Determinants of Dividend Payout Ratios

Determinants of Dividend Payout Ratios

A Study of Swedish Large and Medium Caps

Authors:

Gustav Hellstr?m

Gairatjon Inagambaev

Supervisor:

Catherine Lions

Student

Ume? School of Business and Economics

Spring semester2012

Degree project, 30 hp

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Acknowledgments

We would firstly like to thank our supervisor Catherine Lions for her support

throughout the research process. Secondly, we would like express our gratitude to Ume?

School of Business and Economics for providing us the opportunity to conduct the

degree project.

Gustav Hellstr?m

May, 2012

Gairatjon Inagambaev

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Abstract

The dividend payout policy is one of the most debated topics within corporate finance

and some academics have called the company¡¯s dividend payout policy an unsolved

puzzle. Even though an extensive amount of research regarding dividends has been

conducted, there is no uniform answer to the question: what are the determinants of the

companies¡¯ dividend payout ratios? We therefore decided to conduct a study regarding

the determinants of the companies¡¯ dividend payout ratios on large and medium cap on

Stockholm stock exchange.

The purpose of the study is to determine if there is a relationship between a number of

company selected factors and the companies¡¯ dividend payout ratios. A second purpose

is to determine whether there are any differences between large and medium caps

regarding the impact of the company selected factors. We therefore reviewed previous

studies and dividend theories in order to conclude which factors that potentially could

have an impact on the companies¡¯ dividend payout ratios. Based on the literature, we

decided to test the relationship between the dividend payout ratio and six company

selected factors: free cash flow, growth, leverage, profit, risk and size. The data used in

the research are secondary data collected during a time period of five years, between

2006 and 2010.

The study follows a quantitative research method with a deductive approach and we

have based the study on four dividend theories: the dividend irrelevance theory, the bird

in hand theory, the signaling theory and the agency theory. In order to determine

whether there is a relationship between the companies selected factors and the dividend

payout ratio we conducted both an Ordinary least square (OLS) and a Tobit regression.

Multicollinearity tests were also conducted in order to ascertain that no multicollinearity

affected the results of the study.

The results indicate that some of the company selected factors have an impact on the

companies¡¯ dividend payout ratios and there are some differences between large and

medium caps. The dividend payout ratios of large caps have a significant relationship to

free cash flow, growth and risk. While the dividend payout ratios of medium caps have

a significant relationship to free cash flow, leverage, risk and size.

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Table of Contents

Chapter 1: Introduction ................................................................................................................. 1

1.2Problem Statement ............................................................................................................... 2

1.3 Research Question ............................................................................................................... 3

1.4 Purpose ................................................................................................................................ 3

1.5 Audience ............................................................................................................................. 4

1.6 Delimitations ....................................................................................................................... 4

1.7 Disposition .......................................................................................................................... 5

Chapter 2: Methodology................................................................................................................ 6

2.1 Previous Understanding and Choice of Subject .................................................................. 6

2.2 Methodological Assumptions .............................................................................................. 6

2.3 Research Approach ............................................................................................................. 8

2.4 Research Method ................................................................................................................. 9

2.5 Type of Study .................................................................................................................... 10

2.6 Research Strategy .............................................................................................................. 10

2.7 Summary of Methodology ................................................................................................ 11

2.8Literature Search ................................................................................................................ 11

2.9Critiques of Sources ........................................................................................................... 12

Chapter 3: Theoretical Framework ............................................................................................. 13

3.1 NASDAQ OMX Stockholm.............................................................................................. 13

3.2 Dividends .......................................................................................................................... 13

3.3 Modigliani-Miller Dividend Irrelevance Theory .............................................................. 14

3.4 The ¡°Bird in Hand¡± Theory............................................................................................... 16

3.5 Signaling Theory ............................................................................................................... 18

3.6 Agency Theory .................................................................................................................. 19

3.7 Dividend Payout Ratio vs. Dividend Yield ....................................................................... 20

3.8 Summary of Theoretical Framework ................................................................................ 22

3.9 Previous Studies ................................................................................................................ 22

3.10 Company Selected Factors .............................................................................................. 26

3.10.1 Free Cash Flow ........................................................................................................ 26

3.10.2 Growth...................................................................................................................... 26

3.10.3 Leverage ................................................................................................................... 27

3.10.4 Profit......................................................................................................................... 28

3.10.5 Risk .......................................................................................................................... 28

3.10.6 Size ........................................................................................................................... 29

Chapter 4: Practical Method ........................................................................................................ 30

4.1 Sampling ........................................................................................................................... 30

4.2 Sample and Observations .................................................................................................. 31

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4.3 Data Collection.................................................................................................................. 35

4.4 Manual Processing of Data ............................................................................................... 35

4.4.1 Risk ............................................................................................................................ 35

4.4.2 Growth........................................................................................................................ 36

4.4.3 Debt to Equity Ratio................................................................................................... 36

4.4.4 Free Cash Flow .......................................................................................................... 36

4.4.5 Dividend Payout Ratio ............................................................................................... 37

4.5 Statistical Tests.................................................................................................................. 37

4.5.1 Pearson Correlation Coefficient ................................................................................. 37

4.5.2 Regression Analyses .................................................................................................. 38

4.5.3 Tobit Model ................................................................................................................ 39

4.5.4 Hypothesis Testing ..................................................................................................... 39

4.5.5 Multicollinearity ......................................................................................................... 41

4.6 Criticism of Practical Method ........................................................................................... 42

Chapter 5: Empirical Results....................................................................................................... 43

5.1 Descriptive Statistics ......................................................................................................... 43

5.1.1 Large Cap, Non-Financial .......................................................................................... 43

5.1.2 Large Cap, Financial .................................................................................................. 44

5.1.3 Medium Cap, Non-Financial ...................................................................................... 45

5.1.4 Medium Cap, Financial .................................................................................................. 45

5.2 Multicollinearity Tests ...................................................................................................... 46

5.3 Regression Results ............................................................................................................ 47

5.3.1 Large Cap, Non-Financial .......................................................................................... 47

5.3.2 Large Cap, Financial .................................................................................................. 48

5.3.3 Medium cap, Non-Financial....................................................................................... 49

5.3.4 Medium cap, Financial ............................................................................................... 49

5.4 Regression Remarks .......................................................................................................... 50

Chapter 6: Empirical Analysis .................................................................................................... 51

6.1 Hypotheses ........................................................................................................................ 51

6.1.1 Free Cash Flow .......................................................................................................... 51

6.1.2 Growth........................................................................................................................ 52

6.1.3 Leverage ..................................................................................................................... 53

6.1.4 Profit........................................................................................................................... 54

6.1.5 Risk ............................................................................................................................ 54

6.1.6 Size ............................................................................................................................. 55

6.2 Financial Large and Medium Caps ................................................................................... 56

6.3 Summary of the Analysis .................................................................................................. 56

Chapter 7: Conclusions and Recommendations .......................................................................... 58

7.1 Conclusions ....................................................................................................................... 58

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