Effect of Profitability and Firm Size on Dividend Policy
Zain Velji
02-320182-001
MBA (3.5 Years)
Thesis Proposal
Semester 6th
Bahria University, Karachi Campus
MBA THESIS PROPOSAL APPROVAL
STATEMENT BY SUPERVISOR
APPROVAL FOR EXAMINATION
Candidate’s Name: Zain
Thesis Title:
Registration No 57544
Effect of Profitability and Firm Size on Dividend Policy
. I hereby certify that the above candidate's Proposal has been completed to my satisfaction and, to my
belief, its standard is appropriate for submission for examination. I have also conducted plagiarism
test of this thesis using HEC prescribed software and found similarity index at ___ that is within the
permissible limit set by the HEC for the MBA thesis. I have also found the thesis in a format
recognized by the Business Studies Department
Supervisor Signature:
Date:
Supervisor Name: Dr. Mubashir Ali Khan
HOD Signature:
Date:
TABLE OF CONTENTS
CHAPTER 1
INTRODUCTION
1.1
Introduction
1.2
Background
1.3
Problem Statement
1.4
Research Objectives
1.5
Research Questions
1.6
Significance of the Study
1.7
Scope of the Research
1.8
Organization of the Thesis
CHAPTER 2
LITERATURE REVIEW
.
2.1
What is Dividend
2.2
Dividend Policy
2.3
Effect of Profitability on Dividend Policy
2.4
Effect of Firm Size on Dividend Policy
2.5
Conceptual Framework
2.6
Hypothesis Development
CHAPTER 3
Research Methodology
3.1
Research Approach & Type
3.2
Research Design
3.3
Research Population
3.4
Sample Size & Sampling Technique
3.5
Research Instrument
3.6
Data Collection
CHAPTER 1: INTRODUCTION
1.1
Introduction:
This chapter include the history regarding the topic. Foundation and history are incorporated in
this chapter. The economy of Pakistan has privatization, liberalization and globalization all
together with rapid research in information technology as well which have required serious field
in all the businesses because of which Pakistani firms have been confused dazed and anxious in
order to survive the competition, firms needs to increase their value the finance manager will have
to make the basic businesses and budgetary choices so that they can meet their budgetary goals
and can also increase their shareholders wealth and firm value and profit will also be increased.
Earning profit is the main drive for the firms and can be distributed into two main destinations one
it can either be distributed to its shareholders or used for future growth for the firm. The distribution
can be done in the form of dividends or by repurchasing or circulating of shares so the firms needs
to create dividend policy in order to determine whether to pay dividend or not. There are many
researchers who have study about dividend policy. It symbolize and give importance about the
development of the organization (Black 1976). All the potential investors and shareholders usually
decide to invest in company by investigating the capacity of the company that how much company
can pay dividend and dividend policy also help in minimizing the agency cost of the company and
the prosperity of management can be determined by the shareholders wealth so management
should always comprehend the dividend policy because there has been less research regarding the
effect of dividend policies on shareholders of a company.
1.2 Background
Dividend policy is a procedure that is used by company to select the amount of income that they
will payout to their shareholders. Profit can be in the form of money, stock or at times property.
The steadiest organizations offer dividend to its shareholders. The stock cost of such organization
don’t move that much comparatively to small firms and dividend are usually offers to compensate
and to hold the shareholders the choices of dividend can be imperative since they work out what
stores rushes to and the asset which are held by the company are more for all the venture that they
want to do thus they share their data in the organization the firm decides the future based on it and
also accumulate the profit which create impact on the cost of capital.
The board of director of a firm work on the profit management so in order to discuss regarding
what amount should be given to the shareholders because their return for creating their interest is
giving organization a profit and also held the money that can be used for the organization purpose.
