Determinants of dividend policy
The effect of the global financial crisis on Swedish firms
by
Henrik Svensson & Victor Thorén
May 2015
Master’s Programme in Corporate and Financial Management
Supervisor: Naciye Seckerci
Abstract
Dividend is a much-debated subject and has been compared to a puzzle with no sole solution
to explain why firms pay dividend. Many academics have tried to determine what company
variables determines a firm’s dividend policy. These studies have provided different
explanatory variables to explain why firms pay dividends. Therefore, the main purpose of this
study was to fill in a piece of the dividend puzzle by investigating the determinants of
dividend policy for Swedish firms.
The global financial crisis in 2008 caused the Swedish economy experienced the fastest
deceleration in demand and production since World War II. This challenging event forced
many firms to take considerable action to avoid the negative effect that followed. The lack of
studies regarding the impact of the financial crisis made us want to test whether Swedish
firms experienced any significant changes in the determinants of dividend policy.
Using a quantitative and deductive approach, this study used the Irrelevance, Bird-in-hand,
Signalling, Agency, Catering, Life Cycle and Pecking Order theory to examine the
determinants. The sample was drawn from the NASDAQ OMX Stockholm Large cap list.
There were three time periods employed, pre & post the financial crisis as well as one whole
period. By using a random effects model we tested the relationship between the selected
company determinants and the dividend payout ratio for the three time periods.
The study found that profitability, size, risk, retained earnings, and firm value can be seen as
determinants of dividend policy for Swedish firms since they are significant. This implies that
Life cycle, Agency, Bird-in-hand, Catering and Pecking order theory is applicable to the
Swedish firms. The study does not find any supporting evidence for Signalling or the
Irrelevance theory. The results showed that there were no statistically significant changes in
the determinants between the pre & post period, except for a minimal difference in firm value.
This implies that the financial crisis did not affect Swedish firms dividend policy.
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Acknowledgements
We would like to thank out supervisor Naciye Seckerci for her support throughout the
research process and Lund School of Economics and Management for providing the necessary
means for conducting the research.
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Table of content
1.0 Introduction ...................................................................................................................................5
1.1 Purpose and research question ............................................................................................................ 7
1.1.1 Hypothesis ....................................................................................................................................................... 7
1.2 Research limitations ............................................................................................................................... 9
1.3 Thesis outline ........................................................................................................................................... 9
2.0 Literature review ....................................................................................................................... 10
2.1 Dividends ............................................................................................................................................... 10
2.2 Irrelevance theory................................................................................................................................ 10
2.3 Bird-in-hand theory ............................................................................................................................ 11
2.4 Signalling theory .................................................................................................................................. 11
2.5 Agency theory ....................................................................................................................................... 12
2.6 Catering theory .................................................................................................................................... 13
2.7 Life cycle theory ................................................................................................................................... 13
2.8 Measures of dividend .......................................................................................................................... 14
2.9 Previous studies of determinants ..................................................................................................... 15
2.10 Selected dividend policy determinants ......................................................................................... 19
2.10.1 Growth opportunities ............................................................................................................................... 19
2.10.2 Profitability ................................................................................................................................................. 20
2.10.3 Cash flow ..................................................................................................................................................... 20
2.10.4 Size ................................................................................................................................................................ 21
2.10.5 Risk ................................................................................................................................................................ 21
2.10.6 Retained earnings ...................................................................................................................................... 22
2.10.7 Firm value.................................................................................................................................................... 22
3.0 Methodology ............................................................................................................................... 23
3.1 Research method choices ................................................................................................................... 23
3.2 The data.................................................................................................................................................. 23
3.2.1 Sample and sample size ............................................................................................................................. 23
3.2.2 Data collection & time period ................................................................................................................. 24
3.2.3 Variables definition..................................................................................................................................... 24
3.3 Regression model ................................................................................................................................. 26
3.3.1 Average values of the errors is zero....................................................................................................... 26
3.3.2 Variance of the errors is constant ........................................................................................................... 26
3.3.3 Covariance between the error terms is zero ........................................................................................ 26
3.3.4 Independent variables are non-stochastic ............................................................................................ 26
3.3.5 Disturbances are normally distributed .................................................................................................. 27
3.3.6 No multicollinearity .................................................................................................................................... 27
3.3.7 Fixed & Random effects............................................................................................................................ 27
3.3.8 T-test ................................................................................................................................................................ 28
3.3.9 Z-score ............................................................................................................................................................ 28
3.3.10 R-squared ..................................................................................................................................................... 29
3.4 Validity & Reliability .......................................................................................................................... 29
3.4.1 Validity of the independent variables.................................................................................................... 29
3.4.2 Reliability ....................................................................................................................................................... 29
4.0 Empirical findings ..................................................................................................................... 31
4.1 Regressions ............................................................................................................................................ 31
4.1.1 Whole period regression (2003-2013) .................................................................................................. 31
4.1.2 Pre-crisis period regression (2003-2007) ............................................................................................. 32
4.1.3 Post-crisis period regression (2009-2013) ........................................................................................... 33
4.1.4 Z-score ............................................................................................................................................................ 34
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5.0 Analysis and discussion............................................................................................................ 35
5.1 Determinants of the dividend policy ............................................................................................... 35
5.1.1 Growth ............................................................................................................................................................ 35
5.1.2 Profitability .................................................................................................................................................... 36
5.1.3 Cash flow ....................................................................................................................................................... 36
5.1.4 Size ................................................................................................................................................................... 37
5.1.5 Risk .................................................................................................................................................................. 37
5.1.6 Retained earnings ........................................................................................................................................ 38
5.1.7 Firm value ...................................................................................................................................................... 38
5.1.8 What are the determinants of the dividend policy in Swedish firms? ......................................... 39
5.2 Were the determinants of dividend policy amongst Swedish firms affected by the financial
crises? ............................................................................................................................................................ 40
6.0 Conclusion................................................................................................................................... 42
6.1 Summary................................................................................................................................................ 42
6.2 Contribution.......................................................................................................................................... 43
6.3 Further research .................................................................................................................................. 43
7.0 References ................................................................................................................................... 45
List of tables
Table 2.1 List of previous studies _________________________________________________________________________________
Table 3.1 Sample selection ________________________________________________________________________________________
Table 4.1 Regression results for whole period (2003-2013) ______________________________________________________
Table 4.2 Regression results for pre-crisis period (2003-2007) ___________________________________________________
Table 4.3 Regression results for post-crisis period (2009-2013) __________________________________________________
Table 4.4 Z-scores for the independent variables _________________________________________________________________
Table 5.1 Determinants of dividend policy ________________________________________________________________________
Table 5.2 Difference in coefficients (pre and post crisis period) __________________________________________________
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1.0 Introduction
“The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that
just don't fit together.”
- Fischer Black, 1976
Dividend is and has been a debated subject among academics for many years. Does it create
value or is it totally irrelevant? And why do firms pay dividend? The Irrelevance theory, a
groundbreaking theory first introduced in 1961 by Miller & Modigliani (M&M) states that
dividend has no affect on the value of shares. This has since then been much debated.
Opposing M&M, Lintner in 1956 mentions the Bird-in-hand theory, which is contradictive to
the Irrelevance theory and indicates that investors are inclined to pay a premium on dividend
paying shares. It states that investors would rather have one bird in the hand, than two in the
bush (Lintner, 1956).
Jensen (1986) joined the debate by introducing the Agency theory, which tries to explain why
firms pay dividend. Jensen looked at dividend from the agency cost perspective and examined
the possibility of using dividend payments as a means of decreasing agency costs (Jensen,
1986). Dividend also has the benefit of conveying information of future earnings and financial
stability, which brings us to Signalling theory. In 1956 Lintner first introduced this theory,
connecting managers dividend payout ratio to the share price. It was further mentioned by
M&M (1961). The theory was then discussed by Akerlof (1970) where he stated that
information asymmetry (lemons problem) makes the firm want to signal they are not a lemon.
Fischer Black (1976) further argued that dividend policy says something the managers don’t
say explicitly. It signals that a raise in dividend is only feasible if the firm can continue paying
dividend in the future and managers will only lower the dividend if the outlooks for a quick
recovery seem dismal.
A contemporary contribution to the dividend discussion is the Life cycle theory presented by
DeAngelo & DeAngelo (2006), which states that the need to distribute free cash flow is the
driver for the optimal dividend policy. The theory states that firms pay out different amounts
depending on if they are a young firm with the need for internal financing or a more mature
one where they can shift out a larger portion of retained earnings. This associates to the
financial crisis, were firms were put under a lot of stress, mainly from the difficulty of
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financing themselves during the crisis. Therefore, the need for internal financing increased
and in turn affected dividend.
The global financial crisis has had a significant impact on the global business environment in
recent years. The event is of high relevance as it impacted many firms financially and as a
result firms had to take action in order to limit the negative effects. Few attempts have been
made to investigate the impact that this significant event has had on the determinants of the
firm’s dividend policy. The origins of the global financial crisis can be traced back to the US
housing and mortgage market. The fall in prices combined with highly leveraged consumers,
thanks to subprime loans, resulted in a dramatic increase in credit losses. This together with
the difficulty in assessing the risk due to securitization of these loans lead to an interbank
lending failure. When Lehman Brothers filed for bankruptcy, it showed clear evidence of the
severity of the impact that these subprime loans and structure credit products had on banks.
The financial unease therefore turned into an acute global financial crisis (Riksbanken, 2009,
translated).
