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Dividend Policy in India: New Survey Evidence
H. Kent Baker
University Professor of Finance
American University, Kogod School of Business
Department of Finance and Real Estate
Washington DC 20016-8044
Telephone: (202) 885-1949
Email: [email protected]
Sujata Kapoor
Assistant Professor of Finance
Jaypee Business School
Jaypee Institute of Information Technology
Noida,Uttar Pradesh
India
Telephone: (981) 887-9618
Email: [email protected]
Abstract
We survey managers of 500 dividend-paying firms listed on the National Stock Exchange (NSE)
to learn their views about the factors influencing dividend policy, dividend issues, and
explanations for paying cash dividends and repurchasing shares. This is the most
comprehensive study in an Indian context to date that captures the perceptions of managers on
both cash dividends and share repurchases. Our survey evidence shows that managers view
the most important determinants of dividends involve earnings (the stability of earnings and the
level of current and expected future earnings) and the pattern of past dividends. Respondents
also perceive that dividend policy affects firm value. The most highly supported reasons for
paying cash dividends involve signaling, the firm life cycle, and catering. Although none of the
theories of repurchasing shares is dominant, respondents provide little support for the agency
explanation.
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Introduction
Dividends remain one of the greatest conundrums of modern finance. As Baker et al.
(2002, p. 255) note, “Despite a voluminous amount of research we still do not have all the
answers to the dividend puzzle.” According to Baker et al. (2011), a major reason for this
ongoing debate is the heavy reliance on economic modeling approaches without an in-depth
understanding of how investors and managers behave and perceive dividends. To resolve the
dividend puzzle, Chiang et al. (2006) conclude that the main thrust of academic research should
turn toward learning about the motivations and perceptions upon which this motivation is based.
Distributing cash to shareholders via alternate forms has increased dramatically in many
countries. Since the mid-1980s, U.S. firms have increasingly used share repurchases to
distribute cash to shareholders. In 1998, the Indian government yielded to the corporate sector’s
demand for permitting share repurchase, which are commonly known as buybacks in India.
Being aware of management’s views on factors influencing cash dividends and repurchases is
important to understanding dividend policy in India.
Although most dividend studies focus on U.S. firms, a growing body of evidence exists
on dividend policy outside the United States (Baker et al., 2011). To provide further insights on
how managers of Indian firms perceive dividends, we survey managers of dividend-paying firms
listed on the National Stock Exchange (NSE) in India to learn their views about the factors
influencing dividend policy, dividend issues, and explanations for paying cash dividends and
repurchasing shares.
The Indian capital markets present a unique case in the study of corporate dividends.
The Indian economy has undergone major changes in the last few decades. Emerging from the
closed economy of the 1980s, the 1990s was a decade of liberalization of the economy. In the
2000s, the economy witnessed unprecedented growth supplemented by substantial increases in
capital market activity. Changes also occurred to the legal framework, with the Securities
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Exchange Board of India (SEBI) being entrusted with the regulatory power to govern the capital
markets to ensure compliance. Ownership structure in India differs from most Anglo-Saxon
countries such as the United States and the United Kingdom. In India, large shareholders,
especially directors and promoters, have greater incentives and ability to control the financing
decisions of their companies than small investors.
Our study investigates four major questions:
1. What are the most important factors that managers perceive as influencing the dividend
policies of NSE-listed firms?
2. Do the overall perceptions about the factors influencing dividend policy differ between
managers of Indian firms and those from Indonesia, Canada, and the United States?
3. What views do managers of Indian firms have on dividend processes and patterns,
dividend policy and firm value, and residual dividend policy?
4. What level of support do managers of Indian firms give to various explanations for
paying cash dividends and repurchasing shares?
Our study contributes to the dividend literature in several ways. First, it updates and
expands previous survey-based research on dividends and provides new evidence from
managers of Indian firms. Survey evidence on Indian dividend policy is limited and more than a
decade old (Bhat and Pandey, 1993; Anand, 2004). We examine issues not previously
addressed in dividend surveys involving managers of Indian firms. To our knowledge, this is the
most comprehensive study in an Indian context to date that captures the perceptions of
managers on both cash dividends and share repurchases. Second, we compare the views of
managers of Indian firms with those in Indonesia, Canada, and the United States on factors
influencing dividend policy. Thus, our study helps to corroborate whether certain primary
reasons, which we call first-order factors, dominate dividend decisions.
The remainder of this paper has the following organization. The next section reviews
some important literature about dividends. This is followed by a discussion of our research
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methodology and its potential limitations and then our survey results. The final section provides
a summary and conclusions.
Literature Review
The literature on dividends and dividend policy is voluminous, including surveys dating
back more than 50 years. We discuss two main topics in this section. First, we review
explanations for paying cash dividends and repurchasing shares. Second, we examine the
survey research on dividend policy. More detailed discussions of dividend theories and policies
are available in Lease et al. (2000), Bierman (2001), Frankfurter et al. (2003), Baker (2009), and
Baker et al. (2011).
Why Firms Pay Cash Dividends
For more than a half century, researchers have tried to justify why companies pay cash
dividends and have proposed various theories, motives, and explanations. Below are seven
broad categories, which are not necessarily mutually exclusive, for paying dividends.
Bird-in-the-hand theory. Investors value cash in the hand more than a future promise of
capital gains when making decisions related to stocks due to lower risk (Gordon, 1959,
1963; Walter, 1963; Bhattachara, 1979).
Signaling explanation. As insiders, managers choose dividend payment levels to convey
private information about the firm’s future prospects to investors, which in turn reduces
asymmetries (Bhattacharya, 1979, 1980; John and Williams, 1985).
Agency theory. Dividends help to overcome the agency problem stemming from the
separation of ownership and control in a firm with diffused ownership (Jensen and
Meckling, 1976; Rozeff, 1982; Easterbrook, 1984; Jensen, 1986).
Taxes and clientele effects. Differentials in tax rates between dividends and capital gains
lead to different clienteles (Elton and Gruber, 1970; Miller and Scholes, 1978, 1982).
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Firm life cycle theory of dividends. Dividend policy is a function of a firm’s life cycle. That
is, firms tend to begin paying dividends when their growth rate and profitability are
expected to decline in the future (Mueller, 1972; Fama and French, 2001; DeAngelo et
al., 2006).
Catering theory of dividends. Managers give investors what they currently want. They
cater to investor demand by paying dividends when investors put a stock price premium
on payers and by omitting or reducing dividends when shares of dividend-paying firms
trade at a discount (Baker and Wurgler, 2004a, 2004b).
Financial flexibility. Managers seek financial flexibility in making capital structure
decisions. Therefore, firms characterized by high financial leverage and consequently
limited financial flexibility may have to be more flexible with aspects of their dividend
policy decisions than firms with lower financial leverage (Graham and Harvey, 2001).
