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An Investigation into the Dividend Policy of Firms in East Asia
Julia Sawicki
Abstract
This study investigates the determinants of dividend policy at the firm, industry and country levelin seven countries in East Asia: Taiwan, South Korea, Thailand, Malaysia, Hong Kong,
Singapore, Indonesia and Japan. The findings indicate that past and expected revenue growth,
cash flow adequacy, leverage collateralizable assets and (unexpectedly) systematic risk are
positively related to payout ratio. Inter-industry and -country differences are related to
legislation, tax and ownership structure, and socio-cultural and political influences.
Keywords: dividend policy, emerging markets
JEL classification: G32
Julia Sawicki
Nanyang Technological University
School of Business
Nanyang Avenue
Singapore 639798
(65)790.4669
The author would like to acknowledge gratefully research assistance of :Ho Jie Ying, Lee Seet
Ling and Teo Harn Kiat.
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Introduction
For nearly four decades, researchers have been grappling with the dividend puzzle, trying to
understand the determinants of dividend policy. Most studies focus on US firms. We expand the
investigation by studying dividend policy from an Asian perspective focusing on firms in 8
representative countries of East Asia namely Taiwan, South Korea, Thailand, Malaysia, Hong
Kong, Singapore, Indonesia and Japan. We measure the relationship between dividend payout
and seven variables: expected growth, historical revenue growth, firm size, leverage, cash flow
adequacy, collateralizable assets and systematic risk. We also investigate industry and country
differences.
The results regarding firm-level differences are consistent with prior work indicating a
positive relationship between dividend payout and expected growth, historical revenue growth,
cash flow adequacy, and collateralizable assets. Interestingly systematic risk is also positively
related to payout ratio, which contradicts the results of prior work. The results for firm size are
mixed with the direction of the relationship to dividend payout differing for different countries
and industries.
Finally, we find inter-industry and inter-country differences. The former can be attributed
to the nature of the industries as well as the legislation unique to certain industries, while inter-
country differences in dividend payout are due to tax structure, ownership structure and socio-
cultural and political influences.
Background
Miller and Modiglianis (1961) seminal theoretical paper demonstrates the irrelevance of
dividend policy and demonstrates in perfect market conditions that dividend payout does not
affect firm value. In a frictionless world with no agency costs, information asymmetry, taxes and
transaction costs, investors are indifferent between capital gains and dividends.
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However such assumptions are unrealistic in the real world. Among the many studies on
dividend policy, most investigate the underlying dynamics of dividend policy, investigating
questions like: What are the various factors in the real world that affect dividend policy? Do firm
characteristics affect dividend policy? How and why do these determinants affect dividend
policy? The examination into the effect of dividend policy on firm value examines: the role
dividend policy plays in a firm; the informational value of dividend change; investors reaction
to dividend changes. A discussion of studies focusing on the determinants of dividend policy
follows.
Firm-level Effects on Dividend Policy
Rozeff (1982) proposes an optimal dividend payout model, which appeals to two market
imperfections: agency cost and the transaction cost associated with external financing. He argues
that due to agency costs, dividends are increased but on the other hand this raises the costs of
external financing. The sum of these two opposing costs determines an optimal payout ratio. The
firms beta, past and expected future growth rate of sales as proxy for the transactions associated
with external financing He argues that beta is a surrogate for the firms operating and financial
leverage, and firms with a high leverage will lower the dividend payout to lower the cost of
external financing. Dividend payments are quasi-fixed charges, which are substitutes for other
fixed charges. For the other two proxies, he concludes that firms experiencing or anticipating
higher revenue growth will lower dividend payout ratios. Firms, in this case would tend to retain
funds to avoid external financing. Lastly, he uses the percentage of common stock held by
insiders and the number of common stockholders as proxy for agency costs. Firms pay out more
dividends when a lower fraction of the equity and or a greater number of stockholders own the
outside equity.
Jensen (1992) examines the determinants of three policy choices within a system of
equations. The three policy choices are insider ownership, debt and dividend policies. In the
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dividend equation, which examines the determinants of dividend payout ratios, he finds that
investment, insider ownership, debt ratio, growth, and business risk are negatively related to
dividends while only profitability is related positively related to dividends.