The rapid spread of the financial crisis as a result, lead to sharp declines in the global
economy, which resulted in many countries having to revise their GDP forecasts by 4 to 5
percentage points (Braunerhjelm, Djerf, Frisén, Ohlsson, 2009, translated). Sweden, which is
a small open economy country with extensive foreign trade and a financial market that is well
integrated with the rest of the world, was directly impacted by the global economic downturn
(Riksbank, 2009, translated). The global economic downturn caused a large decline in the
demand for Swedish exports goods, causing significant effects on employment and production
in the country, as the portion of exports accounted for 40 percent of GDP in 2007 (Riksbank,
2009, translated). This caused Sweden to experience the fastest deceleration in demand and
production since World War II (Braunerhjelm, Djerf, Frisén, Ohlsson, 2009, translated). In
addition to the sharp drop in demand for Swedish exports, many firms had to reassess their
investment policies as they found it increasingly difficult to finance these investments from
banks. Since this had such a large effect, we feel it is relevant to investigate how an event of
this magnitude can affect firm’s dividend policy. Furthermore, we can clearly state that
despite all of the theories mentioned there is no sole solution to the dividend puzzle that was
first discussed by Fisher Black (1976). The questions he asked; “why do firms pay dividends”
and “why do investors pay attention to dividends” are still relevant today.
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1.1 Purpose and research question
The aim of our empirical research is to investigate the determinants of dividend payout policy
and contribute to the on going debate why firms pay dividend. This will be accomplished by
looking at a 11 year period, 2003-2013. In addition to this, we will try to clarify the effects
made by the financial crisis on the determinants of dividend, which is an event that has
received little attention. We contribute to the research surrounding the financial crisis by
measuring the dividend policy determinants pre & post the global financial crisis of 2008.
These years will be split in two 2 separate five year periods between 2003-2007 and 20092013.
Our research contributes to the dividend policy research in three distinct ways. Firstly, we will
seek to address the reasons why Swedish firms pay dividends, which to our understanding
hasn’t been extensively researched. Furthermore, we will try to determine whether previous
studies on dividend determinates can be applicable to the Swedish market.
RQ1: What are the determinants of the dividend policy in Swedish firms?
Secondly, we will try to answer whether these companies’ dividend policy was or wasn’t
affected by the macroeconomic environment. This is achieved by examining how one of the
most challenging crises in recent years affected the determinants of dividend policy.
RQ2: Were the determinants of dividend policy amongst Swedish firms affected by the
financial crises?
Thirdly, we will introduce a new variable in the form of price to earnings to the regression
and test it’s affect on dividend policy.
1.1.1 Hypothesis
Based on our research questions and theoretical framework, we have composed the following
hypotheses and sub-hypotheses against the outcome of the data analysis.
H1: The determinants of dividend policy
H1a: Growth will have a positive effect on dividend policy
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We believe that growth will have a positive affect on dividend policy following the Signalling
theory were firms use dividend to signal growth opportunities to investors. This would imply
that a firm with high growth opportunities would increase their dividend payout ratio.
H1b: Profitability will have a negative effect on dividend policy
This hypothesis is based on the assumption that firms with low profitability are in most need
of signalling to the markets that future profits lie ahead.
H1c: Cash flow will have a positive effect on dividend policy
We assume that higher cash flows lead to an increase in dividend payout ratio as a tool to
prevent agency conflicts.
H1d: Size will have a positive effect on dividend policy
The Life cycle theory suggests that mature firms are more likely to pay dividend due to their
access to external financing.
H1e: Risk will have a negative effect on dividend policy
Based on the Pecking order theory, firms with higher risk will chose internal financing before
external financing. This will lead to firms reducing the amount of dividend paid to investors.
H1f: Retained Earnings will have a positive effect on dividend policy
A mature firm that has been historically profitable should be able to distribute larger
proportions of retained earnings.
H1g: Firm value will have a positive effect on dividend policy
According to Catering theory and Bird-in-hand theory investors are willing to pay a premium
on shares that pay dividend.
H2: There will be a change in determinants between the two periods
Based on the significant impact that the financial crisis had on the Swedish economy we
assume that firms will take action that will affect the dividend policy, due to the considerable
macroeconomic effects experienced.
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1.2 Research limitations
A closer look at the dependent variable shows that there are two ways of measuring dividend
and thus the results may differ between the different measurements. This is something we are
aware of and have therefore chosen the most appropriate formula based on previous research.
Furthermore, investor preference is an aspect that this research cannot account for and will
always be a factor that could contradict all relevant theory. Looking at the Swedish NASDAQ
OMX Stockholm Large Cap list, there are a lot of financial firms, which we have chosen to
remove from the sample. Thus, removing financial firms excludes an important industry for
the Swedish market. The reasons for removing them is that the nature of the firms aren’t
comparable to the same extent, however we are aware that the number of observations was
affected negatively. Stock repurchase is a aspect that could have a explanatory factor,
however in this study we have chosen to discard it as we focus on dividends as a means of
distributing wealth. Furthermore we have excluded taxes both on a corporate and personal
level, due to its complex nature. These could be seen as explanatory factors of a firm’s
dividend policy.
1.3 Thesis outline
The first chapter introduces the reader to the subject and relevant background setting, as well
as stating the purpose and research questions. In chapter 2 the relevant theories and previous
empirical findings are presented, finishing off with the definition and description of our
selected determinants of dividend payout ratio. Chapter 3 presents the data and methodology
as well as the regression model used. In chapter 4 the empirical findings are presented and in
chapter 5 the analysis and discussion connects the empirical findings back to the theoretical
framework. Lastly, chapter 6 summarizes and concludes our research.
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2.0 Literature review
2.1 Dividends
Dividends can be defined as payments made to a firm’s shareholders out of past and current
earnings (Pyles, 2014). The amount of earnings that a firm decides to distribute to its
shareholders is set at a specific date by the board of directors, known as the dividend
declaration date (Damodaran, 2010). The declaration date is important in the sense that the
announcement to increase, decrease, or to maintain dividend puts across information upon
which the market reacts to the changes that is most likely to occur (Damodaran, 2010).
From the perspective of an investor the degree of reward they receive for investing in a firms
shares is of high importance. Dividend can be categorized as the source of secured return that
an investor receives (Pyles, 2014). Consequently, this leads to investors paying considerable
attention whether a stock is purchased with or without dividends. For an investor to have the
right to receive dividends, from the invested firm, there is a need to own the stock before the
ex-dividend date. Purchase of shares post the ex-dividend date will result in forgoing the
dividend received for the period, and as a result the market will reflect this loss with a fall in
the stock price (Pyles, 2014).
2.2 Irrelevance theory
Miller & Modigliani’s theory on dividend uses the perfect market assumption as a starting
point under which the Irrelevance theory is developed. The Irrelevance theory states that a
firm’s dividend policy is irrelevant since it doesn’t affect the value of the company under
perfect market conditions (Miller & Modigliani, 1961). Thereby stating that whether the firm
pays dividend or how much doesn’t have an effect on the value of the firm. M&M further
states that investors can construct their own dividend by simply selling stocks to receive the
preferred amount. If the firm pays to much dividend the investor just buys back shares and
should therefore be indifferent between dividend and capital gains. As a result, shareholders
are then unwilling to pay a premium for dividend paying firms hence the Irrelevance theory
(M&M). However, DeAngelo, DeAngelo & Skinner (2009) argue that in a rational market the
current market value equals the discounted future expected dividend. Thus the only way for
an investor to get full value today is if the market expects the firm to fully distribute the value
generated by the investment policy (DeAngelo et al, 2009).
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One might now consider the issue with the different taxation on capital gains but Black &
Scholes (1974) and Miller & Scholes (1978) found that even this doesn’t affect the results. As
well as developing the irrelevance theory in the groundbreaking article, M&M also
acknowledge the information content of dividend, contributing further to Signalling theory
first mentioned by Lintner (1956).
2.3 Bird-in-hand theory
“Better a bird in the hand than two in the bush”
– John Lintner, 1956
The Bird-in-hand theory first mentioned by Lintner (1956) states why a firm should pay
dividend. It contradicts Miller & Modigliani’s Irrelevance theory since it states that investors
are inclined to pay a premium for dividend stocks. Gordon in 1959 & 1962 elaborated on this
theory by stating that investors have a likeness to shares that pay dividend today since there is
higher uncertainty to future dividends and investors therefore use a higher discount rate for
companies who don’t pay dividend. Paying dividend has other benefits such as a higher credit
rating and this is useful since the firm will improve their ability to raise capital (Purmessur &
Boodhoo, 2009). The theory is an equally controversial as M&M and has many opposes.
2.4 Signalling theory
In 1970 Akerlof introduced his paper on information asymmetry regarding quality and
uncertainty in “The market for lemons”, in which he develops the theory and uses the
automobile market as an example. The theory splits the automobile market into four types of
cars where there are new cars (which are lemons or cherries) and used cars (which are lemon
or cherries). The problem arises when the owner after owning the new car for a period of time
decides to sell. Since only he or she and no one else know if the car is a lemon, information
asymmetry arises. If the car is a good car, the seller will not be able to get the price he or she
wants and therefore keeps the car instead. Then lemons and cherries will sell at the same price
thus establishing a new lower market equilibrium (Akerlof, 1970). This results in the lemons
cars gradually driving out the cherries. Therefore the sellers of cherries need to signal to the
market that their car isn’t a lemon, thus creating signalling. The same problem of information
asymmetry arises when managers have more information than the market. They therefore
want to signal they aren't a lemon.
