Cash Flows, Earnings, and Dividend Payout Nexus in Pakistan: A Case Study of KSE-100 Index
Abstract
Abstract Views: 0
The nexus between cash flows, earnings, and dividend payout in Pakistan holds paramount importance for investors. It enables them to assess the financial health and stability of companies listed on the Karachi Stock Exchange-100 (KSE-100) Index, make informed investment decisions, and manage risks effectively. Therefore, the current study discusses the importance of dividends in corporate finance and the factors that affect the dividend payouts, particularly in the context of Pakistani listed companies in the Pakistan Stock Exchange (PSX). The contradictory nature of dividends has made it a fundamental issue of corporate finance, which has been studied in relation to a firm’s investment and financing decisions as prime variables. This study has found that earnings per share and free cash flow affect the level of dividends in the surveyed companies, with earnings per share having a positive but insignificant impact on the dividend per share. Profitability has a positive effect on dividend payout; however, there is no significant effect of earnings per share on the dividend. The findings enhance the current body of literature by providing insights into the determinants of dividend payout among the Pakistani listed companies. Furthermore, these findings are valuable for investors decision-makers, and policy makers, which make informed investment decisions. The study also identified problems for management and investors and other researchers who are conducting different studies to assess firm behaviour regarding payout decisions with possible solutions and future implications.
Downloads
References
Abbas, G., Rafiq, S., & Gul, M. (2023). Unraveling dividend payouts: A comprehensive analysis of cash flow and earnings approaches in the listed manufacturing companies. Gomal University Journal of Research, 39(2), 240–249. http://www.gujr.com.pk/index.php/GUJR/article/view/1644
Abor, J., & Bokpin, G. A. (2010). Investment opportunities, corporate finance, and dividend payout policy: Evidence from emerging markets. Studies in Economics and Finance, 27(3), 180–194. https://doi.org/10.1108/10867371011060018
Afza, T., & Mirza, H. H. (2011). Do mature companies pay more dividends? Evidence from Pakistani stock market. Mediterranean Journal of Social Sciences, 2(2), 152–161. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1950698
Ahmed, H., & Javid, A. (2009). Dynamics and determinants of dividend policy in Pakistan: Evidence from Karachi stock exchange non-financial listed firms. JISR Management and Social Sciences & Economics, 7(1), 167–194. https://jisrmsse.szabist.edu.pk/index.php/szabist/article/view/329
Al-Malkawi, H. A. (2007). Determinants of corporate dividend policy in Jordan: an application of the Tobit model. Journal of Economic and Administrative Sciences, 23(2), 44–70. https://doi.org/10.1108/10264116200700007
Anil, K., & Kapoor, S. (2008). Determinants of dividend payout ratios-a study of Indian information technology sector. International Research Journal of Finance and Economics, 15(1), 63–71.
Baker, H. K, & Powell, G. E. (2012). Dividend policy in Indonesia: survey evidence from executives. Journal of Asia Business Studies, 6(1), 79–92. https://doi.org/10.1108/15587891211191399
Baker, H. K. (2009). Dividends and dividend policy: An overview. Dividends and dividend policy (pp. 1–19). Wiley Publisher.
Baker, H. K., & Weigand, R. (2015). Corporate dividend policy revisited. Managerial Finance, 41(2), 126–144. https://doi.org/10.1108/MF-03-2014-0077
Bali, T. G. (2008). The intertemporal relation between expected returns and risk. Journal of Financial Economics, 87(1), 101–131. https://doi.org/10.1016/j.jfineco.2007.03.002
Balios, D., Daskalakis, N., Eriotis, N., & Vasiliou, D. (2016). SMEs capital structure determinants during severe economic crisis: The case of Greece. Cogent Economics & Finance, 4(1), Article e1145535. https://doi.org/10.1080/23322039.2016.1145535
Bancel, F., Bhattacharyya, N., Mittoo, U. R., & Baker, H. K. (2009). Cross‐country determinants of payout policy: European firms. Dividends and Dividend Policy (pp. 71–93). Wiley. https://doi.org/10.1002/9781118258408.ch5
Berle, A., & Means, G. (1932). The modern corporation and private property Macmillan. New York.
Bhayani, S. J. (2008). Dividend policy behaviour in the Indian capital market: A study of BSE-30 companies. DIAS Technology Review, 4(1), 30–39.
Bradley, B. P., Mogg, K., Falla, S. J., & Hamilton, L. R. (1998). Attentional bias for threatening facial expressions in anxiety: Manipulation of stimulus duration. Cognition & Emotion, 12(6), 737–753. https://doi.org/10.1080/026999398379411
Bulan, L., & Hull, T. (2013). The impact of technical defaults on dividend policy. Journal of Banking & Finance, 37(3), 814–823. https://doi.org/10.1016/j.jbankfin.2012.10.014
Fama, E. F., & French, K. R. (1988). Dividend yields and expected stock returns. Journal of Financial Economics, 22(1), 3–25. https://doi.org/10.1016/0304-405X(88)90020-7
Fama, E. F., & French, K. R. (2002). The equity premium. The Journal of Finance, 57(2), 637–659. https://doi.org/10.1111/1540-6261.00437
Farrelly, G. E., Baker, H. K., & Edelman, R. B. (1986). Corporate dividends: Views of the Policy-makers. Akron Business and Economic Review, 17(4), 62–74.