Based on their review of the non-survey research literature, Baker et al. (2011, p. 251)
conclude: “There is no clear winner among the competing dividend theories and no single theory
has become the dominant solution to the dividend puzzle. Some empirical support exists for each
theory.” They note, however, that agency theory and signaling explanations appear to have more
convincing empirical support than the tax-preference explanation. Although no theory provides
definitive answers, more recent theories such as the firm life cycle theory and catering theory of
dividends offer some useful insights but still produce mixed results.
Why Firms Repurchase Shares
Grullon and Ikenberry (2000), Lease et al. (2000), Baker et al. (2003), and Baker et al.
(2011) among others discuss various theories explaining why firms buy back their stock. The
following are five explanations for repurchasing shares.
Signaling and undervaluation. Information asymmetry between management and outside
investors provides incentives for firms to announce share-repurchase programs to signal
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managers’ private information about their companies and convey their assessment to
the market if they believe the company’s stock is undervalued (Bhattacharya, 1979;
Miller and Rock, 1985; Ofer and Thakor, 1987; Williams, 1988).
Agency cost of free cash flows. Firms use share repurchases as a mechanism to
mitigate the agency costs of free cash flows. Firms with abnormally high levels of cash
flows and/or few investment opportunities are more likely to initiate share repurchase
programs and return extra cash to shareholders (Dittmar, 2000; Brav et al., 2005).
Takeover deterrence. Managers use repurchases as a means of deterring an unwanted
bid by signaling firm value or increasing cost of purchasing remaining shares
outstanding (Harris and Raviv, 1988; Stulz, 1988).
Capital structure adjustments. Share repurchases provide a way for managers to change
their firm’s capital structure. Using debt-financed stock repurchases results in more
substantial changes in capital structure than using cash flows as the source of the
repurchase (Dittmar, 2000; Hovakimian et al., 2001).
Flexibility. Option grants to corporate executives may lead to potential dilution of
earnings per share (EPS). Firms may buy back shares to offset such dilution and to
increase EPS. Managers may substitute share repurchases for dividends when they are
heavily compensated (Lambert et al., 1989; Hsieh and Wang, 2009).
Based on their review of non-survey empirical evidence, Baker et al. (2011, p. 324)
conclude that “the evidence suggests a lack of a universally accepted motivation behind
repurchases. Thus, different firms are likely to have varying motives for buying back their
shares.”
Survey Research on Dividend Policy
Researchers have attempted to identify different factors influencing the payment of
dividends using survey research (Baker et al., 2011). For example, in his seminal study, Lintner
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(1956) reports that past dividends and current earnings are the primary determinants of current
dividends. He also finds that managers prefer to maintain stable dividends and make periodic
adjustments toward a target payout ratio. Baker et al. (1985) and Baker and Powell (2000) find
that the most important factors influencing dividend policy by corporations listed on the New
York Stock Exchange (NYSE) are the level of current and expected future earnings and the
pattern or continuity of past dividends. Baker et al. (2001) report similar results for NASDAQ
firms.
Brav et al. (2005), who benchmark their findings to Lintner (1956), find that the perceived
stability of future earnings still affects dividend policy but the link between dividends and
earnings is weaker. They also report that managers continue to make dividend decisions
conservatively but that the importance of targeting the payout ratio is not as high. Dividend
payers also tend to smooth dividends from year to year and alter the amount of dividends in
response to permanent changes in earnings.
Bancel et al. (2005) survey managers from 16 European countries to examine cross-
country determinants of payout policy. They find that the factors largely driving European
managers’ views on dividend policy are similar to those of the U.S. peers as reported in Brav et
al. (2005). For example, Bancel et al. report than an overwhelming majority of respondents
consider the factor “stability and level of future earnings” as important in making dividend
decisions, followed in importance by a “sustainable change in earnings.” They also find that a
complex interaction of a firm’s ownership structure and the legal and institutional structure of its
home country influence dividend policy.
Baker et al. (2007) explore the perception of Canadian managers with respect to
dividend policy and investigate the uniqueness of the Canadian context. Their results show that
managers of Toronto Stock exchange (TSX) listed firms set dividends consistently with the
dividend model of Lintner (1956). Most respondents perceive the firm’s investment, financing,
and dividend decisions are interrelated. Their survey evidence also reveals that managers
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express greater support for the signaling and firm life cycle theories than for the bird-in-hand,
tax preference/dividend clientele, agency cost, and catering explanations.
Baker and Powell (2012) survey managers of dividend-paying firms listed on the
Indonesian Stock Exchange. Their evidence shows that managers view the most important
determinants of dividends as the stability of earnings and the level of current and expected
future earnings. Respondents also believe that the effects of dividends on stock prices and
needs of current shareholders are important determinants. Survey responses indicate that
managers of Indonesian firms perceive that dividend policy affects firm value.
Based on their review of the survey research literature, Baker et al. (2011) conclude that
certain determinants are consistently important over time in shaping actual policies. These first-
order determinants in making dividend decisions include the pattern of past dividends, stability
of earnings or cash flows, and the level of current and expected future earnings. The authors
caution, however, that the same factors influencing dividend decisions are not equally important
to all firms. As Baker et al. (p. 306) note, “Because various factors may affect a firm’s dividend
decisions in different ways, no universal set of factors is likely to apply to all firms. Thus,
universal or one-size-fits all theories or explanations for why companies pay dividends are too
simplistic.”
Survey Research on Share Repurchases
Survey evidence on share repurchases is available from various U.S. and non-U.S.
studies (Baker et al., 2011). For example, Baker et al. (2003), who survey 640 top financial
executives of primarily large U.S. firms, find that responding managers view low (undervalued)
stock price as the most important circumstance leading to the firm's most recent stock
repurchase. The reasons cited for open-market repurchase are consistent with the signaling
hypothesis, specifically the undervaluation version of this hypothesis. Their evidence suggests
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shifts in the importance managers attach to reasons for repurchasing shares over the past
several decades.
Brav et al. (2005) sample financial executives from a cross-section of U.S. public and
private firms. Managers perceive that repurchases provide flexibility and can be used in an
attempt to time the equity market or to increase EPS. Respondents generally believe that taxes
are not a dominant factor affecting repurchases. Management views provide little support for the
agency and clientele hypotheses for repurchasing shares. Although their findings appear to
provide strong support for the signaling hypothesis, they conclude that when considering other
evidence from their study, conveying information does not appear to be related to signaling in
the academic sense.
De Jong et al. (2003) investigate the dividend and share repurchases policies of the 500
largest nonfinancial Canadian firms listed on the Toronto Stock Exchange. They find that the
existence of buildup of surplus cash drives the payout decision and that tax preferences drive
the choice of share repurchases. Their evidence also suggests that the payout for firms with
managerial options plans is less likely to be dividends than repurchases.