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Signalling theory and dividend originates from Lintner who in 1956 discusses the change in
stock price when managers change the dividend. Miller & Modigliani (1961) argue that
dividends has no effect on share price in the Irrelevance theory, but they still mention that in
the real world (excluding their perfect market assumption) there is a form of signalling effect,
which they describe as information content. Fischer Black (1976) also argues that dividend
policy says something the managers don’t say explicitly, in the sense that they will only raise
the dividend if they are sure that the company can continue paying dividend in the future and
will only lower it when the outlook for a quick recovery are poor. This gives investors a
unique insight, different from other open sources, to how managers view the company’s
future prospects. This is exactly what Miller & Modigliani (1961) mention when they
describe the information content i.e. dividend polices conveys information. DeAngelo &
DeAngelo (2006) further state that the literature sees signalling as the reason behind why
companies have increased dividend despite the fact that this has resulted in higher taxes for
investors (DeAngelo & DeAngelo, 2006). The theory connecting dividend and signalling is
supported by Baker & Powell (2000) & Brav, Graham, Harvey, & Michaely (2005).
2.5 Agency theory
In Agency theory managers are seen as agents and shareholders as principals. The agent’s
main task is to make decisions that are in the interest of the principals. The two debate over
the investment policy and the optimal size of the company (Rozeff, 1982; Jensen, 1986). If
managers are free to make choices in their own best interest, agency costs arises. Dividend
can reduce these costs. Keeping excess cash in the company and thereby using internal
financing avoids monitoring, which isn’t a good thing for principals since there is a
correlation between the size of the firm and the compensation of the manager. This indicates
that the firm might grow beyond their optimal size. Agency costs can be reduced by paying
dividend since when there are higher free cash flows the agency costs increase and excessive
free cash flow can be paid as dividend and thereby reduces the problem. Another solution to
this discussed by Jensen & Meckling (1976) is increasing debt since it increases monitoring
and results in managers having to hold their word of paying out parts of the free cash flow.
Jensen finds that cutting dividend results in a large drop in the stock price, which would be
consistent with Agency theory since this will leave managers with greater free cash flow and
principals with increased costs for managerial risk aversion and empire building (Jensen,
1986). Academics have conducted research regarding Agency theory as a determinant of
dividend policy. Rozeff (1982), Lloyd, Jahera, & Page (1985), Holder, Langrehr, & Hexter
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(1998) found significant evidence that agency theory can be seen as a determined of dividend
policy used to monitor management of the company. The previous research motivates that a
firm with a dispersed ownership structure will use dividend as a method to monitor
agents/managers. In our research we will look at the correlation between FCF and the
dividend payout ratio to see if Jensen (1986) findings apply to the Swedish stock market
before and after the financial crises.
2.6 Catering theory
The Catering theory was developed by Malmcom Baker and Jeffrey Wurgler (2004) where
they view dividend policy as being driven by investor preferences. Managers need to cater to
the investors needs, i.e. their preference regarding cash generating stocks. Baker & Wurgler
(2004) state that “further analysis confirms that these results are better explained by catering
than other theories of dividends”. An important detail to notice is that the theory only focuses
on the decision of instigating or not instigating dividend and should therefore not be mixed up
with investment policy (Baker & Wurgler, 2004).
2.7 Life cycle theory
DeAngelo & DeAngelo (2006) develop the Life cycle theory were they view the need for the
firm to distribute free cash flow as the driver of the optimal dividend policy. The theory
summarizes many of the facts surrounding dividend, which they have collected from previous
studies such as Lintner (1956), Fama & French (2001) and Jensen (1986). The theory
cultivates how dividend is paid or not paid out during different life cycles of the firm. The
model predicts that young high growth firms pay no dividend while mature firms with stable
cash flows pay out a large part of the retained earnings. This relates to the financing decision
that face firms and can be associated with Pecking order theory, which was summarized by
Myers & Majluf (1984). It states how firms should prioritise their financing needs when
managers have superior information. Internal financing is highest in the hierarchy and
external financing is the lesser-preferred choice. If external financing becomes necessary then
debt is higher in the hierarchy than equity (Myers & Majluf, 1984). They further state that no
dividend should be paid if the firm has to finance themselves through other risky securities
like selling stock. In their model dividend is highly correlated with manager’s view on the
value of the assets, i.e. information asymmetry and dividend can help convey this
information.
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Miller & Modigliani also mention the information content of dividend but establish in their
perfect market assumption that dividend is irrelevant for the investment decisions made by the
firm and therefore shouldn’t be a determinant (Miller & Modigliani, 1962). Fama (1974) set
out to test this theory and found results indicating a relationship between dividend and
investment policy. However Fama (1974) could not statistically confirm that this relationship
holds and as a result could not reject M&M’s statement. Myers & Majluf (1984) discusses
the investment decisions managers face for example when a firm has to issue equity to peruse
a positive NPV project. They then risk ending up in the “financing trap” where managers with
insider information don't want to issue new equity since it is a negative signal at the expense
of the old shareholders. Passing on this good investment opportunity though, leads to a
decrease in firm value (Myers & Majluf, 1984).
2.8 Measures of dividend
In order to conduct a study that investigates a firm’s dividend policy there is a need to discuss
the different measurements of dividends. One of the most common measures of a firm’s
dividend policy is the dividend payout ratio. The measurement allows us to observe the
percentage of the firm’s earnings that is paid as dividends to the shareholders (Damodaran,
2010).
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Furthermore, the dividend payout ratio is a measurement that can be seen as highly
independent to external factors, as the inputs of the formula are accounting figures from the
firm (Penman, 2009). McManus, Gwilym & Thomas (2004) discuss that this measure of
dividends is more informative regarding signalling effects due to the formula taking into
account only internal factors.
The second widely used measurement is the dividend yield. The measurement takes into
consideration the firms dividends in relation to the stock price. The dividend yield measures
the return that the investors make from dividends (Damodaran, 2010). The measurement takes
into consideration the stock price of the firm, which make it subject to external factors that
influence the measurement of the dividend policy. This means that influences that are not
factors of the dividends policy can overstate or understate the firm’s policy of distributing its
earnings to shareholders.
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𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 =
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒
However, Campbell and Shiller (1988), and Fama and French (1988, 1989) document that
dividend yields is a measurement that can forecast a firm’s stock return and is therefore more
informative than the dividend payout ratio.
For our research we see that the dividend payout ratio is a more informative measurement of
the firms dividend policy as it illustrates the percentage of earnings that is distributed to the
shareholders. Furthermore, the measurement only takes internal factors into consideration,
which we believe will be more informative in our analysis of the determinants of firm’s
dividend policies. This is evidenced by the majority of studies that use the dividend payout
ratio as a measurement of dividend policy (Rozeff, 1982; Baker & Smith, 2006; Gupta &
Banga, 2010, Hellström & Inagambaev, 2012; Abidin, Singh, Agnew, & Banchit, 2014;
Bisschop, 2014).
2.9 Previous studies of determinants
Over the years academics have tried to establish a set of determinants that impacts a firms
dividends policy. Throughout these studies they have analysed various financial variables and
their relationship with a firms dividends policy. We have observed that a majority of studies
have analysed firms in the United States. However, recently academics have broadened the
geographical area conducting research on dividend policy in various countries. Table 2.1
presents a sample of academic research on the topic and their finding of factors that influence
a firm’s dividends policy. We can clearly see that there is a shortage of studies that analyse
the Nordic region, a gap that we want to fill.
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Table 2.1 List of previous studies
Among the discussions regarding dividends payout policy, Rozeff (1982) contributed with a
widely recognized study that investigated what type of determinants that impact a firm’s
motivation to implement a dividend policy. Rozeff’s (1982) study sampled 1000 US firms and
analysed a variety of variables as explanatory factors of dividends. He found that the number
of shareholders had a positive relationship with dividends. Furthermore, he found a negative
relationship between insider ownership and dividends. These explanatory factors support the
agency theory, as he argues that a firm with a high number of shareholders will pay higher
dividends in order to reduce agency costs, whereas a firm with high percentage of insider
ownership require less monitoring of the management of the firm (Rozeff, 1982). In addition
to these factors Rozeff (1982) found that growth had a negative relationship with dividends,
as high growth leads to higher investments. External financing will be costly and a high
growth firm will avoid a dividends payout policy as this would lead to lower internal funds.
Rozeff (1982) also found that high-risk firms avoid dividend payments due to their financial
uncertainty. Firms with high risk will retain their earnings, as a constant dividends policy will
be difficult to preserve. Many academics have replicated and expanded Rozeff’s (1982) work
in order to confirm his result and also to strengthen his evidence. Lloyd et al (1985), Holder et
al (1998) and Baker & Smith (2006) all found supporting evidence for Rozeff’s determinants.
16
Lloyd et al (1985) included firm size as a variable in their study. They found that larger firms
have a higher tendency to pay dividends. They argue that larger firms have easier access to
capital markets resulting in less dependence on internal funds to finance investments.
Additionally, Holder et al (1998) included a firm’s free cash flow as variable to their 477 firm
sample. Their results demonstrated that firms with high free cash flow pay higher dividends.
Their findings provided further support to Rozeff’s (1982) findings, as they argue that
dividends are used as a method of monitoring management and reducing agency conflict of
over-investment or empire building. In addition to these new variables Baker & Smith (2006)
concluded that firms with low leverage levels pay higher dividends than firms with high
degree of leverage. These studies indicate that dividend is used as a substitute to debt in order
to monitor the firm’s management.
Baker & Powell (2000) presented a study that examined the different theories regarding
dividend payments to shareholders. They investigated corporate managers view on the
relationship of dividends to value, optimal dividends payout ratio, and dividends relevance to
the different theories such as, Signalling, Bird-in-hand, and Agency theory. They found that
77% of the respondents viewed dividends as a factor of the firm’s value, supporting the Birdin-hand theory. In addition, the study found that managers followed Linter’s (1956) model of
partial adjustment of dividends policy. They observed a consensus view that the dividend
policy was an effective method of signalling information to shareholders. However, the study
is consistent with Fisher Blacks (1976) statement that dividend is a puzzle as Baker & Powell
(2000) found no theory that dominated among managers.