Farsio, F., Geary, A., & Moser, J. (2004). The relationship between dividends and earnings. Journal for Economic Educators, 4(4), 1–5. https://libjournals.mtsu.edu/index.php/jfee/article/view/1431
Frankfurter, G. M., & Wood, B. G. (2002). Dividend policy theories and their empirical tests. International Review of Financial Analysis, 11(2), 111–138. https://doi.org/10.1016/S1057-5219(02)00071-6
Friend, I., & Puckett, M. (1964). Dividends and stock prices. The American Economic Review, 54(5), 656–682. https://www.jstor.org/stable/1818565
Gill, A., Biger, N., & Tibrewala, R. (2010). Determinants of dividend payout ratios: Evidence from United States. The Open Business Journal, 3(1), 8–14. https://doi.org/10.2174/1874915101003010008
Glen, J. D., Karmokolias, Y., Miller, R. R., & Shah, S. (1995). Dividend policy and behavior in emerging markets: To pay or not to pay. The World Bank.
Graham, B., & Dodd, D. L. (1934). Security analysis. McGraw-Hill.
Hashmi, S. D., & Gulzar, S. (2022). Examining the Nexus between board gender diversity and shareholder’s value in pre and post mandatory requirement for female directors in Pakistan. Pakistan Journal of Social Sciences, 42(1), 107–119. http://pjss.bzu.edu.pk/index.php/pjss/article/view/1056
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Keown, D. M., Li, X., Hayashi, J. I., & Li, C. Z. (2007). Characterization of the structural features of char from the pyrolysis of cane trash using Fourier Transform− Raman spectroscopy. Energy & fuels, 21(3), 1816–1821. https://doi.org/10.1021/ef070049r
Lamont, O. (1998). Earnings and expected returns. The Journal of Finance, 53(5), 1563–1587. https://doi.org/10.1111/0022-1082.00065
Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and taxes. The American Economic Review, 46(2), 97–113. https://www.jstor.org/stable/1910664
Liu, J., Nissim, D., & Thomas, J. (2007). Is cash flow king in valuations? Financial Analysts Journal, 63(2), 56–68. https://doi.org/10.2469/faj.v63.n2.4522
Marcus, A. J., Brealy, R. A., & Myers, S. C. (1996). Principios de dirección financiera. McGraw-Hill.
McManus, I., Gwilym, O. A., & Thomas, S. (2004). The role of payout ratio in the relationship between stock returns and dividend yield. Journal of Business Finance & Accounting, 31(9‐10), 1355–1387. https://doi.org/10.1111/j.0306-686X.2004.00577.x
Michaely, R., & Roberts, M. R. (2006). Free Cash Flow, Signaling, and Smoothing: Lesson from Dividend Policy of Public and Private Firms. Working Paper. Cornell University.
Michel, A. J., & Shaked, I. (1986). Country and industry influence on dividend policy: Evidence from Japan and the USA. Journal of Business Finance & Accounting, 13(3), 365–381. https://doi.org/10.1111/j.1468-5957.1986.tb00502.x
Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), 411–433. https://www.jstor.org/stable/2351143
Miller, M. H., & Rock, K. (1985). Dividend policy under asymmetric information. The Journal of Finance, 40(4), 1031–1051. https://doi.org/10.1111/j.1540-6261.1985.tb02362.x
Musiega, M. G., Alala, O. B., Musiega, D., Maokomba, C. O., & Egessa, R. (2013). Determinants of dividend payout policy among non-financial firms on Nairobi Securities Exchange, Kenya. International Journal of Scientific Technology & Research, 2(10), 253–266.
Papadopoulos, D. L., & Charalambidis, D. P. (2007). Focus on present status and determinants of dividend payout policy: Athens stock exchange in perspective. Journal of Financial Management & Analysis, 20(2), 24–37.
Penman, S. H., & Yehuda, N. (2009). The pricing of earnings and cash flows and an affirmation of accrual accounting. Review of Accounting Studies, 14(4), 453–479. https://doi.org/10.1007/s11142-009-9109-4
Perretti, G, F., Allen, T., & Shelton W. H. (2013). Determinants of dividend policies for ADR firms. Managerial Finance, 39(12), 1155–1168. https://doi.org/10.1108/MF-04-2013-0075
Pruitt, S. W., & Gitman, L. J. (1991). The interactions between the investment, financing, and dividend decisions of major US firms. Financial Review, 26(3), 409–430. https://doi.org/10.1111/j.1540-6288.1991.tb00388.x
Rasheed, M. H., Zahid, T., & Sadiq, S. (2022). Exploring the nexus between accounting anomalies, stock returns, and growth: A study of KSE-100 companies. UW Journal of Management Sciences, 6(1), 95–113.
Reddy, B. E., Lambert, D. L., & Prieto, C. A. (2006). Elemental abundance survey of the Galactic thick disc. Monthly Notices of the Royal Astronomical Society, 367(4), 1329–1366. https://doi.org/10.1111/j.1365-2966.2006.10148.x
Stevens, J. L., & Jose, M. L. (1992). The effects of dividend payout, stability, and smoothing on firm value. Journal of Accounting, Auditing & Finance, 7(2), 195–212. https://doi.org/10.1177/0148558X9200700207
Travlos, N. G., Trigeorgis, L., & Vafeas, N. (2001). Shareholder wealth effects of dividend policy changes in an emerging stock market: The case of Cyprus. Multinational Finance Journal, 5(2), 87–112. https://ssrn.com/abstract=2627623
Warren, C. S. Reeve, J. S., & Duchac, J. (2011) Accounting. South Western Educational Publishing.
Copyright (c) 2023 Khadija Riaz, Muhammad Ramzan Sheikh, Irfan Hussain, Muhammad Imran Mushatq
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgement of the work’s authorship and initial publication in this journal.