Bancel et al. (2005) survey managers from 16 European countries to examine cross-
country determinants of payout policy. Their results indicate that the undervaluation of a firm is a
driving force for managers of European firms in repurchasing their shares. Additionally,
managers view repurchases as a tool of flexibility rather than a substitute for dividends. The
authors conclude that important factors governing share repurchase policy appear similar
between European and U.S. firms.
Survey Research on Dividend Policy in India
Few researchers use survey methodology to examine dividend policy in India. Bhat and
Pandey (1993) survey finance directors of the Economic Times 250 top companies in India.
Their results show that determinants of dividend policy include current and expected earnings
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as well as the pattern of past dividends. Respondents do not view liquidity as an important
consideration in dividend policy. Finance directors believe that firms strive to maintain an
uninterrupted record of dividend payments and avoid making changes in the dividend payment
that might have to be reversed. Their evidence shows that respondents consider dividends as a
signaling device but they do not find any support for the residual dividend hypothesis. Managers
of Indian firms do not seem to fully understand the clientele hypothesis. Finally, respondents
perceive that firms prefer paying dividends even if they have profitable investment opportunities.
Anand (2004) presents the results of a 2001 survey to identify the factors that chief
financial officers (CFOs) consider in formulating dividend policy in India. His initial sample
consists of a large cross section of 474 private sector and the top 51 public sector firms in India
based on market capitalization. The results suggest that managers of Indian firms believe that
dividend decisions are important because they provide a signaling mechanism for the future
prospects of the firm and thus affect its market value. This does not necessarily mean, however,
that the board sets the new level of the dividend to deliberately send a signal. Managers also
consider investor preferences for dividends and the shareholder profile when designing dividend
policy. Firms have a target dividend payout ratio but want to pay stable dividends with growth.
Anand (p. 14) concludes “Therefore, dividend policy does matter to the CFOs and the
investors.”
Research Design Sample and Survey
Using the Prowess database of Center of Monitoring Indian Economy (CMIE), we select
500 Indian firms listed on the National Stock Exchange (NSE). These companies are
constituents of the S&P CNX 500 Index. The S&P CNX 500 represents about 96% of total
market capitalization and about 93% of the total turnover on the NSE. From this sample of 500
companies, 92% of the firms are regular dividend payers, which may suggest a conservative
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investor base in India. By comparison, at the end of the third quarter, the number of stocks
paying dividends in the S&P 500 reached a 17 year high (417 or 84% of the index), and the
number of companies increasing their year-over-year, dividend per share distribution hit the
highest level in at least 20 years (Amenta, 2013).
A mail survey serves as our primary means of gathering data. We model our survey
instrument after those designed by Baker and Powell (2000) and Baker et al. (2001), and later
used by Baker et al. (2007) for Canadian firms and subsequently by Baker and Powell (2012)
for Indonesian firms to enable comparisons among several countries. We extend our survey to
include issues on stock repurchases, stock dividends (called bonus shares in India), and stock
splits not in the aforementioned surveys. In this paper, we focus only on cash dividends and
share repurchases.
The survey has three sections. One section contains four questions that provide a profile
of respondents and their firms. Another section asks respondents to indicate the importance of
21 factors (which we refer to as F1 through F21) in determining their firm’s dividend policy. We
use a four-point scale where 0 = no importance, 1 = low importance, 2 = moderate importance
and 3 = high importance. The final section asks respondents to indicate their general opinion
about each of 53 closed-end statements (which we refer to as S1 through S53). The responses
are based on a five-point scale: 1 = strongly disagree, 2 = disagree, 3 = no opinion/neutral, 4 =
agree, and 5 = strongly agree. Of the 53 closed-end statements, we focus on 41 statements: 15
of the 41 statements relate to issues involving dividend policy and the remaining 26 relate to
seven explanations for paying cash dividends and five motives for repurchasing shares. The
survey is available from the authors upon request.
We sent a cover letter requesting participation in this study along with a self-addressed
return envelope and the survey instrument to the company secretary of each of 500 firms
between mid-February and early March, 2013. The cover letter assured recipients that their
answers would be confidential and released only in summary form and no information would be
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disclosed about individual companies. If a company secretary preferred not to respond to the
survey, the cover letter instructed that person to give it to someone actively involved in the firm’s
dividend decisions or to return an unanswered questionnaire. The survey contained a code
number to avoid potentially including duplicate responses in the analysis and to enable us to
conduct tests for non-response bias. We sent reminders through emails to non-respondents in
the first week of May, 2013 to increase the response rate and to reduce potential non-response
bias.
By June end 2013, we had received 42 usable responses (an 8.4% response rate). Of
the 500 surveys, 16 companies returned the questionnaire unanswered. By comparison, Anand
(2004) received 81 completed questionnaires resulting in a 15.4% response rate. Our lower
response rate may result from a more comprehensive survey and reflect the increasing difficulty
of getting Indian managers to respond to surveys. Of the respondents, 82.5% indicate they are
actively involved in determining their company’s dividend policy. The most common positions or
titles of respondents are company secretary (70%) and CFO (10%). The remaining respondents
belong to one of the following categories: general managers (finance), director (finance), and
director (investor relations).
Statistical Tests
We use a t-test for the null hypothesis that the mean response for each of the 21 factors
influencing dividend policy equals 0 (no importance). We calculate the Spearman rank
correlation coefficient, rs, to determine whether a significant relationship exists between the
rankings of the 21 factors by the managers of Indian firms and those in Indonesia, Canada, and
the United States. We use a one-sample t-test to determine whether the mean response for
each of the 41 issues involving dividend policy differs significantly from 3 (no opinion) on a five
point scale. Finally, we use several tests for non-response bias including a t-test for equality of
means with and without assuming the equality of variance and a non-parametric Wilcoxon test.
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Potential Limitations
As with any methodology, survey research has potential limitations. For example, the
phrasing of the survey questions could potentially affect the response. Another possible concern
is the relatively small number and percentage of responses, which could lead to non-response
bias. We took several steps to reduce potential non-response bias by making the survey
reasonably easy to complete, assuring respondents of confidentiality, sending a reminder email
to non-respondents, and offering all interested parties an executive summary of the results. Due
to the relatively low response rate, the findings should be viewed as suggestive rather than
definitive.
To test for non-response bias, we compare characteristics of the 42 responding firms to
those of the 458 non-responding firms using t-test for equality of means and non-parametric
Wilcoxon test. We use the Prowess database of CMIE to obtain the following data on each of
the two groups for 2012: (1) equity dividend, (2) total assets, (3) market capitalization, (4) price-
to-book ratio, and (5) dividend yield. To determine if the responding and non-responding firms
differ significantly on each characteristic, we first test for equality of variance using Levene’s
test. We use the t-test for equality of means. Given the skewness of the distributions, we also
use the non-parametric Wilcoxon test. The total number of respondents and non-respondents is
less than 500 because of missing observations. If the characteristics of the two groups are
similar, this lessens the concern about potential non-response bias.