In Mohd (1995), firm size and industry representation function as control variables. Firm
size is employed as a control variable for both the transaction cost and agency cost proxies.
Industry representation was also used as a control variable as it is an important factor in the
payout decision. It was found that dividend payout is positively related to firm size, the amount
of institutional holdings, and number of shareholders. It is negatively related to past and future
growth, operating and financial leverage risk, intrinsic business risk, and insider shareholdings.
Chirinko (1998) exploits the unique initial homogeneity of seven regional phone
companies which are created from AT&Ts local operating. This is a result of an anti-thrust libel
against AT&T. As the firms originate from the same corporation, there are reasonable grounds
for compensation of subsequent heterogeneity in dividend policy of the 7 firms. It is found that
investment opportunities and dividend payout are negatively related. Also, increased
indebtedness leads to increased contacts with external financial sources, which results in closer
monitoring and an increased dividend payout.
Fama and French (2000) find that larger and more profitable firms are likely to pay more
dividends. This is due to their ability to sustain the high payout. Mollah et. al. (2000) report that
the number of common stockholders, the level of collateralizable assets, and free cash flow is
positively related to dividend payout ratio. Insider ownership on the other hand is positively
related to dividend payout ratio.
Inter-industry Effects on Dividend Policy
Lintner (1956) argues that there is be positive correlation between dividend policies of
firms in the same industry and certain factors within the industry. More than a decade later,
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Harkins (1971) also posits a relationship among dividend of firms in the same industry due to
their comparable investment opportunities.
Michel (1979) uses data from 13 industries in America over the period 1967-1976, to
determine if a systematic relationship exists within an industry. The null hypothesis, that
dividend yield are generated from the same population or identical populations, was rejected on
the basis of significant differences in dividend payout ratios across industries.
Michel (1986) did an inter-industry analysis of US and Japan to find out if a systematic
relationship exists between a firms dividend policy and the industry it is in. The null hypothesis
that across-industry dividend yields are generated from the same population is rejected for both
the USA and Japanese samples. The results conform to those reported by Michel (1979). This
present study however, suggests that industry-influence phenomenon also exists in Japan.
Baker (1988) updates Michel (1979) study by using data from 1977 to 1981, which he too finds
support for industry effects on dividend payout.
Collin et. Al. (1996) and Saxena (1999) recognize the differences in dividend policy between
regulated firms and unregulated firms. Collins focuses on agency-cost and monitoring
explanations for the relevance of dividend and examines the role of insiders in determining
dividend policy for unregulated firms, utilities and financial firms. Saxena, on the other hand,
investigates if determinants of dividend policy differ between regulated and unregulated firms.
He concluded that some of the determinants of dividend policy are different for regulated and
unregulated firms. Specifically, the percentage of common stock held by insiders and expected
future growth rate do not play a key role in a regulated firms payout ratio as compared to an
unregulated firm.
Inter-country Effects on Dividend Policy
Michel (1986) investigates whether a systematic relationship exists between a firms
dividend policy and the country it operates. The results indicate a difference in the payout ratios
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of US and Japan. Reasons cited include bank ownership of companies, growth rate of the
economy as well as accounting, tax and risk characteristics.
La Porta (1998) finds that firms in common law countries, where investment protection is
higher, tend to make higher dividend payout than those in civil law countries as investors in
protected countries use their legal rights to demand higher dividends.
Also, Buchanans (2000) study of the G7 countries reports that there is a relationship
between the dividend policy and the country in which the firm operates. One reason cited is that
the corporations in one country may be leveraged differently from their counterparts in another
country.
Kang (2001), it is argues that institutional structure may be a reason for differences in
dividend payout in different countries, noted that the corporate governance systems in UK and
the US are characterized as a market based system while the governance systems in both
Australia and France are governed by relationship-based system. UK and US firms generally
have lower insider ownership and agency problems may be more widespread, thus the firms have
relatively higher dividend payout ratios.
HYPOTHESIS: Relationship between firm characteristics and payout ratio.
Expected Growth: negative
Firms establish lower dividend payout ratio when they anticipate higher growth, presumably
because growth entails higher investment expenditures. Due to the high cost of external
financing, firms will retain a higher proportion of earnings to finance future investment needs,
hence reducing their dividend payout in anticipation of future growth.
