Dividend Decision: A Study of Managers Perceptions

In finance literature several theoretical constructs have been proposed to explain the dividend policy of a company. Several empirical studies have been conducted to test these theories. Very few attempts have been made to understand the perceptions and attitudes of managers about the factors they think are important in determining dividend policy. It is with this objective that the present study purports to present the survey results. The study attempts to answer the following questions: 1. What factors do managers consider important in deciding their companies’ dividend policy? 2. Do managers perceive a relationship between their companies’ dividend policy and the value of the share? 3. Do managers consider last year’s dividend policy relevant in deciding the current dividend policy? 4. Do managers think tax status of their shareholders as an important determinant of dividend policy? 5. Do managers use dividend policy as a signal for indicating the company’s future prospects to shareholders? 6. Do managers consider dividend payment merely as a residue? This study used questionnaire to seek answers to above questions. The questionnaire was divided into two parts. Part I focused on determinants which managers consider important (on a seven point scale) in deciding their dividend policy. Part II of the questionnaire was devoted to managers’ views (strong disagreement to strong agreement scale) on different issues which have implications for dividend policy. The questionnaire was sent to the Economic Times 250 top companies and was addressed to finance directors of these companies. This study reveals a number of interesting conclusions. First, it is shown that payment of dividend depends on current and expected earnings as well as the pattern of past dividends. This vindicates Lintner’s findings in U.S.A. about forty years ago. Similar results are reported by Baker et. al. for U.S.A. companies in 1985. It is also pertinent to note that managers of companies in India would like their companies to continuously maintain payment of dividend. They do not consider liquidity to be a significant consideration in dividend policy. Second, managers consider that there s a positive relationship between payment of dividends and share price. However, it is surprising to find that they do not consider the purpose of dividend policy as maintaining or increasing share price. They strongly believe that companies should strive to maintain an uninterrupted record of dividend payments, and they should avoid making changes in dividend policy that might have to be reversed. Third, respondents in our survey do not seem to fully understand the clientele hypothesis. They, of course, do not deny the existence of high-payout clientele. Managers do consider dividend policy as a signaling device. Fourth, managers seem to prefer payment of dividend even if companies have profitable investment opportunities. Thus, they do not provide any support to dividend residual hypothesis. This is in tone with their perception that the dividend must be paid consistently and continuously.