For the NSE-listed firms surveyed, Table 1 presents descriptive statistics for the 42
responding and 458 non-responding firms on the five characteristics. The results show that only
one of the five characteristics the price-to-book ratio differs significantly at the 0.05 or
greater level for the Levene’s test for equality of variances and the t-test for equality of means
(equality of variance not assumed). The Wilcoxon test, however, is not statistically significant for
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the price-to-book ratio. Hence, despite the relatively low response rate, respondents and non-
respondents appear statistically similar on at least four of the five characteristics.
Another limitation of this study is that the number of responses precludes separating
firms by size, industry, and other characteristics and testing for statistically significant
differences between various groups. The small number of responses also limits our ability to
test for differences between the various hypotheses for cash dividends and share repurchases
and to statistically compare our results with those of other studies.
(Insert Table 1 about here)
Results and Discussion
Factors Influencing Dividend Policy
Our first research question attempts to identify the most important factors that managers
of Indian firms perceive as influencing their dividend policies. Table 2 reports the level of
importance of 21 potential determinants of the dividend policies of the responding firms. We
report the results for each of the 21 factors ranked by their mean score along with their
corresponding t-statistic for the null hypothesis that the mean response equals 0 (no
importance). Respondents view all 21 factors as important at the 0.01 level or greater. Of the 21
factors, we mainly focus on the highest ranked factors. Although we received 42 responses to
the survey, some respondents did not answer each of the 21 statements involving factors
influencing dividend policy. Table 2 shows the actual number of responses to each of these
statements.
As Table 2 indicates, at least half of the respondents view three factors as being of high
importance in determining their firm’s dividend policy: the stability of earnings (F2) (66.7%), level
of current earnings (F3) (64.1%), and pattern of past dividends (F1) (53.8%). The next most
highly ranked factor is the level of expected future earnings (F4). Thus, three of the four most
highly ranked factors involve earnings (F2, F3, and F4). The importance that respondents place
15
on earnings appears rational given that earnings tend to be highly correlated with cash flows
and cash typically serves as the basis for paying dividends. Besides these four factors, the only
other factors whose means fall within the moderate level of importance category are liquidity
constraints such as availability of cash (F5) and the desire to pay out, in the long run, a given
fraction of earnings (F6). Overall, these six factors appear most important in influencing the
dividend policy of the responding Indian firms. We do not test for statistically significant
differences between these factors using, for example, a chi-square test because of inadequate
cell sizes.
Of the 21 factors influencing dividend policy, using dividends as a signaling mechanism
such as using dividend changes to convey information to financial markets (F16) ranks last.
Academics often like signaling theory because it lends itself to complicated modeling. Our
results show, however, that manager of Indian firms tend to focus on the conservative Lintner
(1956) factors rather than signaling,
(Insert Table 2 about here)
Our second research question addresses whether managerial perceptions about the
importance of the factors influencing dividend policy differ between Indian firms and Indonesian,
Canadian, and U.S firms. We calculate the Spearman rank order correlation coefficient, rs, to
determine whether a significant relationship exists between the rankings of the 21 factors by
managers of NSE and IDX (Indonesian) firms, NSE and TSX (Canadian) firms, NSE and NYSE
listed (U.S.) firms, and NSE and NASDAQ (U.S.) firms. The resulting correlation coefficients are
as follows: 0.445 for NSE-IDX (significant at the 0.05 level), 0.823 for NSE-TSX, 0.767 for NSE-
NYSE, and 0.686 for NSE-NASDAQ (all significant at the 0.01 level). Overall, these correlation
coefficients show that managers of NSE, IDX, TSX, NYSE, and NASDAQ firms rank the factors
influencing dividend policy in a significantly positive manner despite differing characteristics
among the firms and markets on which their stocks trade. We do not test for statistically
16
significant differences between countries on each individual factor because of statistical issues
involving sample size.
Not surprisingly, both similarities and differences in rankings emerge for individual
determinants of dividend policy. For example, the rankings relating to earnings (F1, F2, F3, and
F4) generally appear among the most highly ranked by managers of firms on all five markets
(NSE, IDX, TSX, NYSE, and NASDAQ). Although not shown in Table 2, the key determinants
that influence dividend policy appear very similar to those reported in surveys conducted
decades earlier by Lintner (1956) and Baker et al. (1985) among others. Thus, some of the
more important and consistent determinants of payout policy appear to be the pattern of past
dividends (F1), stability of earnings or cash flows (F2), and the level of current and expected
future earnings (F3 and F4). These firm-specific factors appear to be first-order determinants in
making dividend decisions.
Dividend Issues
Our third research question concerns identifying the views managers of Indian firms
have on the dividend process, dividend patterns, dividend policy and firm value, and residual
dividend policy. Table 3 presents the survey results on these issues. In most instances, we
discuss the percentage of respondents that express agreement (agree and strongly agree)
rather than the mean response because the former provides a more easily interpretable way of
describing their views.
(Insert Table 3 about here)
Panel A of Table 3 provides respondents’ views on five statements (S2, S3, S4, S5, and
S7) based on Lintner’s (1956) behavioral model describing the corporate dividend setting. The
responses to all five statements differ significantly from 3 (no opinion) at the 0.01 level. More
than 95% of respondents believe a firm should strive to maintain an uninterrupted record of
dividend payments (S2). Almost 85% of respondents express agreement that a firm should
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change dividends based on a sustainable shift in earnings (S7). About 81% agree with the
statement that a firm should set a target dividend payout ratio and periodically adjust its current
payout toward the target (S4). Close to 68% of respondents indicate that a firm should avoid
increasing its regular dividend if it expects to reverse the dividend decision in a year or so (S5).
Almost 66% express agreement with the statement that the market places greater value on
stable dividends than stable payout ratios (S3). Overall, these results suggest that respondents
agree with the notion of maintaining continuity when paying regular cash dividends.
Panel B of Table 3 presents the results for two statements about the historical pattern of
dividends (S1 and S6), which show the responses differ significantly from no opinion at the 0.01
level. About 98% express agreement that a firm should strive to maintain steady or modestly
growing dividends (S1) and about 69% believe that dividends generally follow a smoother path
than earnings (S6). Again, these findings suggest the importance of maintaining a pattern of
steady or growing dividends.
The survey evidence presented in Panels A and B suggests that managers of NSE-listed
firms set dividends in accordance with the dividend model of Lintner (1956). Consistent with
Lintner, responding managers of Indian firms appear to support the notion of making dividend
decisions conservatively and to view stability of dividends as important. To avoid unnecessary
surprises, dividend-paying firms seem to strive for a stable and slow-growing stream of
dividends. These findings also corroborate the results shown in Table 2 involving the most
important determinants of dividend policy as perceived by managers of Indian firms, such as the
pattern of past dividends (F1).