The type of profit approach is essential for researching regarding corporate fund. Even though
there have been many reviews regarding profit arrangement, but many studies have been
uncovered the materialness about profit. Some recorded organizations have sorted their hypothesis
on stock trade so improving the profit of the shareholders are important for the firm (Panday K
2005) the riches of stockholders have been developed by the deals with the investment choices and
the changes that occur in the net revenue (Azha and Priya 2005). For this purpose, the execution
of the company can be seen that how the company can increase the profit for their shareholders
and what is the firm’s capacity to create income contributed by the shareholders. the profit
approach helps in influencing the estimating regarding the firm (Bakers and powell, 2001). To
qualify the overall execution of the firm the goals are set keeping the quality and quantity in mind
to raise the net wage and the organization decides on the approach to earn the profit and held
income the main principle regarding this review is to know the huge effect that is occur through
dividend policy on corporate profitability and in the event, it is related with the dividend policy.
1.3 Problem Statement:
In this chapter we will discuss the problem because of which we are doing research. Dividend
policy has been a debatable subject of discussion. The researchers have developed models which
describe how the company should make their dividend policy and what things to keep in mind
before making them but still many companies faced challenges while setting a policy and also
well-established companies also make mistakes and loose out on their profit hence it is important
to keep factors in mind while making policy (Miller and Modigliani). The question regarding does
dividend policy affects the shareholder’s wealth still remain unresolved and the result may vary
across in different countries due to their country’s situation so as a result the researchers have a
huge premise to explore this issue with different countries perspectives there has been previous
studies which have been done in some particular sector, but it has been seen that in developing
countries the researchers have ignore researching regarding this. If research done in such countries
would help giving a diversified perspectives of research and will provide them more knowledge
regarding this and will also shed a light on the firm performance and shareholders wealth also
keeping in mind the view of potential investor that is why it is important to study the impact that
dividend policy made on the wealth of shareholders and on firm performance. And the company
would also know regarding what the consequences will be if dividend policy is not announced
properly and what image of the company will it create.
1.4 Research Objectives:
The primary aim in conducting this research is to examine and address the impact which a company
face while making dividend policy.
The objective of this study is also to determine the impact of firm size on dividend policy and also
determine the impact of profitability on the dividend policy of a company.
Secondly the study focuses on the relationship among the corporate profitability while analyzing
the dividend policy and determine the relationship between dividend policy and its impact on
profitability and firm size of the company.
1.5 Research Questions:
Following research questions come in mind regarding the topic.

What does change in profitability has an impact on dividend policy.

What does change in firm size has an impact on dividend policy.

How does change in dividend policy effect on company decision.

How importance it is for any firm to have clear dividend policy.
1.6 Significance of the Study:
The present view of this research is very broad because it shows the effect of corporate strategy
on the gainfulness. The profit strategy is considered as the gainful part of the study. And the profit
approach influences the evaluation of the organization and as a result the money has an uncommon
position among the shareholders. The profit approach relies on few elements and one of these is
corporate administration. The profit strategy is used in making profits for the shareholders (Nizim
and Ziv 2001) the profit approach choice of the company are to be considered as an essential
component of corporate strategy.
The importance of this research is that it will give us an idea that how important it is for the
company to have a clear dividend policy and what kind of role does dividend policy plays in
earning profit for the company. By this research and the data obtained from this research will be
helpful to understand the importance of dividend policy and will also help the financial dept and
directors to understand the importance of it and will help in creating a good image of the company
in the market and will also help the company in increasing their revenue.
1.7 Scope of this Research:
The scope of this research is to identify the importance of dividend policy ad what role does it play
since dividend policy Is an important factor for the company and for the shareholders and investors
as well so it will shed a light on this and will help understand the broader perspective on its
importance. Dividend policy is a wider concept and what process and main points the company
faced and keep in mind while making them and also while designing and implementing them thus
having understood regarding it will give them a viewpoint which would be beneficial for the firm.
1.8 Organization of this research:
The organization of this research will cover the impact the dividend policy has on the firm size
and profitability of the company while discussing the factors keeping in mind while setting a policy
for the company.
CHAPTER 2: LITERATURE VIEW
2.1 What is Dividend?
It is the reward that company transfer to its shareholders. The main question arises that how much
dividend should be given to the shareholders of the company this depends upon the dividend policy
of the company because dividend policy plays an important part in funding of the company. It also
plays a pivotal role regarding retaining of funding and also in re investing funding in the company
(Hoang et al., 2020; Nam, 2019). This proposal with help us to understand the effect of probability
and firm size on dividend policy. There are two types of dividend one is cash and other is stock.