Hence, a negative relationship between dividend payout and expected growth is expected.
Historical Growth: negative
In order to support rapid past growth, firms would have retained more funds for investment to
generate the growth as opposed to raising the more costly external funds. Hence, this implied that
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firms would have adopted a low payout ratio in periods when past growth was high. Hence, it is
hypothesized that dividend payout is negatively related to historical growth.
Firm Size: positive
As the size of a firm increases, shareholders are not able to monitor the firm effectively and there
is a higher tendency of agency problems. Thus, shareholders will demand higher dividend
payout, which acts as an indirect monitoring tool. Firms in current or potential need of external
financing will use their funds more prudently as they will be monitored by both existing and
potential creditors.
Leverage: positive or negative
On one hand, firms trade off dividend payments with fixed financial charges. A highly leveraged
firm would tend to lower its dividend payout ratio because of high fixed financial commitments.
On the other, increased indebtedness leads to increased contacts with external financial sources,
which results in closer monitoring and an increased dividend payout. Hence, we do not expect
any particular direction of relationship between leverage and dividend payout.
Cash Flow Adequacy: positive
A firm will not be able to distribute cash dividends without the means to do so. Also, a firm with
high cash flow may tend to have higher agency problems if the cash are misused in improper
ways. A higher dividend payout will reduce the free cash flow, and in turn reducing the agency
problems.
Collateralizable Assets: positive
Shareholders may expropriate wealth from bondholders by paying themselves dividends.
Bondholders try to contain this problem through restrictions on dividend payments in the bond
indenture. However, fewer restrictions are placed on the firm if debt can be collateralized as the
borrower is restricted to use the funds for a specific project. Hence, a positive relationship
between collateralizable assets and dividend payout is expected.
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Systematic Risk: negative
Beta is a proxy for systematic risk. Risky firms tend to have higher volatility in their cash flows.
In this case, the firms reliance on external financing would be increased. A firm with high beta
would tend to adopt a lower dividend payout to avoid costly external financing. Hence, a
negative relationship between systematic risk and dividend payout is expected.
Industry-specific Differences in Dividend Payout
Dividend policies and certain factors like sales volume, internal funds flow may be positively
correlated for firms in the same industry, indicating some relationship between industry and
dividend payout. Due to the structural characteristics of an industry, it is likely firms within the
same industry faced comparable investment opportunities while firms in different industries may
have different investment opportunities. The extent of regulation may also have an impact on
dividend payout as regulated firms face a different set of factors from unregulated firms in the
determination of dividend payout. Due to the difference in structural characteristics and
investment opportunities, we expect that dividend payout among industries would exhibit
differences. Hence, we propose the hypothesis that there are industry-specific differences in
dividend payout.
Country-specific Differences in Dividend Payout
Although there are limited previous studies on inter-country differences, we expect some
differences in the typical dividend payout in different countries due to the fundamental
differences in these countries. Examples of fundamental differences include legal frameworks,
culture and political environment.
DATA
Data Source
All the financial data used in our study are obtained from the PACAP database.
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Sample Coverage
Our study covers a period of 10 years from 1989-1998.
We have included firms from 8 countries including:
Hong Kong
Indonesia
Japan
Malaysia
Singapore
South Korea
Taiwan
Thailand
Furthermore, we have grouped these firms into 32 industries including: Agriculture, Forestry & Fishery
Apparel & Textiles
Automobile
Building Materials
Chemicals, Petroleum & Plastics
Computer & Computer Services Conglomerate
Construction
Electronics & Electrical Appliance
Entertainment & Recreation
Finance
Food & Beverage
Footwear & Leather Products
Healthcare Services
Hotels & Travel Services
Household Goods
Machinery & Equipment
Metal Products
Mineral Products
Mining
Miscellaneous (Consumer)
Miscellaneous (Industrial) Miscellaneous (Services)
Paper Products
Pharmaceuticals
Printing & Publishing
Property
Retail
Telecommunications
Transportation & Logistics
Utilities
Wood Products
Sample Selection Criteria
Our sample only consists of dividend-paying publicly listed firms. A sample firm must have a
typical dividend payout ratio ranging from 0 to 1. Data for calculating all the variables must be
available for that firm.
