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  A Research Proposal onDeterminants of Dividend payout ratio of Pakistani Firms Abstract: This paper focuses on to identify the determinants of Dividend policy of Pakistani firms. This studyanswers the questions that , “What are the key determinants of dividend payout ratio of Pakistani firms?”,and “What are the factors that effects the dividend policy of Pakistani firms?” The findings of this paper supports that the most important determinants of dividend payout ratio of Pakistani firms are High profitability, Investment Opportunities, Size of the Firm, market Liquidity and Ownership Structure.These are the main Factors that increase or decrease the dividend payout ratio of the firm. 1. Introduction The behavior of dividend policy is the most debatable issue in the corporate finance literatureand still keeps its prominent place both in developed and emerging markets. Many researcherstry to uncover the issue regarding the dividend behavior or dynamics and determinants of dividend policy but we still do not have an acceptable explanation for the observed dividend behavior of firms (Black, 1976; Allen and Michaely, 2003 and Brealey and Myers 2005). One of the well known explanations of dividend behaviour is the smoothing of firm ‟ s dividends vis-a-vis earnings and growth. In his seminal research, Lintner (1956) find that firms in the UnitedStates adjust their dividends smoothly to maintain a target long run payout ratio. Several studiesappear after this work and evidence suggest that the dividend policy of the companies variesfrom country to country due to various institutions and capital market differences.The Pakistan ‟ s capital market and the economy have several important features for examiningthe dynamics of dividend policy. Firstly, Pakistan is moving towards the development andimproving the economy position in the world since the 1980.The capital markets of Pakistan aremuch develops as before.Many studies conclude that firms are likely to pay stable dividend  during the high growth period and it is interesting to find that how dynamic dividend policy isdetermined in growing economy like Pakistan. Secondly, due to weak corporate governance theownership structure of Pakistani firms is often characterized by the dominance of one primaryowner who manages a large number of affiliated firms with just a small amount of shares or investment which result in the agency conflict between the shareholders and the owner, wherecontrolling shareholders confiscate value from minority shareholders and can influence thedividend policy easily. Thirdly, the tax environment in Pakistan is totally different as compare todeveloped markets. There is no capital gain tax   on stocks in Pakistan while 10% withholding taxis charged on dividend incomes and it is important to mention here that if the firms earned the profit and not announced the dividend that the 35% of the income tax is charged by theGovernment of Pakistan. There is a possibility of differences in the tax system may influence thedividend policy and also influence the degree of dividend smoothing in Pakistan since thisadverse tax treatment of dividend income is a more serious issue than the developed countrieslike United States. Fourthly, in the Pakistan the payment of dividend is voluntary. In Korea for example, it is mandatory for listed companies to pay the annual dividend divided by its facevalue at a level equal to the interest rate of one year time deposit. In fact, in Pakistan the manymajor investors are still disagreed with dividends and consider stock prices appreciation as themajor component of stock returns therefore, it is assumed that investor attitude towardsdividends is expected to have an impact on the way in which firms set their dividend policy inPakistan.The theoretical and empirical evidences suggest that there are many firm specific factors relatedto governance related which play an important role in dividend signaling and agency costexplanation of dividend behavior. The main focus of the study is to explore the role of variousdeterminants such as ownership concentration, profitability, liquidity, size, leverage andinvestment opportunities on the firms dividend paying behavior..  2. Review of Literature: During the last fifty years the several theoretical and empirical studies are done leading to themainly three outcomes: the increase or decrease in dividend payout affect the market value of thefirm or the dividend policy of the firm does not affect the firm value at all. However, we can saythat empirical evidence on the determinants of dividend policy is unfortunately very mixed.Furthermore there are numerous theories on why and when the firms pay dividends. Debt ratiocan be used as independent variable because when a firm has   relatively high financial leverage, itsdependence on external finance is   increased, thus, has low dividend payout ratios. (Aivazian, Booth,and   Cleary, 2003 and Ho, 2003).   Higher revenue firms should have lower probability of bankruptcy,and, therefore,   should be more likely to pay higher dividends; Barclay, Smith, and Watts, (1995).   Wealso think that size of firms, measured by log of sales, has an important   contribution in explainingdividend policy of Pakistani firms since Larger firms   have better access to market and therefore ableto pay higher dividends.   Asset structure defined as total assets minus current assets divided by totalsassets will be used to capture tangibility for non-financial firms and for financial   firms change intotal assets will be used. Investments in fixed assets for    expansion purpose leave little out of profitsto be paid to shareholders as Gordon and Walter (1963) present the bird in the hand theory whichsays that investors always prefer cash in hand rather then a future promise of capital gain due tominimizing risk.The agency theory of Jensen and Meckling (1976) is based on the conflict between managers andshareholder and the percentage of equity controlled by insider ownership should influence thedividend policy. Easterbrook (1984) gives further explanation regarding agency cost problemand says that there are two forms of agency costs; one is the cost monitoring and other is cost of risk aversion on the part of directors or managers. The explanation regarding the signaling theorygiven by Bhattacharya (1980) and John Williams (1985) dividends allay information asymmetric between managers and shareholders by delivering inside information of firm future prospects.investigating the determinants of dividend policy of Tunisian stock Exchange Naceur  et al. (2006) find that the high profitable firms with more stable earnings can manage the larger cashflows and because of this they pay larger dividends. Moreover, the firms with fast growthdistribute the larger dividends so as attract to investors. The ownership concentration does not  have any impact on dividend payments. The liquidity of the firms has negatively impacted ondividend payments.In particular, the factors involve for determination of dividend policies in Pakistan, which iscentral issue of this area needs in depth research. It is in this perspective this study aims to makecontribution in the literature on dividend policy. 2.1 Aim of Research: Dividend payout ratio is important and most debatable topic in corporate Finance and it is mostcrucial topic in developed as well as developing country. Especially in case of developingcountry it is too much important because in developing countries certain important determinantfactors that effects the dividend payout ratio. Due to these factors it is very difficult to measurethe behavior of dividend policy in developing countries because these factors just exist just indeveloping countries. These Factors include Tax, Corporate Ownership e.t.c due to these factorsit is difficult to measure the behavior of dividend policy .The main aim of my research work is todetermine these important factors that just exist in developing countries on which dividend policy depends.Many researchers have done work to determine these factors and identify many factors I alsohave done research to determine some other factors on which dividend policy depends. Myresearch is beneficial for the shareholders of the company who are mostly effected by dividend policy this research will help them to analyze these factors which effects their dividend. Also itwould be helpful to the management and owners of the company. My research will determinesome new factors and It will be beneficial for the Pakistani firms shareholders and managementto set their dividend policy.
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