The distribution of cash between the state holder and the money paid to the shareholder is called
as cash dividend. Cash dividend is paid in the form of money as opposite to being paid in other
value or stock or in other value. The time period for paying cash dividend is monthly, quarterly or
yearly basis but at times there are yearly payout as well which is called as settlement. Many offers
usually offers either to reinvest the cash dividend. Reinvesting dividend is considered as a smart
join in longer run for the investors and for shareholders as well. The companies who generally pay
dividends have stable cash flows and beyond the growth stage
Stock dividend is paid in stock to the shareholder and is opposite of cash dividend and is usually
trade in the form of additional shares of the company, stock dividends are not taxed until the shares
granted by the owners are sold. Share price are dilute in stock split and stock dividend but as a
cash dividend they also do not effect on the value of the company
2.2 Concept of Dividend Policy:
Dividend policy is a decision in which the profit is distributed among the shareholders of the
company in a form of dividend or either be returned as a retained earnings for future investments
Sartono (2001: 281). The dividend policy is divided into two parts cash and stock dividend as
mentioned above. In corporate finance point of view dividend payout has been considered a very
debatable subject. There has been, it has been observed that many researchers and theorist have
come up in past regarding what factors should be kept in mind while making dividend policy and
decisions regarding it because it is important aspect for both firm and investors. While making
decision based on dividend policy the management keep in mind the current investment
opportunities that would increase the future earning of the company’s and if earnings are not
available so in such cases the management would should ideally distribute it in their shareholders
(Miller and Modi Gillani 1961)
In traditional view of dividend it is state that the investment that is made today through dividend
is more valuable than the cash retained. The traditional view also argues that if a firm pays early
dividend it does not make an impact on corporation risk level but it will change the perception in
the mind of investor regarding the corporation risk hence dividend is considered as better option
than retained earnings. In imperfect market usually the investors considered choosing the
companies whose dividend patterns is similar to their consumption patterns. And because of which
the investor be consistent with their dividend policy and also reduction in dividend is considered
negative in the eyes of the management of the company and as a result the company’s higher
dividend is announced in order to sustain in the future.
One drawback for investor is that in imperfect market they have incomplete information and as a
result less information create less know how and investor then considered whatever available
information as important for investors. Dividend announcement is considered as future growth for
company and all these factors plays important for relevance regarding the dividend. The earning
of the company can be used in various ways like buying of securities, retire debt or can also be
used for investing of operation of assets such earnings can also be used for distributing among the
shareholders in the form of dividend. But there are also multiple reason while the company not
pays a dividend. For investors the dividend are considered as very important and any company’s
financial wellbeing are also analyzed through dividend. Dividend are also very helpful in
maintaining the market price of the company’s share.
Those companies who pay stable dividend would be negatively affected if they discontinued their
dividend due to any reason and company that paid a favorable dividend would be considered
having a good image in the market. Bird in hand theory suggested that those company that pays
dividend are considered as successful and investors are interested in such companies (Wiagustini,
2010: 262). The dividend paid by firm is considered as a positive signal for investors and investors
preferred a definite investment. Companies that distribute dividend will attract more and more
investors.
2.3
Effect of probability on dividend policy:
Probability is the picture of company which tells that how much profit is generated by the company
which can be earned from operational processes that would be implemented in order to ensure that
the company is going concern. (Manoppo & Arie: 2016).if a company generate higher profit so it
will give confidence to the creditors to provide loans which will result in increasing investors’
confidence to invest capital. The pecking theory states that the higher the probability of the
company the lower will be the use of debt. (Guna& Sampurno: 2018). Similarly based on the signal
theory the profits earns from the usage of signal theory will be considered as signal for the
management and will show them prospect of the company that can be seen on the basis on the
level of the profits obtained. ( Utopía y Praxis Latinoamericana, 2020).