Gupta & Banga (2010) conducted a study of 150 dividend-paying firms in India over a period
of seven years, 2001-2007. They investigated the firm’s leverage level, profitability, liquidity,
growth rate, and ownership structure as explanatory factors of dividends decisions. Their
study showed that only the leverage level and liquidity of a firm could be seen as
determinants of a firm’s dividend decision. They discuss that a firm with high level of debt
will incur high interest payments and as a result decrease the level of dividends in order to
lower the firms fixed charges. Furthermore, they found that liquidity has a positive
relationship with dividends. They consider that a firm with high liquidity will be able to
consistently pay a set dividend ratio.
17
Osobov & Denis (2007) study investigated the determinants of dividends policy from an
international perspective. They conducted an analysis of six countries, US, Canada, UK,
Germany, France, and Japan. Osobov & Denis (2007) found that in all six countries large,
profitable, and high earning firms tend to pay higher dividends. They argue that these findings
support Jensen’s (1986) Agency theory and DeAngelo & DeAngelos (2006) discussion of
firm life cycle as reasons for firm’s dividends decision. They argue that their results cast
doubt on Signalling theory as their result contradict that small and less profitable firms use
dividends as a means of signalling to investors. In addition, they found mixed results
regarding growth opportunities as a variable, as dividend paying firms in US, Canada, and the
UK tend to have less valuable growth opportunities unlike dividend paying firms in Germany,
France, and Japan.
Hellström & Inagambaev (2012) conducted a study on large and medium cap Swedish firms.
Their study investigated the dividends determinants of financial and non-financial firms. They
couldn’t find any significant determinants for Swedish financial firms. However, from their
sample they concluded that non-financial dividend paying firms had a positive relationship
with free cash flow. They argue that investors prefer firms to distribute the excess cash in
form of dividends rather than retain the cash internally. They found that high-risk firms with
high growth tend to pay low dividends, consistent with Rozeff’s (1982) findings. Moreover,
their findings support previous studies that large and profitable firm pay higher dividend. This
supports DeAngelo & DeAngelo (2006) statement that mature firms tend to pay dividends.
Abidin, Singh, Agnew, & Banchit (2014) studied industrial UK firms during the financial
crisis of 2008, a period of economic adversity. They found that during this period dividends
became more concentrated as small firms either reduced or omitted dividends. They argue
that the later a firm in the life cycle the more able they are to pay dividends. They discuss that
their results support the Life cycle theory and Signalling theory.
Bisschop (2014) conducted one of the most recent studies regarding the determinants of
dividends payout policy. He studied 78 Dutch firms over the period 2006-2012, and analysed
the financial crisis impact on firm’s dividend policy. Bisschop (2014) found that profitability
and firm size have a positive relationship with dividends, as previous studies have shown.
Contrary to academic research he found a positive relationship between growth opportunities.
18
In addition to this, the result showed a negative relationship between liquidity and dividends
payout ratio.
2.10 Selected dividend policy determinants
In this section we will discuss the different determinants of dividend policy and their
relationship to the discussed theories. In addition, we will discuss the various measurements
used to reflect the determinants. The presented determinants will be the basis of our analysis
of Swedish firms and it is therefore important to illustrate their relevance to our study.
2.10.1 Growth opportunities
It is argued that the firm’s growth opportunities is an important determinant of its dividend
policy. A firm’s value can be categorized as the value of assets in place and the sum of the
firm’s growth opportunities (Shin & Stulz, 2000). It is therefore an important variable that a
firm takes into consideration in its decision making process. As a result, growth opportunity is
a key determinant of a firm’s dividend policy as it can be used to convey information about
the firm’s outlook of the growth to investors, known as signalling effect. On the other hand,
the firm’s growth opportunities are also an important component in DeAngelo & DeAngelo
(2006) theory of life-cycle period of a firm. They state that a firm in the early stages with
valuable growth opportunities will avoid dividends, as internal financing is important to
finance these opportunities. Due to the importance of growth opportunities and its
interlinkage to different theories regarding dividends we see this as an important variable to
analyse.
A firm’s growth opportunities can be measured in various ways. Among academics, sales
growth has been used as a measurement of the firm’s growth opportunities (Rozeff, 1982;
Lloyd et al, 1985; Holder et al, 1998; Baker & Smith, 2006, Gupta & Banga, 2010; Hellström
& Inagambaev, 2012). A common measure of sales growth among previous studies has been
to use the past sales growth of the firms (Rozeff, 1982; Lloyd et al, 1985; Holder et al, 1998;
Baker & Smith, 2006, Gupta & Banga, 2010; Hellström & Inagambaev, 2012). However, the
drawback with this measurement is that it is backwards looking and does not accurately
reflect the growth opportunities in the future. This has been evidenced in Rozeff’s (1982) and
Lloyd et al (1985) studies, which have also used forecasted sales growth to reflect a forward
looking measure. We should note that the forecasted sales growth measurement technique is
subject to over and underestimations and can also be seen as inaccurate measurement
technique. An alternative to sales growth as a measurement that can minimize these issues is
19
the market value of equity to total assets of the firm. We observe that this measurement
technique is the preferred choice in recent studies (Osobov & Denis, 2007; Bisschop, 2014).
2.10.2 Profitability
Profitability of a firm is an important aspect of a firm’s dividend policy. The profitability of a
firm is a good indicator of their ability to generate earnings to its shareholders. Furthermore, it
is an important determinant as it can reflect the firm’s operational efficiency. The discussed
theory above, states that dividends can be used to convey information to the market. A firm
that may have low profitability is a candidate most in need of signalling to the market that the
management has a positive outlook of the firm’s performance. For this reason we see the need
to include this variable in our analysis. In order to assess firm profitability there are a variety
of different measurement techniques that researchers have used. Baker & Smith (2006) and
Gupta & Banga (2010) used the profit margin to measure the firm’s profitability. The profit
margin is a measurement technique that shows how much the firm keeps as earnings for the
sales. However, an alternative that measure earnings in relation to total assets has shown to be
the preferred measurement of profitability, used in studies by Gupta & Banga (2010), Osobov
& Denis (2007), Abidin et al (2014), and Bisschop (2014). Return on asset is a good indicator
of the manager’s ability to use the company’s assets to generate earnings for shareholders. For
our research we see that the profit margin is a useful measurement of the firms profitability.
The measurement technique demonstrates the ability to create earnings from sales, which will
in turn be used for dividends. This will also be useful in comparing the variable with growth
opportunities, which are important explanatory variables for the Signalling theory.
2.10.3 Cash flow
A firm’s cash flow is an important determinant of the dividend policy. The cash flow of a firm
illustrates the amount of cash that a firm can generates from its operations. The determinant is
an important explanatory variable of Jensen (1986) theory of agency conflicts. A firm that can
generate excess cash is subject to conflicts between managers and shareholders, where
manager could use the excess cash for their own personal interest. As a result, investors of
firms with high cash flows are in need of monitoring and as discussed above paying dividends
is a form of monitoring mechanism.
In order to measure a firm’s cash flow there are many different techniques that we could use.
One of the preferred measurements of cash flow seen in previous studies is the free cash flow
of a firm. Jensen (1986) explains that the free cash flow of the firm is the excess cash after the
20
firm’s required investments. This measurement has been used in previous studies to
investigate the relationship with the dividend policy (Holder et al, 1998; Baker & Smith,
2006; Hellström & Inagambaev, 2012). An alternative measurement used by Gupta & Banga
(2010) and Abidin et al (2014) is the cash flow from operations to demonstrate the cash
available for the firm to expand and grow with investments in projects. The drawback of this
measure is that it does not represent the excess cash of a firm, as it is pre-required investment.
As a result, the measurement does not accurately reflect the issue discussed in agency theory.
For our research we see that the free cash flow measurement technique as the most accurate
technique as it measures the excess cash of the firm, which a better variable to relate to the
Jensen (1986) Agency theory.
2.10.4 Size
Firm size is an important factor for the investment decision. It can be measured in different
ways, using different proxies (Bisschop, 2014). These proxies can range from sales, number
of employees, total value to total assets. Bigger firms are often in the mature part of the life
cycle discussed by DeAngelo & DeAngelo (2006) and usually pay out a larger part of their
retained earnings. We speculate that larger firms might also have done better in maintaining a
higher dividend payout ratio. Looking at different ways of measuring firm size, Fama &
French (2001) measure firm size as the percent of listed firms on NYSE that have a smaller
market cap than the research object. Osobov & Dennis (2007) use the book value of total
assets as a proxy for firm size. Hellström (2012) uses another alternative, which is market
value. Our research will use the natural logarithm of total sales as a measurement for size,
which has been used by Lloyd et al (1985), Holder et al (1998), Baker & Smith (2006),
DeAngelo & DeAngelo (2006) and Bisschop (2014). This is more appropriate than for
example market value since we will be looking only at large cap firms, which differs less than
looking at the total stock market.
2.10.5 Risk
Risk can be measured using different variables and there have been some alternatives in
dividend research. Rozeff (1982) uses the Beta of a firm as a proxy for operating and financial
leverage, since he argues a firm with higher leverage will have a higher alternative cost of
dividend and therefore pay out a smaller portion of its retained earnings. This measurement
technique is further supported by Lloyd et al (1985) study, which uses the Beta as a proxy for
financial and operating leverage. Holder et al (1998) study uses an alternative measure of risk
with standard deviation of the firm’s monthly returns as a proxy for risk, connecting it to
21
transaction costs. We want to use risk as a variable to check against Pecking order theory,
observing if higher risk firms will use retained earnings, internal financing prior to paying
dividend, i.e. the investment decision. To test for this we will be using Beta as a proxy for
financial and operating leverage.
