in level are cointegrated and thus, ignoring the long run dynamics among the variables. To circumvent this problem, we test for cointegration between investments and dividends and estimate a dynamic panel vector error correction model. Annual time series data over the period 1995 to 2008 for various sectors chosen on the basis of the available sectoral indices of National Stock Exchange are considered for empirical analysis. The empirical evidence derived from group mean and lambda-Pearson tests seem to indicate that there is long run causal link between investments and dividends and therefore, firms' decisions regarding dividend payout and investments are inseparable.

Suggested Citation

  • P. S. Sanju & P. S. Nirmala & M. Ramachandran, 2011. "Are dividend and investment decisions separable?," Applied Financial Economics, Taylor & Francis Journals, vol. 21(20), pages 1515-1524.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:20:p:1515-1524
    DOI: 10.1080/09603107.2011.581207
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603107.2011.581207
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09603107.2011.581207?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mbodja Mougoue, 2008. "An empirical re-examination of the dividend-investment relation," Quantitative Finance, Taylor & Francis Journals, vol. 8(5), pages 533-546.
    2. Smirlock, Michael & Marshall, William, 1983. "An Examination of the Empirical Relationship between the Dividend and Investment Decisions: A Note," Journal of Finance, American Finance Association, vol. 38(5), pages 1659-1667, December.
    3. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    4. Phoebus J. Dhrymes & Mordecai Kurz, 1967. "Investment, Dividend, and External Finance Behavior of Firms," NBER Chapters, in: Determinants of Investment Behavior, pages 427-485, National Bureau of Economic Research, Inc.
    5. Mbodja Mougoué & Tarun K. Mukherjee, 1994. "An Investigation Into The Causality Among Firms' Dividend, Investment, And Financing Decisions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(4), pages 517-530, December.
    6. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    7. Fama, Eugene F, 1974. "The Empirical Relationships Between the Dividend and Investment Decisions of Firms," American Economic Review, American Economic Association, vol. 64(3), pages 304-318, June.
    8. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    9. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
    10. Ieuan G. Morgan & Jacques Saint-Pierre, 1978. "Dividend and Investment Decisions of Canadian Firms," Canadian Journal of Economics, Canadian Economics Association, vol. 11(1), pages 20-37, February.
    11. repec:bla:obuest:v:61:y:1999:i:0:p:631-52 is not listed on IDEAS
    12. Carl Chiarella & Toan Pham & Ah Boon Sim & Madeleine Tan, 1991. "The Interaction of the Financing and Investment Decisions: Preliminary Results in the Australian Context," Working Paper Series 4, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    13. Mougoue, Mbodja & Mukherjee, Tarun K, 1994. "An Investigation into the Causality among Firms' Dividend, Investment, and Financing Decisions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(4), pages 517-530, Winter.
    14. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    15. McCabe, George M., 1979. "The Empirical Relationship Between Investment and Financing: A New Look," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(1), pages 119-135, March.
    16. McDonald, John G. & Jacquillat, Bertrand & Nussenbaum, Maurice, 1975. "Dividend, Investment and Financing Decisions: Empirical Evidence on French Firms," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(5), pages 741-755, December.
    17. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 653-670, November.
    18. Pruitt, Stephen W & Gitman, Lawrence J, 1991. "The Interactions between the Investment, Financing, and Dividend Decisions of Major U.S. Firms," The Financial Review, Eastern Finance Association, vol. 26(3), pages 409-430, August.
    19. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    20. repec:bla:obuest:v:61:y:1999:i:0:p:653-70 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yu, Chih-Ping, 2015. "Financial policies on firm performance: The U.S. insurance industry before and after the global financial crisis," Economic Modelling, Elsevier, vol. 51(C), pages 391-402.
    2. Cheng-Few Lee & Woan-lih Liang & Fu-Lai Lin & Yating Yang, 2016. "Applications of simultaneous equations in finance research: methods and empirical results," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 943-971, November.