METHODOLOGY
Objective 1
Statistical Test
This particular objective will be tested using multiple regressions on three different sets of
samples namely:
(1) pooled [No. of sample = 1],
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For the pooled regression, we have excluded firms in the finance industry due to fundamental
differences of these firms. One of the independent variables for the regression is free cash flow to
assets ratio. However, for finance firms, the balance sheet and income statement of such firms
are structured in a different manner and there are certain comparability issues which we found
hard to overcome.
(2) country specific [No. of samples = 8]
For the country specific regressions, we have also similarly excluded finance firms in the
regressions
(3) industry specific [No. of samples = 32]
Regression
divpay = 0 + 1 (tobinq) + 2 (histgrwt) + 3 (mktcap) + 4 (leverage) + 5 (fcf) + 6 (colasset) +
7 (beta) + e
Dependent Variable: Dividend payout ratio (divpay)
In order to prevent the problem of multi-collinearity between the independent variables, we run a
correlation test between the independent variables. No instance of high correlation is found
between the independent variables. [Refer to Correlation Matrix in Appendix A: Objective 1]
Independent Variables & Hypothesis
No Expected Direction
Independent Variable Abbreviation
Leverage leverage
H0 : i = 0
H1 : i ? 0
Expected Direction : Positive
Independent Variable Abbreviation
Market capitalization mktcap
Free cash flow to assets ratio fcf
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Fixed assets to assets ratio colasset
H0 : i = 0
H1 : i > 0
Expected Direction : Negative
Independent Variable Abbreviation
Tobins Q tobinq
Historical revenue growth histgrwt
Beta beta
H0 : i = 0
H1 : i < 0
Control Variables
We have also introduced certain qualitative variables in our regression model to control for some
factors which we would like to isolate from our research.
CONTROL VARIABLES
Pooled Regression
Year
Age
Industry
Country
Country-Specific Regression
Year
Age
Industry
Industry Specific RegressionYear
Age
Country
Variables that are qualitative in nature are quantified into n-1 binary variables where n refers to
the number of categories existing for the qualitative variable.
- Year refers to the financial year of that particular observation and there are 10 categories
consistent to the period covered by our study.
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- Age refers to the age of the company and we have grouped this variable into 3 categories,
namely: old (age>= 24), medium (5
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H1: Not all the means of dividend payout ratios of the different countries are equal.
Assumptions
(1) We assume independent random sampling from each of the r populations.
(2) We assume r populations under study are normally distributed, with means i that may or
may not be equal, but with equal variances 2.
Populations
For objective 2, there are 32 populations, which adhere to the number of industries in our study.
For objective 3, there are 8 populations, which adhere to the number of countries covered in our
study. The financial firms are excluded from the populations due to incomparability issues.
Level of Significance
The level of significance used in the ANOVA tests is 5%
Kruskal Wallis
We also use the non-parametric alternative of ANOVA- Kruskal Wallis test to find out if the
populations have the same distribution.
Hypothesis
Ho: All k populations have the same distribution
H1: Not all k poupulations have the same distribution
Assumptions
(1) The k samples are random and are independently drawn from the respective populations.
(2) The random variables under the study are continuous and the measurement scale used is at
least ordinal.
Populations
As mentioned earlier, there are 32 populations for objective 2 and 8 populations for objective 3.
Level of Significance
The level of significance used in the Kruskal Wallis tests is 5%
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Turkey Pairwise Comparisons
If Ho of the ANOVA test is being rejected, we can only conclude that not all the means are the
same but cannot conclude exactly which means are different. Thus, we have to carry out further
analysis to find out the exact pairwise differences.
Hypothesis
H0 : i - j = 0
H1 : i - j 0
Level of Significance
The level of significance used in the Turkey tests is 5%
Limitations
There are 465 unique pairwise comparisons for objective 2 and 28 unique pairwise comparisons
for objective 3. Thus, we might not be able to comment on each and every significant pairwise
test. We will seek to summarize the results and provide certain general reasons to explain the
differences as well as homogeneity between certain populations.
RESULTS & ANALYSIS
Objective 1: To investigate the determinants of dividend policy.