2.10.6 Retained earnings
We want to look at Retained earnings to Total assets since this is a measure of how much
internal financing the firm generates. Fama & French (2001) found that firms, which have
higher earnings than investment-needs, in the past used to pay dividend but have now become
non-payers. DeAngelo et al (2009) found a view consistent with Fama & French (2001) in
that the number of firms with positive retained earnings has decreased and that this could
explain the decreasing number of dividend paying firms since earnings serve as a basis for
dividend (Lintner, 1956). This is a variable that could be used to show past profitability and
need for external financing as it shows the ability to generate internal funds. There is different
ways of measuring retained earnings. Osobov & Denis (2007) use something they call earned
equity. This is derived by dividing retained earnings by total book equity, which is also used
by Bisschop (2014). We want to look at this variable to see if the findings of the above are
consistent with the Nordic market and in particular the Swedish market. We also want to
connect the variable to the Pecking order theory, which looks at the different preferences of
financing the firm.
2.10.7 Firm value
Dividends impact on the firm value is a debated subject and connects to the Irrelevance, Birdin-hand and Catering theory. The Miller & Modigliani Irrelevance theory states that the firm
value isn’t affected by dividend whereas the Bird-in-hand theory states that investors will pay
a premium on dividend paying stocks. In addition to the Bird-in-hand theory firms can cater
to investors needs by paying dividends, which results in a premium on the share price. We can
observe that no previous studies have taken this variable into consideration. Therefore we
think it will be an interesting contribution to existing research. Our variable of choice to
estimate the firm value to equity holders will be the Price to Earnings (P/E) ratio. The price to
earnings ratio measures the market value per share divided by the earnings per share. It can be
measured as trailing or forward looking. A firm with a high P/E is expected to showcase high
growth and companies that aren’t earning will not have a P/E ratio. Liu, Nissim & Thomas
(2002) find the historical P/E ratio to be a good indicator of frim value, in fact, better than
models based on dividend or cash flow and therefore we will use a trailing P/E ratio.
22
3.0 Methodology
3.1 Research method choices
Our study will be an explanatory and descriptive one, since we are using a deductive approach
and hypothesis testing (Bryman & Bell, 2011).
Epistemology
The research will follow the natural science methods and therefore we have chosen a
positivistic approach. The advantage is that the author’s personal opinions are excluded given
that we can observe the research object without affecting it (Bryman & Bell, 2011).
Ontology
Since we will look at historical data and won’t use a subjective interpretation method we
instead have an external approach and use an objective approach when conducting the
research (Bryman & Bell, 2011). These choices reflect a common approach in quantitative
finance and we will follow in that tradition (Bryman & Bell, 2011).
3.2 The data
3.2.1 Sample and sample size
Our research analyses the determinants of dividend payout policy in the Swedish market. Due
to the availability of data we have chosen to analyse publicly listed firms. We have chosen to
analyse the Swedish NASDAQ OMX Stockholm Large Cap list (as the original sample) due
to the higher probability of dividend paying firms among the larger corporations. The original
sample consisted of 94 firms. An important factor to adjust for in the sample, is the fact that
the firm had to be listed during our time periods, which resulted in removing 14 firms. After
adjusting and removing financial firms (-18), due to their characteristics, as well as nondividend paying firms (-17), the sample size was reduced to 45. Next we adjusted the sample
size by removing one of the stocks for firms who had dual class listed shares. This resulted in
a total of 35 firms that we analysed.
Table 3.1 Sample selection
23
3.2.2 Data collection & time period
Our time period can be divided into three periods. Firstly, we looked at the time period
between 2003-2013 in order to define the determinants of dividend policy of Swedish firms.
Secondly, in order to analyse the effects of the financial crisis on Swedish companies, we
compared the determinants of two separate time periods. The first time period, which we
categorize as pre crises period is 2003-2007 and the second time period listed as post crises
between 2009-2013. In our research we consider 2008 to be the crisis year, which means that
we have excluded it from the pre and post periods. The data was collected from Thomson
Reuters Datastream database. It was then summarized in a spreadsheet before manually
constructing the variables and running the various regression models.
3.2.3 Variables definition
In order to conduct our research on the determinants of dividend payout policy of Swedish
firms we conducted a regression analysis on the following variables. The different
determinants of dividend policy have been discussed above and are based on previous studies.
Firstly, the dependent variable of our research is the dividend payout ratio, which reflects a
firm’s dividend policy. The dividend payout ratio is measured in this study as total dividend
paid by total earnings.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Secondly, we analyse seven independent variables that are seen as determinants of the firm’s
dividend policy. These independent variables have been selected on the basis of the discussed
literature review.
One of our independent variables will represent the firm’s growth opportunities. This will be
measured as the total market value of equity divided by the total asset of the firm.
𝐺𝑟𝑜𝑤𝑡ℎ 𝑂𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑖𝑒𝑠 =
𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
24
Profitability is the second independent variable that will be measured. We have defined
profitability as the firm’s profit margin. This is measured as the firm’s net income divided by
total sales.
𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦 =
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
The third variable represents the firm’s cash flow. We measured the firm’s cash flow as the
free cash flow divided by total assets. Free cash flow was computed by subtracting capital
expenditures from operating cash flow of the firms.
𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 =
(𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝐹𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Another variable that will be analysed is the size of the firms. In order to reflect this in our
analysis we have used the natural logarithm (ln) of sales as a proxy.
𝑆𝑖𝑧𝑒 = ln(Total Sales)
To reflect the firm’s risk we have used the firm specific betas (β) as an independent variable.
This has been calculated as the volatility of the firm’s share price in comparison to the
market. The firm specific beta has been calculated manually from the firm’s share price and
market index weekly returns. We have used the OMX Stockholm 30 index to represent the
market.
𝛽=
Where:
𝐶𝑜𝑣(𝑟𝑖, 𝑟𝑚)
𝑉𝑎𝑟(𝑟𝑚)
ri= return of stock
rm= return of market index
The sixth independent variable that we investigated is the retained earnings of firms. We have
measured the firm’s retained earnings variable as the total retained earnings divided by total
assets.
𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
25
Lastly, the firm value will be measured as an independent variable. This is a new variable in
studies of determinants of dividend payout policy. We have measured the firm’s value by
using the price to earnings ratio. In order to compute this ratio we have divided the firm’s
share price by their earnings per share.
𝑃𝑟𝑖𝑐𝑒 𝑇𝑜 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅𝑎𝑡𝑖𝑜 =
𝑆ℎ𝑎𝑟𝑒 𝑃𝑟𝑖𝑐𝑒
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
3.3 Regression model
Since our research consists of both a time series and a cross sectional dimension we have a
dataset known as panel data (Brooks, 2008). In order to achieve unbiased and consistent
estimates our model needs the Ordinary Least Squares (OLS) five assumptions to hold. These
assumptions are as follows:
3.3.1 Average values of the errors is zero
The first assumption for OLS is that the mean value of the errors is zero (Brooks, 2008).
Since we’ve included a constant term in our regression, this assumption isn’t violated
(Brooks, 2008).
3.3.2 Variance of the errors is constant
The second OLS assumption is that the variance of the errors is constant, also known as the
assumption of homoscedasticity (Brooks, 2008). Using the Breusch-Pagan-Godfrey test we
tested if the variance of the errors are constant. The null hypothesis under the test states that
there is homoscedasticity in the variance of the errors. The test shows that we cannot reject
the null hypothesis implying that there is no evidence of heteroscedasticity.
3.3.3 Covariance between the error terms is zero
The third assumption implies that the covariance between the error terms, which over time or
cross-sectionally, must be zero (Brooks, 2008). This is known as autocorrelation and we
tested for this using the Durbin-Watson (D-W) test, which has a null hypothesis that there is
no evidence of autocorrelation. Since our D-W statistic was found to be 2, we cannot reject
the null hypothesis and therefore there is no evidence of autocorrelation.
3.3.4 Independent variables are non-stochastic
The forth assumption is that the independent variables are non-stochastic. This implies that
the error terms are not correlated with the independent variables (Brooks, 2008). We tested
this by conducting a correlation matrix between the independent variables and the error terms.
26
The correlation matrix showed no evidence of higher correlation, therefore we can conclude
that the independent variables are non-stochastic.
3.3.5 Disturbances are normally distributed
The fifth and last assumption is that the disturbances are normally distributed (Brooks, 2008).
Testing this data for normal distribution, we used the Jacque-Berra test and found the
coefficients to be normally distributed at a significant level of 99 % with the exception of risk,
which was significant at the 90% level.
3.3.6 No multicollinearity
An additional assumption when using an OLS model is that the independent variables are not
significantly correlated with each other. From conducting a correlation matrix we can
conclude that there is no significant correlation between any pair of variables. The highest
correlating pair is observed between CASH FLOW and GROWTH with 0.725, which is
below 0.8.
3.3.7 Fixed & Random effects
Our datasets embodies information both cross-sectionally and over time, which means there is
a need to apply different estimator approaches to analyse the data. The most broadly used are
pooled, fixed and random effects regressions.
