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Economic reforms, determinants and stability of dividends in a dynamic setting

Economic reforms, determinants and stability of dividends in a dynamic setting Purpose – This study aims to find whether the Indian private corporate sector follow stable cash dividend policies, whether dividends smoothen earnings, estimate the implicit target dividend ratio, and examine the determinants along with speed of adjustment of dividends towards a long run target ratio. Design/methodology/approach – The study uses the instrumental variable (IV) approach for dynamic panel data for 1971‐2010 periods controlling for economic reforms. The GMM‐in‐levels model, GMM‐in‐first‐differences and GMM‐in‐systems are alternatively estimated to include other lag structures. Findings – In the post‐reform period lower dividends are consistent with rapid growth in the economic environment and the tendency to smoothen dividends has considerably decreased over time. The estimated model suggests dividends substitute for less opportunity for internal growth and increased general likening to relatively retain their earnings and finance their growth, unlike the past. Research limitations/implications – Limitation to capture substitution, ownership and self selection effects stems up from data as the Annual Studies RBI does not include such variables, does not capture qualitative data and disallows identification of the firm. Practical implications – The paper documents long run trends and inter‐temporal dividend patterns controlling economic reforms for a relatively larger number of public limited firms nearing four decades for an emerging economy. Originality/value – This is a first attempt to take a holistic view of dividend using rich set of unexplored dynamic panel data on Indian firms controlling for reforms using contemporary econometric models and analyzes issues relating determinants, smoothening and stability of the corporate dividend structure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Asia Business Studies Emerald Publishing

Economic reforms, determinants and stability of dividends in a dynamic setting

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Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
1558-7894
DOI
10.1108/15587891311300990
Publisher site
See Article on Publisher Site

Abstract

Purpose – This study aims to find whether the Indian private corporate sector follow stable cash dividend policies, whether dividends smoothen earnings, estimate the implicit target dividend ratio, and examine the determinants along with speed of adjustment of dividends towards a long run target ratio. Design/methodology/approach – The study uses the instrumental variable (IV) approach for dynamic panel data for 1971‐2010 periods controlling for economic reforms. The GMM‐in‐levels model, GMM‐in‐first‐differences and GMM‐in‐systems are alternatively estimated to include other lag structures. Findings – In the post‐reform period lower dividends are consistent with rapid growth in the economic environment and the tendency to smoothen dividends has considerably decreased over time. The estimated model suggests dividends substitute for less opportunity for internal growth and increased general likening to relatively retain their earnings and finance their growth, unlike the past. Research limitations/implications – Limitation to capture substitution, ownership and self selection effects stems up from data as the Annual Studies RBI does not include such variables, does not capture qualitative data and disallows identification of the firm. Practical implications – The paper documents long run trends and inter‐temporal dividend patterns controlling economic reforms for a relatively larger number of public limited firms nearing four decades for an emerging economy. Originality/value – This is a first attempt to take a holistic view of dividend using rich set of unexplored dynamic panel data on Indian firms controlling for reforms using contemporary econometric models and analyzes issues relating determinants, smoothening and stability of the corporate dividend structure.

Journal

Journal of Asia Business StudiesEmerald Publishing

Published: Jan 11, 2013

Keywords: Economic reforms; Dividends; Stability; Determinants; Dynamic panel data; Partial adjustment model; GMM; India

References