Summary of Results
TABLE 1: REGRESSION SUMMARYVARIABLES
q histgr mktcap lev fcf asset beta Model Sig?
Expected Direction - - + ? + + -
Full Regression - - + + + YES
By Industry
1 Finance - + + YES
2 Property - - YES
3 Construction - + + YES
4 Utilities + + YES
5 Transportation & Logistics - + + + + YES
6 Telecommunications - YES
7 Agriculture, Forest&
Fishery
- YES
8 Mining + YES
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VARIABLES
tobinq histgrwt mktcap leverag
e
fcf colasset beta Model Sig?
Expected Direction - - + ? + + -
9 Computer & Comp Services - YES
10 Electronics & E Appliance - - + + + + YES11 Food & Beverage - + + + YES
12 Automobile - - + + YES
13 Household Goods + - YES
14 Apparel & Textiles - - + - + + YES
15 Footwear & Leather - YES
16 Wood Products - YES
17 Miscellaneous (Consumer) - + YES
18 Chem, Petroleum & Plastics - - + + + + YES
19 Machinery & Equipment - - + + + + + YES
20 Paper Products - - + - YES
21 Metal Products - - + + + YES22 Mineral Products - YES
23 Building Materials + YES
24 Misc (Industrial) - - YES
25 Entertainment & Recre - + + + YES
26 Healthcare Services + - - - YES
27 Pharmaceuticals - + YES
28 Hotel & Travel Serv - + NO
29 Printing & Publishing - - YES
30 Retail - - + + YES
31 Misc (Services) - + + + YES
32 Conglomerate + - + YES
By Country
1 Taiwan - - + + YES
2 Korea - - + + + YES
3 Thailand - + YES
4 Malaysia - - - + YES
5 Hong Kong - - YES
6 Singapore - - + + YES
7 Indonesia + + + YES
8 Japan - - + + + + YES
ScaleCell Entry
+/- Significant at 5% (1-tail except for
Leverage)
+ Positive Standardized
Coefficient
- Negative Standardized
Coefficient
Insignificant
+/- Different from
Expectation
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All the regression models are significant except for Hotel & Travel Services. Table 1
provides a summary of the direction of relationship between dividend payout and the
various independent variables. Only significant results are shown in the table. In the
following sections, we will elaborate on the results of each of these variables.
Expected Growth
TABLE 2: REGRESSION COEFFICIENTS OF TOBINS Q
Regression Standardized Coefficient p-value
Expected Direction (-)
Property
Agriculture, Forestry & Fishery-0.054
-0.189
0.099
0.071
Computer & Computer Services -0.279 0.007
Automobile
Electronics & Electrical Appliances
-0.075
-0.201
0.028
0.000Apparel & Textiles
Retail
Electronics & Electrical Appliances
Machinery & EquipmentMetal Products
Paper Products
Miscellaneous (Consumer)
Miscellaneous (Industrial)
Taiwan
Japan
-0.120
-0.213
-0.201
-0.130-0.081
-1.190
-0.260
-.0200
-0.173
-0.076
0.002
0.000
0.000
0.0000.091
0.009
0.008
0.014
0.050
0.000
Opposite Direction (+)
Healthcare Services 0.351 0.050
Conglomerate 0.106 0.009
Indonesia 0.224 0.001
Expected Direction
Table 2 illustrates the regression coefficients for Tobins Q which is the proxy for
expected growth in our study. The results obtained are analogous to our hypothesis that
dividend payout is negatively related to future growth due to investment needs for
sustaining growth and the costly external funding [Rozeff, 1982].
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Property firms that foresee growth will need to devote substantial amount of financial
resources for future property developments in order to meet future increase in demand for
property. Property development entails huge expenses in purchase of land as well as the
actual development of property. Hence, anticipation of future growth necessitates a low
payout ratio for property firms.
Firms in the Agriculture, Forestry & Fishery industry constituent the primary industries
that usually require huge capital outlays for land and equipment and other related
expenses. Thus, such firms will retain more earnings to finance their expenses incurred to
support future growth.