The first regression that we conducted was a pooled least squared regression. This model
assumes that the intercepts are the same for each firm and this is perhaps an inappropriate
assumption, since the pooled regression neglects the cross-sectional and time-series nature of
the data. We therefore used the Redundant Fixed Effects test in order to determine whether
pooled OLS or fixed effects should be used. The test showed that we should use crosssectional fixed effects. Thereafter, we conducted the Hausman test in order to test whether
fixed or random effects should be used. The null hypothesis under the Hausman test states
that random effects are the preferred estimator approach. Our test showed that we could not
reject the null hypothesis, which implies that random effects should be used to analyse our
dataset. As a result the regression that we have chosen to run is:
𝑦𝑖𝑡 = 𝛼 + 𝛽𝑥𝑖𝑡 + 𝜔𝑖𝑡
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜𝑖𝑡
= 𝛼 + 𝛽𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝛽𝑃𝑟𝑜𝑓𝑖𝑡𝑎𝑏𝑖𝑙𝑖𝑡𝑦𝑖𝑡 + 𝛽𝐶𝑎𝑠ℎ_𝐹𝑙𝑜𝑤𝑖𝑡 + 𝛽𝑆𝑖𝑧𝑒𝑖𝑡
+ 𝛽𝑅𝑖𝑠𝑘𝑖𝑡 + 𝛽𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑_𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠𝑖𝑡 + 𝛽𝐹𝑖𝑟𝑚_𝑉𝑎𝑙𝑢𝑒𝑖𝑡 + 𝜔𝑖𝑡
27
3.3.8 T-test
To be able to test if our independent variables are significant, as well as testing our various
hypothesis stated we have used the t-test. Following the fact that our data is normally
distributed the t-test is appropriate. The null hypothesis of the t-test is Beta = 0. The
alternative hypothesis is Beta does not equal = 0. The formula for the t-test is given as follows
(Brooks, 2008):
𝑡=
Where:
𝛽̂ − 𝛽 ∗
𝑆𝐸(𝛽̂ )
β = sample mean
β*= population mean
SE(β) = standard deviation of estimator
In order to test the hypothesis a critical value for a two-tailed test is needed. This is provided
by a t-table. Rejecting the null hypothesis at the 95% level indicates that the test is statistically
significant (Brooks, 2008).
3.3.9 Z-score
In our research we have investigated the effects that the financial crisis had on the
determinants of dividend payout policy. We have conducted two separate regressions, pre and
post crisis, to illustrate the determinants of the specified time period. In order to compare the
coefficients of these two regressions we need to assess the significance of the difference using
the z-test (Clogg, Petkova & Haritou, 1995).
𝑧=
𝛽1 − 𝛽2
√𝑆𝐸𝛽12 + 𝑆𝐸𝛽22
Where:
β1 = coefficient from regression one
β2 = coefficient from regression two
SE(β) = standard deviation of estimator
The null hypothesis under the z-test states that the coefficients are comparable (Paternoster,
Brame, Mazerolle, & Piquero, 1998). This means that rejecting the null hypothesis we can
state that there is a significant difference in the coefficients of the two regressions. The z-table
illustrates that the critical value for a 5% two-tailed test is 1.96. The z-test was conducted on
all seven determinants of dividend payout policy.
28
3.3.10 R-squared
The R-squared is a measure of how well the dependent variable is explained by the
independent variables (Brooks, 2008). If R-square is high then the model fits the data well
and inversely if its close to zero it isn’t a satisfactory fit to the data (Brooks, 2008). Our Rsquare using the random effects model were all above 0,90, which indicates that the
independent variables explain more than 90% of the dependent variable in all of the three
time periods.
3.4 Validity & Reliability
3.4.1 Validity of the independent variables
Validity is one of the more important research criteria and examines if the stated variables,
created in the purpose to measure the dependent variable, really do measure this (Bryman &
Bell, 2011).
Internal validity refers to the causality of the independent variables as well as the accuracy of
the measurement techniques (Bryman & Bell, 2011).
To check the validity of our
independent variables we tested the determinants of dividend policy on the whole time period
between 2003-2013. It is important that the independent variables explain the dependent and
we have done a thorough examination of previous researchers use of determinants to make
sure the measures are correct. However consistent our variables may be, there is a possibility
that there are other independent variables that could explain the dependent variable that are
not included in our research.
External validity refers to the generalization of the research to other markets and contexts.
Concerning the generalization of our results we feel that because of the number of companies
and long time period our research is applicable to Swedish companies. However, since we
have analysed the NASDAQ OMX Stockholm Large Cap firms, this can be seen as a
simplification of the Swedish market and this could be seen as a weakness.
3.4.2 Reliability
Reliability is especially important in quantitative research since it tells the reader that he or
she can rely on the results (Bryman & Bell, 2011). The variables (determinants) we have used
are collected from examined previous studies where other researchers have tested them. This
shows that the selected variables are reliable in the study and thereby making our research
reliable. Data was collected from Thomsom Reuters Datastream, which in turn relies on
annual reports. Annual reports can be seen as biased due to the fact that the firms publish
29
themselves, however since the annual reports are subject to auditing rules and accounting
principles we view them as unbiased. As the reader can both confirm the sources of data and
the methods of using them, this makes our research consistent and auditable.
In addition, reliability tells us if it would be possible to replicate the study and get the same
results. Since we have clearly stated the methods used to analyse our data and statistically
tested the results we can conclude that our research can be replicated. As a result, our research
can be seen as reliable.
30
4.0 Empirical findings
4.1 Regressions
In this section we will present our results that we produced from the Random Effects Panel
Data regression. From the discussed testing of the sample data we can state that we meet the
various OLS assumptions, which means that our results are unbiased and consistent.
Furthermore, we will demonstrate the relationship between the selected company
determinants and the dividend payout ratio. In addition, the statistical significance of the
relationships will be presented in the tables below.
4.1.1 Whole period regression (2003-2013)
In order to determine the determinants of dividend policy for Swedish firms we have run a
regression with a time frame of eleven years. The results from the regression for the Swedish
firms listed on the large cap are presented in Table 4.1. The table illustrates that the regression
has a R-square of 94 percent. This indicates that 94 percent of the changes in Dividend Payout
Ratio (DPR) can be explained by the independent variables in the regression. In addition, we
can state that the regression is a good fit for the data.
Table 4.1 Regression results for whole period (2003-2013)
Cross sectional Random effects, period 2003-2013
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
-1.928080
0.672284
-2.867954
0.0044
Growth
0.032901
0.051960
0.633204
0.5270
Profitability
0.292447
0.173005
1.690398
0.0918
Cash_Flow
-0.062291
0.784636
-0.079388
0.9368
Size
0.144690
0.040546
3.568520
0.0004
Risk
-0.188280
0.098309
-1.915182
0.0562
Retained_Earnings
-0.546482
0.308590
-1.770901
0.0774
Firm_Value
0.014849
0.000183
81.12158
0.0000
R-squared
0.946596
Looking at the whole period with the intent of determining our determinants, we can observe
that two variables are significant at the 5 % level, Size and Firm Value. A further three
variables are statistically significant at the 10 % level, Profitability, Risk and Retained
Earnings. The table shows that the firm’s growth opportunities have a positive relationship
with the dividend payout ratio. However, the relationship with the DPR is insignificant,
indicated by the p-value of 0.527. Profitability has a significant and positive relation to DPR,
which indicates that the more profitable a firm is the higher dividends they paid. Cash flow
31
shows a slight negative relationship with DPR but is not statistically significant. On the other
hand, a firms size has a positive and significant effect on DPR, which shows that a larger firm
can pay higher dividend. Risk has a negative and significant effect on DPR and leads us to
believe that higher risk leads to a lower DPR. Furthermore, retained earnings shows a
negative and significant effect on DPR, which indicates that higher retained earnings leads to
firms paying lower dividend. Firm Value has a significant coefficient of 0.01, which indicates
that firm value has a minimal relationship with DPR.
4.1.2 Pre-crisis period regression (2003-2007)
Table 4.2 shows the regression results for Swedish firms prior to the financial crisis that was
experienced in 2008. The table shows that the regression’s has a R-square of 0.96, which
indicate that the model fits the sample data. Additionally, the R-square result suggests that the
selected independent variables can explain 96 percent of the variation in the dividend payout
ratio.
Table 4.2 Regression results for pre-crisis period (2003-2007)
Cross sectional Random effects, period 2003-2007
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
-2.336541
0.889031
-2.628188
0.0094
Growth
0.088879
0.078985
1.125260
0.2621
Profitability
0.317192
0.274913
1.153791
0.2502
Cash_Flow
-0.664688
1.063219
-0.625165
0.5327
Size
0.176183
0.054609
3.226236
0.0015
Risk
-0.263496
0.148864
-1.770042
0.0785
Retained_Earnings
-0.997107
0.521457
-1.912158
0.0576
Firm_Value
0.014457
0.000233
62.14087
0.0000
R-squared
0.960450
The regression output indicate the more growth opportunities that a firm has the higher the
dividend payout ratio, shown by the positive coefficient. However, the positive relationship is
not statistically significant. Profitability also has a positive but not significant relationship
with DPR, though the effect is larger, meaning higher profits could lead to higher DPR.
However, the results show that cash flow has a negative relationship with DPR, but is not
statistically significant. The results from the table above show that the size of a firm has a
positive and significant relation with DPR, demonstrated by the coefficient of 0.176. This
implies that larger firms pay higher dividend during the period. Alternatively, firms that are
perceived to possess higher risk, tend to pay fewer dividends to shareholders, indicated by
coefficient of -0.26. Moreover, the results show that retained earnings has a negative and
32
significant relationship with DPR, leading us to believe that when firms have higher retained
earnings they pay less dividend. Lastly, firm value has a statistically significant coefficient of
0.01, which indicates that the firm value of firms has minimal effect on the dividend payout
ratio.