Panel C of Table 3 presents responses to six statements used to help discern whether
managers of NSE-listed firms believe that dividend payout policy affects firm value (S10, S11,
S13, S17, S18, and S30). The mean response differs significantly from 3 (no opinion) for four
statements (S10, S11, S18, and S30) at the 0.01 level.
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The evidence shown in Panel C of Table 3 shows that all or almost all of the
respondents express agreement with the following statements: an optimal dividend policy
strikes a balance between current dividends and future growth that maximizes shareholder
value (S11) (100%) and a firm should formulate dividend policy to produce maximum value for
its shareholders (S10) (97.5%). Further, more than 93% of respondents concur that a firm’s
investment, financing, and dividend decisions are interrelated (S30). A majority (68.3%)
expresses agreement that a firm’s dividend policy generally affects its cost of capital (S18).
These results suggest that the respondents typically perceive that dividend policy is relevant in
contrast to the theory set forth by Miller and Modigliani (1961) assuming frictionless markets.
Because Indian markets are imperfect, finding that managers strongly support the view that a
firm’s payout policy affects firm value is not surprising. This evidence aligns with the perceptions
of managers of Indonesian, Canadian, and U.S. firms who do not support the dividend
irrelevance proposition. As Baker et al. (2011, p. 274) note, “… although the precise impact of
dividend policy on value remains a contentious question, managers generally tend to operate as
though dividend policy matters.”
Respondents are less certain about other issues. Our evidence shows that almost 44%
express no opinion on the statement that any change in dividend policy is likely to affect firm
value (S13) and about 42% of respondents have no opinion on the statement that a dividend
policy that meets shareholder needs may be helpful in defending against a takeover bid (S17).
The mean responses of both the statements do not differ significantly from 3 (no opinion) at the
0.05 level.
Panel D of Table 3 presents the responses to two statements about residual dividend
policy (S9 and S16). About 71% of respondents believe that a firm should view cash dividends
as a residual after funding desired investments from earnings (S16). Although the majority
(55%) of respondents do not think a firm’s new capital investment requirements generally have
little effect on modifying its pattern of dividends (S9), the mean response does not differ
19
significantly from 3 (no opinion) at the 0.05 level. Thus, our results suggest a mixed response
regarding residual dividend policy.
Overall, our results are consistent with the view that respondents believe that dividend
policy matters. Most respondents apparently view dividend policy as an integral part of business
strategy, which includes both financial and investment decisions. When the dynamics and
characteristics of the firm change, its dividend policy may also change if the firm wants to
maximize shareholder value. Trying to understand why respondents believe dividend policy
matters is an important issue to investigate. Therefore, we examine managerial perspectives on
the underlying reasons for paying dividends.
Explanations for Paying Cash Dividends
Our final research question attempts to learn the level of support that managers of Indian
firms give to various explanations for paying cash dividends and repurchasing shares. Table 4
reports the level of support that respondents assign to various explanations for paying cash
dividends whereas Table 5 reports the results for share repurchases.
(Insert Table 4 about here)
Panel A of Table 4 shows the responses to two statements involving the bird-in-the-hand
theory (S14) and (S15). The mean is statistically different from 3 (no opinion) at the 0.01 level
only for S15 but not for S14 at the 0.05 level. The results are mixed but show some support that
investors prefer a certain dividend stream to uncertain stock price appreciation (S15).
Our evidence shares some similarities with both Indonesian (Baker and Powell, 2012)
and Canadian surveys (Baker et al., 2007), which are inconclusive about how managers view
the bird-in-the-hand theory. Baker and Powell’s (2000) survey of NYSE firms shows no support
for this explanation for paying dividends. This argument is also not supported by managers of
NASDAQ-listed firms (Baker et al., 2001). A potential explanation for these differences is that
20
managers of NSE-listed firms perceive that their investors are more conservative than their
counterparts in the United States.
Panel B of Table 4 presents managers’ opinions on six statements reflecting various
aspects of signaling theory. Given that the mean of four of these statements (S19, S20, S21,
S22) are positive and differ significantly from 3 (no opinion) at the 0.01 level, our analysis
focuses only on these statements. Of the responding managers, 78% express agreement that
dividend changes provide signals about a firm’s future prospects (S19) and more than 90%
agree that a firm should adequately disclose to investors its reasons for changing its dividend
policy (S20). More than 70% of respondents also express agreement on the effect of dividend
changes on stock prices (S21 and S22). Specifically, these respondents believe that a firm’s
stock price usually falls when it unexpectedly cuts or omits its dividend (S21) and a firm’s stock
price usually increases when it unexpectedly increases its dividend or pays a dividend for the
first time (S22). In general, this evidence supports the signaling theory. The high ownership
concentration in Indian firms may help to explain the sensitivity that respondents hold involving
the effect of dividend changes on in a firm’s stock price.
Although respondents appear to recognize that dividend changes can convey
information to financial markets, Table 2 shows that using dividends as a signaling mechanism
ranks last among the 21 factors influencing dividend policy. Respondents generally agree that
dividends may send a signal about the future but this not the same as saying that the board sets
dividend policy with the primary purpose of sending a signal. Hence, signaling could simply be a
desirable consequence of a firm’s dividend policy
Panel C of Table 4 provides the responses to three statements about agency theory
(S27, S28, and S29), but only S27 is statistically significant from 3 (no opinion). Respondents
express a high level of no opinion for all three statements: 35.0% for S27, 40.0% for S28, and
30.0% for S29. On average, respondents disagree that the payment of dividends forces a firm to
seek more external financing, which subjects the firm to scrutiny of investors (S27). Similar to
21
Canadian managers (Baker et al., 2007), respondents from Indian firms do not support the
agency argument for cash dividends. This observation could be attributed to greater emphasis
on compliance to corporate governance norms by Indian companies. Another explanation for
the responses could reflect an unwillingness to recognize or admit the existence of agency
problems. Previous survey studies indicate that Indonesian (Baker and Powell, 2012) and U.S.
managers (Baker and Powell, 2000; Baker et al., 2001) lend mixed or very little support for the
agency theory explanation.
Panel D of Table 4 provides survey responses to two statements about taxes and
clientele effects (S25 and S26) but only S25 differs significantly from 3 (no opinion). About 68%
of respondents express agreement that investors are attracted to Indian firms that have dividend
policies appropriate to their particular tax circumstances (S25). Taxes may be an important
consideration for investors if dividends and capital gains are taxed at different rates. In India the
companies distributing cash dividends have to pay dividend distribution tax, while investors who
receive dividends do not have to pay taxes on them based on the Income Tax Act of 1961. U.S.
studies show mixed support for the tax preference explanation for paying dividends (Baker and
Powell, 2000; Baker et al., 2001).
