Firm Earning and Dividend Policy: A Case of Malaysian Stock Market

International Journal of Economics and Management Studies

© 2020 by SSRG - IJEMS Journal

Volume 7 Issue 1

Year of Publication : 2020

Authors : Faisal Khan

10.14445/23939125/IJEMS-V7I1P118

How to Cite?

Faisal Khan, "Firm Earning and Dividend Policy: A Case of Malaysian Stock Market," SSRG International Journal of Economics and Management Studies, vol. 7,  no. 1, pp. 137-149, 2020. Crossref, https://doi.org/10.14445/23939125/IJEMS-V7I1P118

Abstract:

The study attempts to address the determinants of one of the most important corporate decisions that may have great impacts on investors’ sentiments (dividend policy). This study investigates the determinants of the corporate dividend policy in the context of corporate governance. In order to remove selection biasness, the study applies Tobit and probit model to tackle the censoring problem. For this purpose, a total of 570 firms’ data has been obtained, including 210 firms that didn’t pay a dividend from 2003 to 2018. The results show government ownership (GO), institutional ownership (IO), and foreign ownership (FO) are positively significant at 5%, 5%, and 10%, respectively. Moreover, the board independence and audit quality are significant positive predictors of dividend policy at the 1% level, which shows their importance. However, managerial ownership (MO) is a significant negative predictor of dividend policy. Among control variables, firm profitability, market to book value, size, and life cycle are significant positive predictors of dividend policy at a 1% level. The free cash flow is also a positive predictor at the 5% level. On the other hand, financial leverage (FL), business risk (BR), growth opportunity (GO), and tangibility (TANG) are significant at 1%, 5%, 10%, and 5%, respectively. The results of theprobit model are in line with Tobit regression results which indicate the factors that affect dividend decisions are the same as determinants of dividend policy. The paper also attempts to test dividend smoothening behavior and target payout ratio of Malaysian firms by applying the Linter model. Results show that Malaysian firms have higher adjustment coefficients with lower target payout ratios. This indicates thatMalaysian firm’sspeed of adjustment to their targets is relatively slow but not as slow as the firms in developed marketssuch as the USA. This shows that Malaysian firms do smooth and stable their dividends(but not in the same manner and speed as in the developed markets).

Keywords:

Dividend policy, foreign ownership, institutional ownership, audit quality, board independence, control variables, dividends, developing countries, Malaysia.

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