4.1.3 Post-crisis period regression (2009-2013)
Table 4.3 presents the regression results for the post-crisis period, 2009 to 2013. The results
show that the model fits the data and that the explanatory variables can explain 91 percent of
the variations in the dividend payout ratio. This is demonstrated by the R-square result of
0.916.
Table 4.3 Regression results for post-crisis period (2009-2013)
Cross sectional Random effects, period 2009-2013
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
-1.967742
0.999361
-1.969000
0.0506
Growth
0.064220
0.072782
0.882371
0.3788
Profitability
0.412884
0.242355
1.703637
0.0903
Cash_Flow
-0.213538
1.095445
-0.194933
0.8457
Size
0.127451
0.059073
2.157506
0.0324
Risk
-0.025096
0.145525
-0.172450
0.8633
Retained_Earnings
-0.293527
0.471003
-0.623196
0.5340
Firm_Value
0.017691
0.000408
43.31159
0.0000
R-squared
0.916326
In this period, growth has a positive but insignificant relationship with DPR. Profitability on
the other hand has a significant and positive relationship with DPR, indicated by the
coefficient of 0.41. This means that higher profitability of firms during the post-crisis period
caused the dividend payout ratio to increase. Cash flow of a firm has a negative but not
significant relationship with DPR. However, firm size has a positive and significant
relationship with DPR indicating that larger firms pay higher dividend during the post-crisis
period. The riskiness of a firm has a slight negative relationship with DPR but is statistically
insignificant. Furthermore, we see that an increase in retained earnings would decrease a
firm’s DPR, however the result is insignificant. Firm value affects DPR in a slightly positive
and significant effect.
33
4.1.4 Z-score
The Z-score is used in order to determine whether there is a statistically significant difference
between the independent variables of the pre and post crisis periods. The null hypothesis
under the z-test states that the coefficients are comparable (Paternoster, Brame, Mazerolle, &
Piquero, 1998). The z-test critical value of 1.96 is used for a 95 percent confidence level and
1.64 for a 90 percent confidence level.
Cash flow, Risk and Retained Earnings showed considerable differences in beta between
period 1 and 2 although they were not significant as seen in the table 4.4.
Table 4.4 demonstrates the changes in the independent variables and whether they are
statistically significant. Since we can reject the null hypothesis for Firm_Value we can state
that there is a significant difference in Firm_Value between the two regressions. However, the
test implies that the coefficient changes of the other variables cannot be rejected and thus
there was no significant difference in the other 6 coefficients between the two periods.
Table 4.4 Z-scores for the independent variables
Z-score
Reject/Don't
reject
0.00530
0.22959
Don't reject
0.05874
-0.26111
Don't reject
1.13043
1.20000
-0.29553
Don't reject
0.00298
0.00349
0.60576
Don't reject
0.23840
0.02216
0.02118
-1.14517
Don't reject
0.70358
0.27192
0.20340
-1.02052
Don't reject
0.00350
0.00000
0.00000
-7.45780
Reject
Variable
Beta period 1
Beta period 2
Beta diff
SE^2 period 1
SE^2 period 2
Growth
0.08888
0.06422
-0.02466
0.00624
Profitability
0.31719
0.41288
0.09569
0.07558
Cash_Flow
-0.66469
-0.21354
0.45115
Size
0.17618
0.12745
-0.04873
Risk
-0.26350
-0.02510
Retained Earnings
-0.99711
-0.29353
Firm Value
0.01446
0.01796
Note: the critical value is 1.96 two-tailed test (α=0.05)
Note: the critical value is 1.64 two-tailed test (α=0.10)
34
5.0 Analysis and discussion
In this section we will analyse and discuss the various hypotheses stated in the introduction
and by doing so, answer our two research questions. Moreover, we will elaborate on the fact
if the existing research and literature can be applicable to the Swedish market and if so, what
they imply. Furthermore, we will analyse whether the investigated determinants changed in
any significant way, as a result of the financial crisis.
5.1 Determinants of the dividend policy
In this part of the section we will analyse and discuss the results from the regression analysis
of the whole period, 2003-2013, to determine which of the selected company variables can be
seen as the determinants of the dividend payout policy of Swedish firms.
5.1.1 Growth
H1a: Growth will have a positive effect on dividend policy
Our empirical findings found that growth opportunities and dividend payout ratio has a
positive relationship, which is equivalent to the findings of Osobov & Denis (2007). The
result suggests that Swedish firms with valuable growth opportunities tend to pay higher
dividends. This is consistent with Signalling theory, where Black (1976) argues that dividend
is used to convey information that manager’s don’t explicitly communicate. As a result, we
can assume that Swedish firms use dividends as an effective tool to communicate to
shareholders that the managers see valuable growth opportunities in the future, as Baker &
Powell (2000) argue in their study.
However, the results are contradictive to the findings of Rozeff (1982), Lloyd et al (1985),
Holder et al (1998), and surprisingly Hellström & Inagambaev (2012). These previous studies
found that growth had a negative relationship to dividend payout ratio. Their results suggest
that the Life cycle theory explains the relationship, where young firms with high growth avoid
paying dividends due to the need of financing of future investments. In spite of the opposing
result that our research found, the relationship between growth opportunities and dividend
payout ratio was statistically insignificant and therefore we cannot confidently confirm our
hypothesis.
35
5.1.2 Profitability
H1b: Profitability will have a negative effect on dividend policy
Profitability showed a positive and significant relationship, which was contradictive to our
hypothesis. Therefore, the hypothesis can be rejected, which indicate that the Signalling
theory does not hold. Signalling theory argues that more profitable firms are less inclined to
signal future profits. Previous research states that this effect would be applicable to firms
experiencing lower profitability during a shorter period. These firms would be the ones in dire
need of signalling higher future profits as mentioned by Akerlof (1970). Our results are not in
line with Signalling theory and cast a doubt on signalling as a determinant of dividend payout
policy in the Swedish market especially since our sample consists of large dividend paying
companies who according to signalling theory are the ones least in need of signalling as also
found by Osobov & Denis (2007) Abidin, Singh, Agnew & Banchit (2014).
Though contradictive to Signalling theory, our results show that profitability has a positive
effect on dividend and is therefore inline with DeAngelo & DeAngelo (2006) Life cycle
theory since a more mature firm with higher profitability can pay higher dividend. These
findings coincide with Abidin, Singh, Agnew, & Banchit (2014).
5.1.3 Cash flow
H1c: Cash flow will have a positive effect on dividend policy
Jensen (1986) argue that the higher the free cash flow, the higher probability of agency
conflict. They suggest that firms can use dividend as a monitoring tool to avoid agency
conflicts between managers and shareholders. Holder et al (1998) study suggested that the
Agency theory could be applied to dividend paying firms in the US, as he found a positive
correlation between the cash flow and dividend payout ratio of US firms.
In contrast to Holder et al (1998), our empirical finding indicate that cash flow has a negative
relationship and that the Agency theory is not applicable to the Swedish market. This is
surprisingly different to the Hellström & Inagambaev (2012) study that found a positive
relationship between Swedish firm’s cash flow and dividend policy. However, our result were
found to be statistically insignificant, which does not enable us to determine if the negative
relationship holds. As a result, we cannot argue against the findings of Hellström &
Inagambaev (2012).
36
5.1.4 Size
H1d: Size will have a positive effect on dividend policy
The Life cycle theory suggests that mature firms are more likely to pay dividend due to their
access to external financing (DeAngelo & DeAngelo, 2006) (Abidin, Singh, Agnew, &
Banchit, 2014). A positive and significant relationship was found and this result concurs with
previous studies that confirm that size has a positive effect on dividend (Hellström &
Inagambaev, 2014) (Osobov & Denis, 2006). Thereby this theory can be applied to the
Swedish market and thus confirms our hypothesis.
Because of relatively low manager ownership the goals of the agent could differ from the
principal and larger size could potentially lead to empire building, thus creating an agency
cost (Jensen, 1986). Our result concurs with Hellström & Inagambaev (2014) in that to avoid
agency costs, firms pay higher dividends (Jensen, 1986).
5.1.5 Risk
H1e: Risk will have a negative effect on dividend policy
An examination of our result show that the significant and negative relationship between risk
and dividend payout ratio is consistent with existing research by Rozeff (1982), Lloyd et al
(1985), Holder et al (1998), and Hellström & Inagambaev (2012). This indicates that Swedish
firms dividend payout ratio decreases when they experience higher operational and financial
leverage. The higher operational and financial leverage can result in volatility of the firm’s
cash flows, as explained by Rozeff (1982). If firms experience volatility in the cash flow and
future uncertainty, preserving a stable dividend payout ratio will be difficult and would lead
firms to target a lower DPR, which they could meet. In addition to the operational and
financial leverage, the relationship can also be explained by Myers & Majluf (1984) Pecking
order theory. Firms with high risk can experience limited access to external financing and
decide to retain earnings and lower their DPR to finance investments. Moreover, banks and
debt capital markets will demand higher interest rates due to the higher risk of the firms,
which in turn will increase the firms financial risk. For this reason Swedish firms that have
high risk would prefer to retain a larger proportion of their earnings as an alternative to
external financing. As a result, the findings are in line with our hypothesis.
37
5.1.6 Retained earnings
H1f: Retained Earnings will have a positive effect on dividend policy
A negative and significant relationship was found between retained earnings and dividend
policy. This finding was unexpected and suggests that the Life cycle theory doesn’t hold since
it states that when a firm becomes more mature and stable it should have higher retained
earnings and therefore be able to pay out a higher dividend (DeAngelo & DeAngelo, 2006).