Panel E of Table 4 presents how respondents view the life cycle model of dividends.
Almost 86% of respondents express agreement that the pattern of cash dividends generally
changes over a firm’s life cycle (S8). Their views are consistent with those expressed by
Indonesian, Canadian, and U.S. managers reported in previous surveys.
As Panel F of Table 4 shows, almost 66% of respondents express agreement with the
statement that a firm should be responsive to the dividend preferences of its shareholders
(S24). This evidence is consistent with an underlying tenet of catering theory that managers
base their dividend decisions on investor sentiment. By contrast, Canadian managers show little
support for catering theory (Baker et al., 2007) but Indonesian managers do (Baker and Powell,
2012).
22
Panel G of Table 4 presents views on two statements involving financial flexibility (S31
and S32), but only the mean response for S32 differs from 3 (no opinion) at the 0.05 level. Only
50% of respondents agree that dividend policy decisions are more flexible than financing
decisions because by altering dividend policy, the firm can alter the mix of internal and external
sources of financing (S32). Respondents express highly mixed views about whether cash
dividends represent a fixed cost that impairs financial flexibility by restricting debt capacity
(S31). Overall, the perceptions on the relationship between financial flexibility and dividend
policy are mixed.
Based on the evidence shown in Table 4, respondents appear to agree more strongly
with the signaling, life cycle, and catering hypotheses while showing mixed support for the bird-
in-the-hand, agency, taxes and clientele explanations for paying cash dividends.
Explanations for Share Repurchases
Table 5 reports the views of Indian managers on the level of support they assign to
various explanations for share repurchases. The means of eight of the nine statement relating to
share repurchase differ significantly from 3 (no opinion) at the 0.05 level or greater.
(Insert Table 5 about here)
Panel A of Table 5 presents how respondents view two statements about signaling
theory (S33 and S34). Almost 78% of the respondents agree or strongly agree that share
repurchases reveal positive information about the firm’s future prospects (S34). Around 73%
support the statement that share repurchases signal the firm’s stock is undervalued (S33). This
evidence is consistent with the findings by Baker et al. (2003), Bancel et al. (2005), and Brav et
al. (2005) that support the signaling/undervaluation theory for share repurchases.
Panel B of Table 5 provides the responses to three statements about agency theory
(S35, S36, and S41). Two striking findings are evident. First, a large percentage of respondents
offer no opinion about each statement: 34.1% for S35, 40.0% for S36, and 56.1% for S41. The
23
mean of S41 is not significantly different from 3 (no opinion) at the 0.05 level. Second, a low
percentage of respondents agree with the agency cost explanation: 48.8% for S35, 17.5% for
S36, and 19.5% for S41. Overall, these statements do not support the agency cost explanation
for repurchasing shares.
Panel C of Table 5 reports how respondents view takeover deterrence theory. Almost
71% agree that the share repurchases serve as an anti-takeover mechanism to ward off an
unwanted bidder (S39), which lends support to the takeover deterrence explanation.
Panel D of Table 5 shows responses to two statements relating to capital structure
adjustments (S37 and S40). The vast majority of respondents express agreement with the
statements that share repurchases provide managers with a way to change their firm’s capital
structure (S37) (75.6%) and share repurchases are a useful way to alter the corporate gearing
ratio (S40) (73.2%). Thus, respondents typically perceive that share repurchases provide a way
to adjust their firm’s capital structure. Findings by Baker et al. (2003) for U.S. firms are generally
supportive of using share repurchases to make capital structure adjustments.
Panel E of Table 5 provides the responses about share repurchases and flexibility (S38).
Almost 76% of respondents express agreement with the statement share repurchases provide
flexibility and can be used in an attempt to time the equity market or to increase earnings per
share (S38). This finding lends support to the flexibility explanation for share repurchases.
Overall, the evidence shown in Table 5 shows little support for the agency theory
explanation for repurchasing shares. However, none of the remaining theories examined seems
to be dominant.
Summary and Conclusions
We present new evidence on the perceptions of respondents from dividend paying NSE-
listed firms about the factors influencing dividend policy, dividend issues, and explanations for
paying dividends and repurchasing shares. Some evidence confirms what is already known
24
from earlier surveys and empirical research. For example, the evidence suggests that the most
important factors influencing dividend policy involve earnings (i.e., earnings stability and the
level of current and expected earnings) and the pattern of past dividends. These factors appear
to be first-order determinants in making dividend decisions among the responding firms,
Comparing the overall rankings of the 21 factors by respondents from Indian firms to
those of Indonesian, Canadian, and U.S. firms reveals statistically significant correlations. Not
surprisingly, differences exist on specific factors influencing dividend policy. Although survey
evidence shows that some factors are consistently more important than others, no universal set
of factors is likely to be applicable to all firms.
Our results also show that respondents perceive that dividend policy affects firm value.
Almost all agree that a firm should formulate dividend policy to produce maximum value for its
shareholders. This involves finding an optimal dividend policy that strikes a balance between
current dividends and future growth that maximizes shareholder value. Respondents also view
maintaining an uninterrupted record of dividends as important. Because dividend decisions can
affect firm value and shareholder wealth, dividend policy is worthy of a firm’s attention.
Our evidence supports multiple theories for paying cash dividends with the strongest
agreement involving signaling, firm life cycle, and catering theories with the least support for
agency theory. Although respondents express agreement with multiple explanations for
repurchasing shares including signaling/undervaluation, takeover deterrence, capital structure,
and flexibility, none of these theories appears dominate. Clearly, the least support is for agency
theory.
25
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29
Table 1. Characteristics of Survey Respondents and Non-respondents for NSE-listed Firms
This table shows five characteristics for the survey respondents and non-respondents and the tests for non-response bias.
Equity
Dividend (Rs. Million)
Total Assets
(Rs. Million)
Market Capitalization (Rs. Million)
Price-to-Book Ratio
Dividend Yield (%)
Mean
Respondents 2,115.614 26,0991.562 128,520.243 2.185 1.717
Non-respondents 2,198.614 24,4191.874 111,073.293 2.816 1.848
Standard deviation
Respondents 4,285.295 659,829.921 211,060.841 1.430 1.300
Non-respondents 6,980.512 854,794.1 292,602.3 3.483 3.545
Respondents 37 42 42 42 42
Non-respondents 394 458 458 454 458
Levene’s test for equality of variances
0.096 0.001 0.009 5.218** 0.415
t-test for equality of means (equality of variances assumed)
0.071 0.124 0.377 1.163 0.239
t-test for equality of means (equality of variance not assumed)
0.105 0.154 0.494 2.295** 0.506
Wilcoxon test 1.470 0.806 1.519 1.207 1.075
*,**Significant at the 0.05 and 0.01 levels, respectively.
