Dividend Policy Practices in Corporate Firms of Bangladesh: Trends and Determinants

Abstract

Many researchers worked on different capital markets of the world. But in the context of Bangladesh, a few empirical studies analyzed the dividend payment practices of corporate firms in connection with dividend announcement effects on security prices in the Dhaka Stock Exchange. The present study, therefore, examines the dividend policy practices of corporate firms of Bangladesh over the period 2000-2014 and attempts to explain the observed behavior by analyzing the trends and growth of dividend and also attempts to find the relationship with the trends and growth of the prices of the shares. This study also tries to identify the significant factors which are the prominent determinants of the dividend policy of the corporate firms and lastly attempts to identify the security prices reaction to the dividend announcement of corporate firms of Bangladesh in the Dhaka Stock Exchange Ltd. The general objective of the study is analyzing the trends and determinants of the dividend policy culture and practices by the Bangladeshi corporate firms and subsequent reaction on the capital market. However, the specific objectives are: (1) to review and analyze the growth trend in the dividend payment pattern of Bangladeshi corporate firms and to examine whether there is any relationship exist between the dividend trends with the growth trends of market price of share; (2) to identify the significant factors which are the prominent determinants of the dividend policy of the corporate firms; (3) to identify the security prices reaction to the dividend announcement of corporate firms of Bangladesh in the Dhaka Stock Exchange Ltd.; and (4) to identify the problems and to suggest measures for improving the dividend policy culture and practices of corporate firms of Bangladesh. In order to solve this research problem in the capital market, the study employs content analysis and quantitative research methods and collects secondary data from the annual reports of relevant companies, different issues of monthly reviews of Dhaka Stock Exchange Limited. Data collected from different sources are computed and analyzed by the researcher by applying E views 8 Software. Computer software MS Excel 13 is also used for detail statistical analysis. To make the data more meaningful, those were analyzed in tabular forms, percentages, mean, median, standard deviation, time series and in some other statistical forms according to their suitability and needs of the study. An event methodology is employed to measure security price reactions around the time of the event of dividend announcement. Thirty days (-30) before the announcement day were selected as the observation period whereas, thirty days (+30) after the announcement day were selected as the comparison period. To test for statistical significant security price movement around dividend announcement date, the Student T test was employed to measure the significance among the means of the samples, observation period, and comparison period. In this study, we found that the number of firms paying dividend during the study period has shown an uptrend till 2014. The total number of listed companies in the DSE were 263 in 2014 and out of those 223 companies were paying dividend and the rest could not at all paying any dividend i.e., on an average 67.20% companies were paying dividend regularly and out of 167 companies, on an average they were paying minimum 3.5% and maximum 376.42% dividend. We can also see that only 32.6% of the total numbers of non-financial companies listed in DSE paid cash dividend and 67.4% were not paid any cash dividend whereas 67.20% of total companies listed in DSE paid dividend in the form of either cash or bonus which indicates most of the non-financial firms listed in DSE preferred to declare bonus stock instead of cash dividend. The total number of non-financial listed companies in the DSE were 90 in 2000 and out of those 33 companies i.e., 36.67% were paying cash dividend whereas in 2014 out of 183 non-financial listed companies only 54 companies i.e., 29.51% were paying cash dividend. So, we observed that although the numbers of non-financial listed companies increased during the last fifteen years but percentage of the cash dividend paying companies decreased over the years which was not expected at all. But average cash dividend paid in 2000 was 34.79% whereas in 2014 average cash dividend paid was 82.81% which indicates that average cash dividend paid by the non-financial companies increased significantly over the years. In this study, we have also observed the trend of price movement of industry wise for both cash dividend paying and bonus dividend paying companies. In case of the companies which are paying cash dividend in Food and Allied, Textile and Miscellaneous industry are most efficient in increasing stock values. Average CGR of cash dividend paying companies is 15.13% and it seems to be healthy enough. In contrast, the companies which are paying bonus share as dividend in Food and Allied, Textile and Fuel and Power industry are most efficient in maximizing stock values. Average CGR of bonus dividend paying companies is 3.17% and it seems to be poor because in the economy of Bangladesh the rate of inflation and risk free return (T-bill interest rate) both are quite greater than that. This study also examines to what extent various determinants of dividend payout policy can explain the dividend decisions of DSE listed companies. For this purpose this research uses Multiple Regression Model in E views 8 software to examine the determinants of dividend policy in Bangladesh based on a sample of 54 companies which are paying cash dividend and listed on the DSE. The study aimed at establishing variables affecting dividend policies of the listed non-financial companies in Dhaka Stock Exchange. At the end, the findings of the study shows statistically significant and positive relationship among earnings per share (EPS), NAVPS, previous year dividend, size of the