For Computer & Computer Services, Automobile, Apparel & Textile and Retail firms,
future growth corresponds to increased investments in inventory. It is vital that such firms
maintain an adequate level of inventory to meet demands and prevent loss of business
opportunities. Firms in the Computer industry, in particular, will require increased
investment in computer peripherals as well as specialized personnel to provide computer
services, both entailing large expenses. Hence, such firms will adopt a low payout ratio
to ensure that they have adequate liquidity for their financial needs.
For Electronics & Electrical Appliances, Machinery & Equipment and Metal Product
firms, a high growth rate is typically matched by high investment in long-term assets. In
addition, firms producing metal products are vulnerable to the price of metal, which is
their core raw material. Hence, in anticipation of future growth, such firms are likely to
retain more earnings to finance their long-term investments resulting in low payout ratio.
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For firms producing Paper Products, future growth may entail further investments in
long-term assets as well as increase in manpower requirements. In view of the increase in
financial needs, firms in this industry will adopt low payout ratio meet such needs.
Although there may exist fundamental differences in firms categorized under
Miscellaneous (Consumer) and Miscellaneous (Industrial), such firms would typically
need extra financing to invest in long-term assets or to support anticipated increase in
variable costs when they foresee growth. Hence, it may be reasonable to expect such
firms have low payout ratios in anticipation of future growth.
Capital gains are tax-free in Taiwan while dividends distributed from earnings are tax as
ordinary income and 25% withholding tax for local investors and foreign investors
respectively (Lin C.H. & Shui C.Y., 2003). Due to the above tax structure, we can infer
that most investors will prefer capital gains to dividend. Hence, Taiwanese companies
will have more incentive to retain more earnings to finance future growth.
It is commonly believed that the extensive holdings of industrial corporations by financial
institutions constituent a strong preference towards long-term capital appreciation and
less towards current (dividend) income [Michel and Shaked, 1986]. In view of this
preference, Japanese firms will tend to retain much of their earnings for investment rather
than distribute them as dividend.
Opposite Direction
The seemingly perplexing direction of relationship between dividend payout and future
revenue growth for Healthcare Services may be due to the small number of firms
included in sample. There are only 15 such firms out of the total of 3905 firms. Hence,
the results obtained may not be representative of the industry.
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For Conglomerate firms, there may be certain inconsistencies in the results due to
fundamental differences in the firms categorized under this grouping. Hence, such
inconsistencies may be the cause of the deviation of categorys results from the expected
results.
Indonesian firms rank banks to be the most important source of funds, followed closed by
retained earnings [Ang, Fatemi and Tourani-Rad, 1997]. This result may shed some light
on the puzzling relationship between future revenue growth and dividend payout.
Indonesia firms perceive that interest rates on loans are reasonable if not relatively low
and they believe that banks are committed to provide resources to the firm in the event of
insolvency. In addition, these firms may not want to place too much reliance on retained
earnings due to the uncertainty in future earnings. The extent of institutional ownership of
shares may be another possible explanation for the positive relationship between revenue
growth and dividend payout. However, this reason is not conclusion due to the lack of
ownership data of sample firms.
Historical Revenue Growth
TABLE 3: REGRESSION COEFFICIENTS OF 3-YR REVENUE GROWTH
Regression Standardized Coefficient p-value
Expected Direction (-)
Finance
Property
Construction
Transportation & LogisticsElectronics & Electrical Appliance
AutomobileMachinery & Equipment
Paper Products
Printing & Publishing
Telecommunications
Apparel & Textiles
Chemicals, Petroleum & Plastics
-0.126
-0.091
-0.202
-0.102-0.196
-0.270-0.286
-0.138
-0.198
-0.581
-0.083
-0.118
0.000
0.006
0.000
0.0030.000
0.0000.000
0.048
0.061
0.002
0.008
0.000
Metal ProductsMineral Products
-0.201-0.138
0.0000.053
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Healthcare Services
Hotels & Travel Services
Retail
Miscellaneous (Industrial)Conglomerate
Korea
Thailand
Malaysia
Hong Kong
SingaporeJapan
Taiwan
-0.609
-0.174
-0.097
-0.190-0.174
-0.156
-0.081
-0.059
-0.083
-0.149-0.276
-0.184
0.001
0.009
0.004
0.0310.000
0.000
0.020
0.046
0.002
0.0000.000
0.000
Opposite Direction (+)Household Goods -0.030 0.012
Expected Direction
As mentioned, firms establish lower payout when they experienced higher revenue
growth as this entails higher investment expenditures [Rozeff, 1982]. Firms do so to
avoid the more costly external funding. With reference to Table 3, there exists significant
evidence to support the hypothesis that dividend payout is negatively related to historical
growth.