    3. repec:zbw:rwirep:0557 is not listed on IDEAS
    4. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    5. Apergis, Nicholas & Payne, James E., 2011. "The renewable energy consumption-growth nexus in Central America," Applied Energy, Elsevier, vol. 88(1), pages 343-347, January.
    6. Nicoleta Mihaela Florea & Roxana Maria Bădîrcea & Ramona Costina Pîrvu & Alina Georgiana Manta & Marius Dalian Doran & Elena Jianu, 2020. "The impact of agriculture and renewable energy on climate change in Central and East European Countries," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 66(10), pages 444-457.
    7. Munawar-Shah, Syed & Abdul-Majid, Mariani & Hussain-Shah, Syed, 2014. "Assessing Fiscal Sustainability for SAARC and IMT-GT Countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 5(2), pages 26-40.
    8. Dennis Fok & André Stel & Andrew Burke & Roy Thurik, 2019. "How entry crowds and grows markets: the gradual disaster management view of market dynamics in the retail industry," Annals of Operations Research, Springer, vol. 283(1), pages 1111-1138, December.
    9. Olivier Damette & Mathilde Maurel & Michael A. Stemmer, 2016. "What does it take to grow out of recession? An error-correction approach towards growth convergence of European and transition countries," Post-Print halshs-01318131, HAL.
    10. Hamit-Haggar, Mahamat, 2012. "Greenhouse gas emissions, energy consumption and economic growth: A panel cointegration analysis from Canadian industrial sector perspective," Energy Economics, Elsevier, vol. 34(1), pages 358-364.
    11. Yongfu Huang, 2011. "Private investment and financial development in a globalized world," Empirical Economics, Springer, vol. 41(1), pages 43-56, August.
    12. Mikhed, Vyacheslav & Zemcík, Petr, 2009. "Do house prices reflect fundamentals? Aggregate and panel data evidence," Journal of Housing Economics, Elsevier, vol. 18(2), pages 140-149, June.
    13. Liddle, Brantley, 2012. "The importance of energy quality in energy intensive manufacturing: Evidence from panel cointegration and panel FMOLS," Energy Economics, Elsevier, vol. 34(6), pages 1819-1825.
    14. Fr餩ric Laurin, 2012. "Trade and regional growth in Spain: panel cointegration in a small sample," Applied Economics, Taylor & Francis Journals, vol. 44(4), pages 435-447, February.
    15. Yung-Hsiang Ying & Koyin Chang & Chen-Hsun LEE, 2014. "The Impact of Globalization on Economic Growth," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 25-34, June.
    16. Herzer, Dierk, 2013. "Cross-Country Heterogeneity and the Trade-Income Relationship," World Development, Elsevier, vol. 44(C), pages 194-211.
    17. Muhammad Zakaria & Bashir Ahmed Fida & Saquib Yousaf Janjua & Syed Jawad Hussain Shahzad, 2017. "Fertility and Financial Development in South Asia," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 133(2), pages 645-668, September.
    18. Ramesh Chandra Das & Tonmoy Chatterjee & Enrico Ivaldi, 2022. "Nexus between Housing Price and Magnitude of Pollution: Evidence from the Panel of Some High- and-Low Polluting Cities of the World," Sustainability, MDPI, vol. 14(15), pages 1-18, July.
    19. David Greasley & Les Oxley, 2010. "Cliometrics And Time Series Econometrics: Some Theory And Applications," Journal of Economic Surveys, Wiley Blackwell, vol. 24(5), pages 970-1042, December.
    20. Mónica Meireles & Margarita Robaina & Daniel Magueta, 2021. "The Effectiveness of Environmental Taxes in Reducing CO 2 Emissions in Passenger Vehicles: The Case of Mediterranean Countries," IJERPH, MDPI, vol. 18(10), pages 1-13, May.
    21. Thian-Hee Yiew & Chin-Yu Lee & Lin-Sea Lau, 2021. "Economic growth in selected G20 countries: How do different pollution emissions matter?," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(8), pages 11451-11474, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:21:y:2011:i:20:p:1515-1524. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.