30
Table 2. Factors Influencing Dividend Policy This table shows the level of importance attached to 21 factors influencing dividend policy by managers of Indian firms ranked from highest to lowest based on the mean for the Indian sample. It also shows the factor rankings from surveys of managers of exchange-listed firms in various countries NSE (Indian), IDX (Indonesian), TSE (Canada), NYSE (United States), and NASDAQ (United States). The number of respondents for each factor is less than 42 because some respondents failed to evaluate each factor.
Level of Importance (%) Rank
# Factor n None
0
Low
1
Mod
2
High
3 Mean Std.
Dev. t-value
NSE
IDX
TSE
NYSE
NASDAQ
F2 Stability of earnings 39 0 2.6 30.8 66.7 2.64 0.54 30.69** 1 1 2 6 2
F3 Level of current earnings 39 0 2.6 33.3 64.1 2.62 0.54 30.04** 2 2 4 1.5 3
F1 Pattern of past dividends 39 2.6 0.0 43.6 53.8 2.49 0.64 24.13** 3 7 3 3 1
F4 Level of expected future earnings 39 0 7.7 48.7 43.6 2.36 0.63 23.47** 4 3 1 1.5 4
F5 Liquidity constraints such as availability of cash
39 2.6 15.4 38.5 43.6 2.23 0.81 17.20** 5.5 4 5 8 14
F6 Desire to pay out, in the long run, a given fraction of earnings
39 2.6 2.6 64.1 30.8 2.23 0.63 22.23** 5.5 10 6 9 7
F11 Investment consideration such as the availability of profitable investment opportunities
39 2.6 12.8 51.3 33.3 2.15 0.74 18.06** 7 9 11 7 15
F12 Desire to avoid giving a false signal to investors by changing the dividend
37 5.4 18.9 45.9 29.7 2.00 0.85 14.32** 8 21.5 12 5 8
F8 Current degree of financial leverage 36 5.6 33.3 44.4 16.7 1.72 0.81 12.69** 9.5 13.5 8 NA 10
F14 Financing considerations such as the cost of raising external funds (debt and equity)
39
10.3
28.2
41.0
20.5
1.72
0.92
11.71**
9.5
16
14
12
19
F19 Legal rules and constraints such as paying dividends that would impair capital 39 5.1 35.9 43.6 15.4 1.69 0.80 13.21** 11 20 19 16 12
F10 Expected rate of return on firm’s assets 38 10.5 26.3 47.4 15.8 1.68 0.87 11.89** 12.5 18 10 13 11
F13 Desire to maintain a target capital structure
38
10.5
28.9
42.1
18.4
1.68
0.90
11.49** 12.5 19 13 11 6
F9 Needs of current shareholders such as the desire for current income
39 7.7 28.2 56.4 7.7 1.64 0.74 13.79** 14 6 9 10 9
F7 Concern about affecting the stock price 39 12.8 30.8 41.0 15.4 1.59 0.91 10.92** 15 5 7 4 5
F20 Contractual constraints such as dividend restrictions in debt contracts
39 17.9 28.2 33.3 20.5 1.56 1.02 9.57** 16 15 20 15 21
31
F15 Availability of alternative sources of capital 39 15.4 30.8 38.5 15.4 1.54 0.94 10.20** 17.5 12 15 NA 17
F17 Projections about future state of the economy
39 7.7 38.5 46.2 7.7 1.54 0.76 2.72** 17.5 8 17 18 18
F18 Desire to conform to the industry’s dividend payout ratio
39 15.4 33.3 41.0 10.3 1.46 0.88 10.33** 19 17 18 14 13
F21 Preference to pay dividends instead of undertaking risky reinvestments
39 17.9 38.5 28.2 15.4 1.41 0.97 9.12** 20 13.5 21 19 20
F16 Signaling mechanism such as using dividend changes to convey information to financial markets
39 15.4 41.0 38.5 5.1 1.33 0.81 10.33** 21 11 16 NA 16
*,**Significant at the 0.05 and 0.01 levels, respectively.
32
Table 3. Level of Agreement by Managers of Indian Firms on Issues Involving Dividend Policy
This table presents the survey responses for dividend-paying Indian firms on 15 statements involving four issues: dividend process (Panel A), dividend patterns (Panel B), dividend policy and shareholder value (Panel C), and residual dividend policy (Panel D). Rankings are based on a five-point scale ranging where disagree (SD) = 1, disagree (D) = 2, no opinion (NO) = 3, agree (A) = 4, and strongly agree (SA) = 5. The t-value shows the result of testing the null hypothesis that the mean response equals 3 (no opinion).
*,**Significant at the 0.05 and 0.01 levels, respectively.
# Statement n SD 1
D 2
NO 3
A 4
SA 5
Mean Std. Dev.
t-value
Panel A. Dividend Process
S2 A firm should strive to maintain an uninterrupted record of dividend payments. 41 0 0 4.9 53.7 41.5 4.37 0.581 15.047**
S3 The market places greater value on stable dividends than stable payout ratios. 41 0 14.6 19.5 48.8 17.1 3.68 0.934 4.683**
S4 A firm should have a target dividend payout ratio and periodically adjust the payout toward the target.
41
0
4.9
14.6
63.4
17.1
3.93
0.721
8.234**
S5 A firm should avoid changing its regular dividend if it might have to reverse that change in a year or so because this may create an unfavorable impression among investors about the firm.
41 0 9.8 22.0 56.1 12.2 3.71 0.814 5.566**
S7 Dividends changes generally follow a shift in long-term sustainable earnings. 39 0 0 15.4 69.2 15.4 4.00 0.562 11.113**
Panel B. Dividend Patterns
S1 A firm should strive to maintain steady or modestly growing dividends. 40 0 0 2.5 52.5 45.0 4.42 0.549 16.402**
S6 Dividends generally follow a smoother path than earnings. 39 0 5.1 25.6 66.7 2.6 3.67 0.621 6.701**
Panel C. Shareholder Value and Other Dividend Policy Issues
S10 A firm should formulate dividend policy to produce maximum value for its shareholders.
41
0
0
2.5
46.3
51.2
4.49
0.553
17.219**
S11 An optimal dividend policy strikes a balance between current dividends and future growth that maximizes shareholder value.
41
0
0
0
51.2
48.8
4.49
0.506
18.825**
S18 A firm’s dividend policy affects its cost of capital. 41 0 7.3 24.4 56.1 12.2 3.73 0.775 6.042**
S30 A firm’s investment, financing, and dividend decisions are interrelated. 41 2.4 2.4 4.9 73.2 17.1 4.00 0.742 8.634**
S17 A dividend policy that meets shareholder needs may be helpful in defending against a takeover bid.