Earlier in empirical studies profitability is considered as one of the major factor to obtained
dividend policy (Alala Christopher, Douglas, Robert and Musiega 2013) but many researchers has
mixed opinions regarding the relationship between profitability and dividend payout. According
to pecking order theory the internal source of financing is considered as most preferred source of
the firm which is followed by debt and then equity through the issuance of stocks Amidu and
Arbour (2006) results revealed a negative relationship between dividend payout and profitability
Avizian et al (2003) have studied an impact of probability on dividend policy and have found a
positive relationship between both result from the research done by kim and Gu (2009) in an
hospital sector suggested that firms having higher rate of probability are distributed as a bigger
part in profit in dividend. In Rodriguez and Gill’s (2005) did a research on Malaysian industries
and found that probability measured by ROE (Return on Equity) has an significant positive impact
on dividend payout Jensen (1986) suggested that firms having higher probability usually prefers
to pay higher free cash flows as a dividend when they don’t have any dividend policies.
For both management and stock holder dividend policy has many problem in financial
management. Usually the concern of the firm starts from bottom. The preference of the stock
holder is that they prefer in earnings from their dividend and consider that as profit. The important
factor of dividend policy is profitability. The corporate profitability has been considered as the
primary indicator for the firm in paying their dividends. According to the pecking order theory the
firm prefer to use their internal funds and prioritize their financing sources. Aivazian et al. (2003)
has studied that the profitability and dividend policy have a positive relationship. Jensen (1986)
suggested that all those firms who have high rate in profitability they prefer in paying free cash
flow as their dividend when they don’t have any other sources or investment opportunities so in
such cases they use free cash flow similarly when the firms internal funds are not enough to meet
the financial needs in such cases firm turn towards debt which is called (first to risk free, then risky
debt) and then after that move towards equity (Myers 1984, Myers and Majluf 1984). In correlation
analysis there has been a negative relationship between ROA (Return on Asset) and number of
days in accounts receivable, inventory receivable days, cash conversation cycle and also account
payable according to this the probability of firm can be increased if customer have less time to
make the payments. By reducing the number of days of account receivable, accounts payable and
shortening in cash conversation cycle.
Company’s ability to access their profit is through profitability ratios. Such ratios will help in
measuring the level of effectiveness in corporate management which is indicated by profit from
sales and investment income, which also shows the efficiency of the company. The profitability of
a firm is measured with the help of ratio analysis which include ROA along with the ratio of
earnings before interest and the total number of assets. If ROA ratio is higher so the company is
earning more profit, and for ROE if the company’s ROE rate is higher so it means that company
is generating enough net profit through utilizing the capital.
The mathematically return of equity can be calculated using the below formula
Return of Equity= Net Profit / Shareholders equity *100
Return of Asset= Earnings before interest and tax / total assets *100
Return on Asset: it is the indicator that how profitable is the company in relation to its total asset.
The return of asset gives analysis to the investor regarding how efficient the management of the
company is and how they are using its asset and generating their earning.
Return on Equity: according to the researchers ROE is the way of measuring the financial
performance of the company (Delen, Kuzey & Uyar, 2013). It is related to the earnings made by
the company with the financing which is provided by the shareholders, in ROE it is usually for the
interest of shareholder to access the amount of net income which is the returned as a percentage of
equity that they have provided
2.4
Effect of form size on dividend policy:
It is the reflection of the total asset which is owned by the company. It is easier for the larger
companies to finance their investment because they have high growth rate in sales. In trade of
theory the bigger the company the company can use more debt since in larger company the chances
of bankruptcy are lower. And since larger organization has lower risk in bankruptcy and as a result
the cost using the large company debt is also lower than the small companies and it is better to
encouraging the companies to increase their debt and make more uses of their debt so we can say
that the firm size influence the capital structure. (Marfuah & Nurlela: 2019). The companies having
larger scale attract more investors because for them the impact on the value of company matters a
lot so based on this we can say that size of company has a dorect impact on company’s value. This
statement has been supported by the research of Oktaviarni & Suprayitno (Oktaviarni &
Suprayitno: 2018) because it shows that the company’s size affects the value of the company
because when the size of the companies is larger the funding of the company tends to also be
easier.