Ability of Finance firms to pay dividend is restricted by laws pertaining to capital and
liquidity requirements to ensure the safety of investors funds. In addition, finance firms
would retain more earnings in historical periods of high growth to meet the increase in
demand for loans. Hence, payout ratio during such periods would be low.
To support past growth, property firms would have devoted substantial amount of funds
in property development activities, such as purchase of land and construction of property.
Due to the high cost of developing property, such firms would adopt low payout in
historical periods of growth.
Historical periods of growth for Construction firms would be translated into increased
financial commitments in raw materials and labour. This would explain their low payout
ratio during these past periods of growth.
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For firms in Transportation & Logistics, Electronics & Electrical Appliances,
Automobiles and Machinery & Equipment, Paper Products and Printing & Publishing,
past growth rates must be matched by substantial investments in long-term assets such as
machinery and equipment. In most instances, increase their manpower was also
necessary. Due to the increase in financing needs for investments and payroll expenses,
coupled with the high cost of external financing, these firms typically has a low payout
ratio when they experienced growth in the past..
Firms involved in Telecommunications would have devoted high non-recurring fixed
costs in the construction and upgrading of infrastructure, as well as investments in new
technology when faced with growth in past periods. Hence, this necessitates a low payout
ratio in these periods.
Firms in the Petroleum, Chemicals & Plastics, Metal Products and Mineral Products
maintain low payout in past periods of growth due to their dependence on raw materials
and their vulnerability to the volatility in the prices of raw materials, which makes up the
bulk of their variable costs. Labour cost would constituent another expense component,
particularly for labour intensive firms. Hence, these factors contribute to the low payout
by these firms in past periods of growth.
Firms in the Healthcare industry require specialised personnel to cater to the needs of
customers and such payroll expenses contribute the bulk of financial needs. Medical
supplies as well as investment in medical equipment also amount to a hefty sum for such
firms. Hence, a low payout ratio was observed in historical high growth periods in order
to finance such huge increase in these expenses.
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Firms in Hotel & Travel Services operate in a service industry that relies heavily on
human capital. For hotel operators, the cost outlay extends beyond payroll expenses to
include maintenance and construction or expansion of accommodation facilities. Hence,
these firms normally have a low payout ratio in periods of growth due to the huge capital
involved to support historical growth,.
For Retail firms as well as Apparels & Textiles, historical growth was matched by
increased investments in inventory. Hence, such firms have adopted a low payout ratio to
in order to finance the increase in inventory level.
Although there may exist fundamental differences in firms categorised under
Miscellaneous (Industrial) and Conglomerate, such firms would typically have devoted
extra financial resources for investment in long-term assets or for support of increased
variable costs in order to sustain historical growth. Hence, such firms have low payout
ratios in periods when they experienced growth.
All countries except Indonesia exhibit a negative relationship between dividend payout
and historical growth. This result is not surprising as there is overwhelming evidence
from Table 4 that indicate that firms that have experienced rapid historical growth
typically have low payout ratio. More than half (19 out of 33 groups) of the industrial
groups, representing about 81% of total sample, exhibit this trend. In addition, more than
65% of the firms in each country fall into the category of firms that exhibit this trend.