41 7.3 22.0 41.5 26.8 2.4 2.95 0.947 –0.330
S13 Any change in dividend policy is likely to affect firm value. 41 0 19.5 43.9 31.7 4.9 3.22 0.822 1.710
Panel D. Residual Dividend Policy
S9 A firm’s new capital investment requirements generally have little effect on modifying its pattern of dividends.
40 5.0 50.0 5.0 32.5 7.5 2.88 1.159 –0.682
S16 A firm should view cash dividends as a residual of earnings only after meeting investment needs.
41 0 12.2 17.1 58.5 12.2 3.71 0.844 5.367**
33
Table 4. Views of Managers of Indian Firms on Explanations for Paying Cash Dividends This table presents the survey responses for 41 dividend-paying Indian firms on 17 statements involving seven explanations for paying dividends. Rankings are based on a five-point scale where strongly disagree (SD) = 1, disagree (D) = 2, no opinion (NO) = 3, agree (A) = 4, and strongly agree (SA) = 5. The t-value shows the result of testing the null hypothesis that the mean response equals 3 (no opinion).
# STATEMENT n SD D NO A SA Mean Std.
Dev.
t-value
1 2 3 4 5
Panel A. Bird in the Hand Theory
S14 Investors prefer certain, current dividends to possibly higher but riskier stock price appreciation.
40 5.0 22.5 17.5 47.5 7.5 3.30 1.067 1.778
S15 Investors prefer a certain dividend stream to uncertain stock price appreciation.
41 4.9 12.2 22.0 53.7 7.3 3.46 0.977 3.037**
Panel B. Signaling Theory
S12 A firm should consider the trends in dividend policy of its competitors when setting and reviewing its dividend policy.
41 4.9 19.5 29.3 43.9 2.4 3.20 0.954 1.309
S19 Dividend changes provide signals about a firm’s future prospects. 41 0 4.9 17.1 75.6 2.4 3.76 0.582 8.315**
S20 A firm should adequately disclose to investors its reasons for changing its dividend policy.
41 0 4.9 14.6 58.5 22.0 3.98 0.758 8.243**
S21 A firm’s stock price usually falls when it unexpectedly cuts or omits its dividend.
41 2.4 4.9 22.0 61.0 9.8 3.71 0.814 5.566**
S22 A firm’s stock price usually increases when it unexpectedly increases its dividend or pays a dividend for the first time.
41 0 20.5 29.3 58.5 15.0 3.54 0.711 4.835**
S23 Dividend increases are ambiguous because they can suggest future growth or lack of investment opportunities.
39 0 20.5 35.9 43.6 0 3.23 0.777 1.856
Panel C. Agency Theory
S27. The payment of dividends forces a firm to seek more external financing, which subjects the firm to scrutiny of investors.
40 2.5 45.0 35.0 17.5 0 2.68 0.797 2.579**
S28. The payment of dividends serves as a bonding mechanism to encourage managers to act in the interest of outside shareholders.
40 2.5 32.5 40.0 25.0 0 2.88 0.822 0.961
S29. Dividends are less important as a corporate monitoring mechanism for investors when companies comply with corporate governance norms.
40 2.5 27.5 30.0 35.0 5.0 3.12 0.966 0.819
34
Panel D. Taxes and Clientele Effects
S25. Investors are attracted to Indian firms that have dividend policies appropriate to their particular tax circumstances. 41 0 12.2 19.5 65.9 2.4 3.59 0.741 5.060**
S26. Stocks that pay high (low) dividends attract investors in low (high) tax brackets. 41 2.4 34.1 34.1 29.3 0 2.90 0.86 0.726
Panel E: Firm Life Cycle Theory of Dividends
S8. The pattern of cash dividends generally changes over a firm’s lifecycle. 41 0 2.4 12.2 70.7 15.0 3.98 0.612 10.210**
Panel F: Catering Theory of Dividends
S24. A firm should be responsive to dividend preferences of its shareholders. 40 0 7.3 26.8 61.0 4.9 3.63 0.698 5.814**
Panel G. Financial Flexibility
S31 Cash dividends represent a fixed cost that impairs financial flexibility by restricting debt capacity. 41 2.4 39 24.4 31.7 2.4 2.93 0.959 0.489
S32 Dividend policy decisions are more flexible than financing decisions because by altering dividend policy, the firm can alter the mix of internal and external sources of financing. 40 2.5 17.5 30 50 0 3.28 0.847 2.054*
*,**Significant at the 0.05 and 0.01 levels, respectively.
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Table 5. Views of Managers of Indian Firms on Explanations for Share Repurchases This table presents the survey responses for 41 dividend-paying Indian firms on nine statements involving five explanations for share repurchases. Rankings are based on a five-point scale where strongly disagree (SD) = 1, disagree (D) = 2, no opinion (NO) = 3, agree (A) = 4, and strongly agree (SA) = 5. The t-value shows the result of testing the null hypothesis that the mean response equals 3 (no opinion).
*,**Significant at the 0.05 and 0.01 levels, respectively.
# STATEMENT n SD 1
D 2
NO 3
A 4
SA 5
Mean Std. Dev.
t-value
Panel A. Signaling and Undervaluation
S33 Share repurchases signal that the firm’s stock is undervalued. 41 0 19.5 7.3 58.5 14.6 3.68 0.960 4.554**
S34 Share repurchases reveal positive information about the firm’s future prospects. 40 0 10.0 12.5 75.0 2.5 3.70 0.687 6.445**
Panel B. Agency Cost of Free Cash Flows
S35 Share repurchases reveal a lack of attractive investment opportunities available to the firm.
41 0 17.1 34.1 41.5 7.3 3.39 0.862 2.897**
S36 Share repurchases provide a way to lessen conflicts of interest between managers and shareholders.
40 0 42.5 40.0 17.5 0 2.75 0.742 2.130*
S41 When corporate profits are under pressure, share repurchase programs receive higher priority use of corporate cash flow than cash dividends.
41 2.4 22.0 56.1 19.5 0 2.93 0.721 0.650
Panel C. Takeover Deterrence
S39 Share repurchases serve as an anti-takeover mechanism to ward of an unwanted bidder.
41 0 0 29.3 63.4 7.3 3.78 0.571 8.758**
Panel D. Capital Structure Adjustments
S37 Share repurchases provides managers with a way to change their firm’s capital structure.
41 0 9.8 14.6 70.7 4.9 3.71 0.716 6.328**
S40 Share repurchases are a useful way to alter the corporate gearing ratio (measure of financial leverage).
41 0 2.4 24.4 73.2 0 3.71 0.512 8.845**
Panel E. Flexibility
S38 Share repurchases provide flexibility and can be used in an attempt to time the equity market or to increase earnings per share.
41 0 0 24.4 73.2 2.4 3.78 0.475 10.522**