The Agency theory is also falsified by our result since when a firm has higher retained
earnings they pay dividend to avoid agency costs (Jensen, 1986). It also opposes Osobov &
Dennis (2007) whose research on the topic in different western capitalistic countries all
concluded positive relationships between retained earnings and dividend. Thus, it can be said
that their results are not applicable to the Swedish market and that our hypothesis is rejected.
A possible explanation could be that Swedish firms with higher retained earnings engage in
stock repurchases instead of dividend.
5.1.7 Firm value
H1g: Firm value will have a positive effect on dividend policy
A positive and significant relationship was established between firm value and dividend
policy. The results are in line with the theory by Baker & Wurgler (2004) that show dividend
is driven by investor demand. The Catering theory and Bird-in-hand theory states that
investors are willing to pay a premium on dividend paying shares because managers cater to
investors needs and that investors prefer a dividend today because of the higher uncertainty in
the future (Baker & Wurgler, 2004; Lintner, 1956). Our results are therefore inline with the
Bird-in-hand theory developed by Lintner (1956). Although firm value has a positive effect,
we note that it has a relatively little effect on the dividend payout ratio in our research.
Therefore we feel that the irrelevance theory cannot for certain be falsified since a large
change of 1 unit in the Price to Earnings ratio only results in an increase of 0.01 in the
dividend payout ratio.
38
5.1.8 What are the determinants of the dividend policy in Swedish firms?
An examination of our results show that we can confirm that the following determinants of
dividend policy, profitability, size, risk, retained earnings and firm value, can be applied to
the Swedish firms.
Table 5.1 Determinants of dividend policy
Determinants of dividend policy
Theory
Profit.
Size
Risk
Firm V.
Irrelevance Theory
O*
Bird-in-hand Theory
C*
Signalling Theory
O**
Agency Theory
C*
O**
Catering Theory
Life cycle Theory
R.E
C*
C**
C*
Pecking order Theory
O**
C**
C= Confirms
O= Opposes
**=Significant at 5% level
*=Significant at the 10% level
The results provide evidence that Swedish firms apply DeAngelo & DeAngelo (2006) Life
cycle theory, which is indicated by profitability and firm sizes positive relationship to the
dividend payout ratio. We assume that mature firms with higher profitability have greater
ability to distribute larger proportions of earnings to its shareholders. In addition, the
relationship between profitability and dividend payout ratio questions whether dividends is
used to signal information content since Signalling theory suggests that lower profitable firms
are in greatest need of conveying information to investors.
The positive and significant relationship between size and dividend payout ratio suggest that
firms DPR increase when the firm size grows. From the empirical findings we can assume
that Swedish firms use dividends to counter agency conflicts of empire building by paying
dividend. Moreover, risk showed that Rozeff (1982), Lloyd et al (1985), Holder et al (1998),
and Hellström & Inagambaev (2012) findings of higher operational and financial leverage has
a negative effect on dividend. The result also supports Myers & Majlufs (1984) Pecking order
theory that firms with higher risk prefer internal financing in order to limit the financial risk.
Our research further showed that firm value had a positive and significant relationship with
dividend payout ratio and thus confirms Lintner (1956) Bird-in-hand theory as well as Baker
39
& Wurgler (2004) Catering theory. The results imply that investors in Swedish firms are
willing to pay a premium on dividend paying shares. However, the change in firm value
causes a minimal adjustment to the dividend payout ratio, which might suggest that the Birdin-hand theory is not extensively applied in the Swedish market, and thus the Irrelevance
theory cannot be completely disregarded.
Unexpectedly, our results show that retained earnings contradict the Life cycle theory by
DeAngelo & DeAngelo (2006), which states that mature firms with high past and present
earnings are more likely to distribute these earnings to its shareholders. Therefore the negative
relationship disputes this assumption. Furthermore, the result goes against the Agency theory
by Jensen (1986). The relationship indicates that firms retain a larger amount of earnings and
as a result avoids monitoring and this relationship is there not in line with Agency theory.
5.2 Were the determinants of dividend policy amongst Swedish firms affected by
the financial crises?
H2: There will be a change in determinants between the two periods
Analysing the results from the pre and post crisis periods we can observe some surprising
changes in the coefficient of the selected determinants of the dividend payout policy.
Table 5.2 Difference in coefficients (pre and post crisis period)
Variable
Beta period
1
Beta period
2
Beta diff
Z-score
Reject/Don't
reject
Growth
0.08888
0.06422
-0.02466
0.22959
Don't reject
Profitability
0.31719
0.41288
0.09569
-0.26111
Don't reject
Cash_Flow
-0.66469
-0.21354
0.45115
-0.29553
Don't reject
Size
0.17618
0.12745
-0.04873
0.60576
Don't reject
Risk
Retained
Earnings
-0.26350
-0.02510
0.23840
-1.14517
Don't reject
-0.99711
-0.29353
0.70358
-1.02052
Don't reject
Firm Value
0.01446
0.01796
0.00350
-7.45780
Reject
Note: the critical value is 1.96 two-tailed test (α=0.05)
Note: the critical value is 1.64 two-tailed test (α=0.10)
The largest changes in coefficients were seen in retained earnings, cash flow, and risk. These
results indicate that in the post crisis period retained earnings, cash flow, and risk had a
weaker negative relationship compared to the pre crisis period. Although the regression
results show some changes in the coefficients of the selected determinants, the z-test implies
that six of the coefficient changes are statistically insignificant. The results of the z-test are
40
consistent with Bisschop (2014) and Abidin et al (2014) studies. These studies found that the
financial crisis did not have any statistically significant change in the determinants of
dividend policy. Conversely, our study showed that firm value had a statistically significant
change in the coefficient. However, in table 5.2 we can observe that the change is minimal.
Thus, we can claim that the financial crisis did not alter the determinants of Swedish firms
dividend policy, even though the financial crisis had an impact on the Swedish economy and
forced many firms to take actions to avoid the impact.
41
6.0 Conclusion
6.1 Summary
The main purpose of the research was to investigate the determinants of dividend policy in the
Swedish market and to determine whether the financial crisis had any significant effect on
these determinants.
In order to answer the two research questions, we employed a Random effects regression
model using a selected sample of 35 firms from the NASDAQ OMX Stockholm Large Cap
list. Three time periods were examined, 2003-2013 to examine the determinants of dividend
policy and 2003-2007 & 2009-2013 to empirically test the difference in the determinants pre
and post the financial crisis. After examining existing literature and previous research the
following determinants were chosen: Growth, Profitability, Cash Flow, Size, Risk, Retained
Earnings and Firm Value.
The study found that profitability, size, risk, retained earnings, and firm value can be seen as
determinants of dividend policy for Swedish firms. The empirical result showed that
profitability and size established a positive relationship, which supports DeAngelo &
DeAngelo (2006) Life cycle theory stating that mature firms with higher profitability are
more inclined to pay dividend to its shareholders. Moreover, size also suggests that larger
firms will pay higher dividends in order to avoid empire building as Jensen’s (1986) Agency
theory proposes. Furthermore, risk showed a negative relationship, which coincides with
Myers & Majluf (1984) Pecking order theory since internal financing is the preferred choice
when firms have limited access to external financing. The study found that firm value
established a positive relationship, which is inline with Linter (1956) Bird-in-hand theory and
Baker & Wurgler (2004) Catering theory stating that investors would pay a premium for
dividend paying firms because of the uncertainty of the future and preference for cash
generating shares. Conversely, the study found that retained earnings had a negative
relationship, which casts doubt on the Life cycle and Agency theory’s applicability to the
Swedish market.
However, some questions were left unanswered as the study found that growth and cash flow
relationships with dividend payout ratio were statistically insignificant.
42
Furthermore, this study investigated whether the determinants of dividend policy were
affected by the financial crisis. The results showed that there were no statistically significant
changes between the pre and post period, except for firm value. However, the change
observed was minimal which does not alter the assumption of the effect that firm value has on
the dividend policy.
Overall, the study found that most of the selected company determinants had a significant
relationship with dividend payout ratio and that the financial crisis did not cause changes in
the relationship. In addition, the study provided supporting evidence for Bird-in-hand,
Catering, Agency, Life cycle, and Pecking order theory as well as casts doubt on Signalling
theory.
6.2 Contribution
This study has contributed to the discussion of why firms pay dividend, by investigating the
relationship between the selected company determinants and the dividend payout ratio. The
relationships are analysed to determine whether existing theories and previous research are
applicable to Swedish firms. The outcome of the results provide a piece of the dividend
puzzle mentioned by Black in 1976. Furthermore, the study has focused on Swedish firms, a
market that has not been extensively researched. This study can therefore be used by
academics and professionals to understand how Swedish firm’s dividend policy differs from
other researched markets.
In addition, the study has included a new variable, firm value, which was measured by the
price to earnings ratio. The study found a significant relationship, which indicates that the
variable can be used in future research. The study has also clarified the impact of one of the
most challenging financial crises in recent years. The results provide evidence, for academics
and professionals, that Swedish firm’s dividend policy were not significantly impacted by a
critical event such as one experienced in 2008.
6.3 Further research
The study showed that most determinants could be related to existing theory except for one
independent variable, Retained Earnings. It is therefore interesting if future research could
investigate why retained earnings opposes the existing theories. Moreover, future research
could be conducted to demonstrate the different outcomes using the dividend yield instead of
the dividend payout ratio as a dependent variable.
43
We would also recommend increasing the sample size to include NASDAQ OMX Medium
and Small cap listed firms in order to better reflect the Swedish market. By covering all listed
firms the researcher might get a more accurate result.
Another potential addition to existing research could be achieved by investigating the
differences between other Nordic countries to get a complementing picture of the Nordic
region.
44
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