There were many researchers who had investigated the relationship between firm size and dividend
policy but among them all it was first investigated by Lintner (1956).in his study he has revealed
the relationship between firm size and dividend policy and also regarding the amount of dividend
which the company gives to the investors. (Tahir & Mushtaq, 2016, Aivazian et al., 2003;). The
factors included by dividend policy includes he solvency position, the need to pay off debt, the
position of liquidity of the company, debt expansion and investments. The factor which is also
included in dividend payout is the probability ratio. Firm size tells us how big the assets of the
company are and how much assets are owned by firm. The company having large firm size will
have three advantage they easily get venture capital, they are strong in bargaining and have other
big advantage as well due to their big firm size. The measurement of firm size can be done by
natural logarithm of all the total assets and is served as a control variable. The variable which is
neutral can be controlled so that the relationship exist between dependent and independent variable
is not influenced by other factors which is not part of the research. The natural logarithm of all the
asset is used when through regression the other variable can be measured as well.
Lintner (1956) was the first one to investigate the relationship exist between firm size and dividend
policy according to him a reciprocal relationship exist between dividend policy and the size of the
firm and also in the amount of dividend which were given to the investors of the company.
(Aivazian et al., 2003; Tahir & Mushtaq, 2016). According to Lloyd et al. (1985) larger firms have
diversified and many types of shareholders and in order to reduce the agency cost they tends to
have to pay more dividend due to large number of investors. For this, Langrehr and Hexter (1998)
the size of the firm plays a major role in dividend payout decision.
The firms which are larger and mature have easy access to the capital market and they are not that
much dependent on internal financing of new projects. The Results find out by Al-Kuwari (2009)
says that the firm size have a favorable effect on the dividend paying ability that the firm has Eddy
and Seifert (1988) also concluded this by saying the larger firms have the ability of pay more
dividend then smaller firms. The research done by Nizar Al-Malkawi’s (2007) regarding the
research of corporate dividend has also provide us positive result regarding firm size and dividend
but from the point of view given by Ahmed and Javid (2008) regarding the determinants of
dividend states that there is a negative relationship with reference to Pakistan because firms in
Pakistan usually prefer investing in their company assets rather than giving it to the shareholders
and because of this it reflect a negative impact on the dividend policy hence different theories has
been given out my researchers based on their study.
2.5 Conceptual Framework:
Profitability
Dividend Policy
Firm Size
2.6 Research Hypothesis:
Hypotheses Development:
This study will explore the relationship between profitability and firm size with dividend policy.
The relationship between Profitability and firm size.
To generate effective dividend policy, an effective profit generation-oriented management
approach needs to become evident.
H1: Profitability has an impact on dividend policy.
H2: Firm size has an impact on dividend policy.
CHAPTER 3: RESEARCH METHODOLOGY
3.1 Research Approach & Type:
In a quantitative experimental study, we might aim to produce generalizable knowledge about the
causes of a profitability and firm size. The research type for this research topic is deductive
3.2 Research Design
A research design is an arrangement of collection or conditions. There are four type of research
design: Descriptive, Correlational, Comparative Experimental, and Experimental Research.
We follow descriptive design for this thesis.
3.3 Research Population:
The focus of this research study is to examine the impact on dividend policy on firm size and
profitability for which our research population will be the textile industry of Pakistan.
3.4 Sample Size & Sampling Technique:
For the purpose of sampling, we will use financial data of textile, to study the impact of
profitability and firm size on dividend policy.
For the purpose of this thesis, we will be using regression technique to identify the relation between
profitability and firm size, and their impact on dividend policy
3.5 Research Instrument:
For the purpose of Profitability independent variable, the research instrument would be “Return
on Asset”.
For the purpose of Firm size, the research instrument would be “log of Total Asset”.
Whereas, for the purpose of Dividend Policy the research instrument would be “Dividend Payout
Ratio”.
3.6 Data Collection:
For the purposes of this research, a detailed historical data of all textile would be consider. The
tools used for collection of this would be as follows:

Annual reports

State bank reports

Research Paper
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