firm but found statistically insignificant relationship with return on equity (ROE) on dividend payment. Therefore, the major determinants of dividend policy of non-financial companies in Bangladesh are earnings per share, NAVPS, previous year dividend and size of the firm. Dividend policy of a company has great impact on the share price of a company. Event study methodology is employed to measure the security price performance. Dividend announcement is an instrument, which reflects information about the company. In this analysis, we find that the market adjusted average abnormal returns attributed solely to the dividend announcement day which is statistically insignificant for both stock and cash dividends. Thus, it is evident that there are no differences in the impact of cash or stock dividend as far as the announcement day is concerned. day indicate speculative nature of the investors’ behavior. On the other hand, positive returns for stock dividends are reported for short run after the announcement. The findings do not reject our null hypothesis and provide no strong evidence that stock price reacts significantly with dividend. It also does not reject our null hypothesis of zero abnormal return and provide no strong evidence that stock price reacts significantly on the announcement day of dividend. However, there are some evidence of positive return after the announcement of cash dividend and some negative return before and after the announcement of stock dividend but no significant change on the announcement day. This also indicates that market reacts slowly to the announcement information. Since, the primary goal of companies’ dividend policy is to pay benefits to the shareholders as a whole, so the regulatory body, the management of the companies listed in the DSE and the general investors connecting themselves in the capital market of our country should be very judicious for their respective involvement so as to maximize the interest of the concerned stakeholders and they should not keep themselves intriguingly poised with respect to their pervasion in the capital market of our country. With such a stand, BSEC should take adequate measures to increase the number of firms to declare dividend regularly based on their financial performances for the establishing our capital market into emerging and healthy and also to attract the investors towards the capital marker for secure investment. Actually dividend policy of corporate firms determines how much of a company's earnings will be paid to shareholders and how much will be retained. But in our capital market evidences show most of the firms declared bonus stock instead of cash dividend which causes dilute of earning per share and net asset value of the firm. Several explanations for investors preferring stable Taka dividends have been suggested and one of the major one is many investors may use dividends to cover living expenses, which are usually rather stable from year to year. So, management of the companies need to be very expeditions to declare cash dividend to ensure a sound grownup of their financial earmarks which intern contributes in strengthening a solid capital market in our country. Moreover, the interest of the general investors must not be kept far from the above discussion. They should be timely informed with proper information to take a suitable decision with regard to their financial involvement in the capital market of our country. The study also shows that during the last 15 years non-financial corporate firm’s growth trends of cash dividend were more or less sound and smooth. After analyzing the industry wise growth trends we have found a positive relationship between dividend and price. Most interestingly it is evident from the study that general investors can have prior idea about the prices of shares of companies which are declaring either cash or stock dividend. So, the investors could apply the findings of this study which is a regression model based on the last fifteen year’s cash dividend and bonus dividend declared by the corporate firms and the market average price of the respective firms. In this study, we have observed the trend of price movement of industry wise for both cash dividend paying and bonus dividend paying companies. Result from our study is clear in the sense that the companies which are paying cash dividend are able to maximize their share values in a greater extent; on the other hand, companies which are paying bonus dividend are able to maximize their share values in very few extent. The study aimed at establishing variables affecting dividend policies listed non-financial companies in Dhaka Stock Exchange. The results show that statistically significant and positive relationship exist among earnings per share, NAVPS, previous year dividend, size of the firm. But found statistically insignificant relationship with return on equity on dividend payment. Therefore, the major determinants of dividend policy of non-financial companies in Bangladesh are EPS, NAVPS, previous year dividend and size of the firm. To evaluate the impact of dividend payment on security price our findings suggest that the investors in general show more positive attitude towards cash dividends rather than stock dividend. Again, this fact may indicate that investor perceive cash dividend as good and positive sign and they gain their faith on the management of the companies. So, in this study it can be concluded that the investors should prefer cash dividend rather than stock dividend because in the long run share price generally be maximized if companies pay cash dividend but it generally be reverse or lower if companies pay bonus share as dividend. In addition it has been observed that as the record day for entitlement of the dividend approaches nearer, the investors will have the opportunity to realize the cash dividend within very shortest possible time. That is why from our findings we would like to conclude that record day plays an important indicator for realizing the abnormal returns for cash dividend paying companies indeed.