TABLE 4: BREAKDOWN OF COMPANIES
Industry/ Country Taiwan Korea Thailand Malaysia Hong
Kong
Singapore Japan Total
Finance 15 81 67 32 20 18 155 423
Property 0 1 27 33 80 21 28 191
Construction 9 39 0 32 4 12 154 258
Transport & Logistics 14 11 9 11 1 10 81 140
Telecommunications 0 2 5 0 1 1 9 18
Elec & Appliance 23 66 14 10 8 8 211 360
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Automobile 4 34 5 6 2 2 113 173
Apparel & Textiles 11 64 27 7 1 1 70 200
Misc (Consumer) 18 70 9 22 7 0 195 337
Machinery & Equip 6 39 4 2 4 0 156 213Paper Products 2 23 3 5 4 1 28 69
Metal Products 11 50 0 24 1 4 135 233
Mineral Products 3 33 0 2 0 0 18 56
Misc (Industrial) 0 0 13 0 6 1 27 47
Healthcare Services 0 1 10 2 1 1 0 15
Hotels & Travel 4 1 11 2 12 14 5 58
Printing & Publishing 0 3 8 4 3 1 14 33
Retail 0 8 7 21 0 4 119 161
Conglomerate 1 2 1 4 129 25 0 162
Total 121
(84%)
528
(83%)
220
(68%)
219
(67%)
307
(88%)
154
(81%)
1518
(83%)
3147(81%)
For Japan, due to preference for long-term capital appreciation as opposed to dividends
[Michel and Shaked, 1986], payout ratio tends to be low. This is particularly true when
Japanese firms need the financial resources to invest in various assets to support their
growth.
This same reasoning applies to Taiwan due to their tax structure as previously mentioned.
Due to the existence of tax on dividend, retained earnings would probably be a favored
choice in sustaining their historical growth, leading to the low payout in periods when
Taiwanese companies experience growth.
Opposite Direction
The inconsistent results yielded by Household Goods may be due to the small number of
firms grouped in that category. As only 20 firms out of a total of 3905 are categorized
under Household Goods, the results may not be representative for the industry.
Firm Size
TABLE 5: REGRESSION COEFFICIENTS OF MARKET CAPITALIZATION
Regression Standardized Coefficient p-value
Expected Direction (+)Utilities 0.173 0.002
Metal Products 0.058 0.038
Finance 0.128 0.000
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Transportation & Logistics 0.091 0.010
Machinery & Equipment 0.058 0.037
Opposite Direction (-)
Singapore -0.161 0.026Pharmaceuticals -0.137 0.051
Printing & Publishing -0.182 0.048
Chemicals, Petroleum & Plastics -0.085 0.000
Food & Beverage -0.084 0.003
Wood Products -0.310 0.044
Malaysia -0.117 0.000
Korea -0.052 0.010
Household Goods -0.635 0.003
Entertainment & Recreation -0.165 0.051Healthcare Services -0.443 0.056
Miscellaneous (Services) -0.175 0.009
Expected Direction
With reference to Table 5, firm size is positively related to dividend payout for five
industries namely Finance, Machinery & Equipment, Metal Products, Utilities and
Transportation & Logistics. As the size of a firm increases, information asymmetry may
increase due to increased complexity of the firm and increased dispersion of ownership.
[Kenneth, 1996] As such, shareholders are not able to monitor the large firms closely and
this results in weak control of the management. High dividend payout leads to the
increased need of external financing which in turn leads to increased monitoring of these
firms by both existing and potential creditors. [Mozes and Rapaccioli, 1995] Thus,
dividend payout acts as an indirect monitoring tool. [La Porta et al., 1998]
In addition, further expansions for existing large firms will be increasingly difficult. For
utilities firms in general, there is a limit to the consumer demand. Thus, when utilities
firms increase to a certain extent, the market becomes saturated and further expansion is
close to impossible. The same reasoning applies for metal products, which is basically a
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primary product.1The market demand for such metal products has been shrinking over
the years due to the increased usage of synthetic substitutes so the need for further
expansion is minimal.
Furthermore, there is also a reduced need for such firms to intensify their investments to
reinforce their market visibility. In fact, a further increase in size may be detrimental if
increased size leads to higher tax brackets or increased scrutiny by investors, legal
authorities and competitors. Finance firms, in particular, are governed by laws pertaining
to capital and liquidity requirements to ensure the safety of investors funds e.g. deposits,
insurance premiums, investment funds] in these firms.
Thus, large firms will choose to distribute a larger proportion of their earnings to
shareholders through dividends rather than pumping more financial resources into
expansion plans. The same reasoning holds for the Machinery & Equipment and
Transportation & Logistics industries that exhibit positive relationship between dividend
payout and firm size.
1Plastics served as substitutes for wood, glass and metal during the hardship times of World Wars I & II.
After World War II, newer plastics, such as polyurethane, polyester, silicones, polypropylene,
polycarbonate and polymethyl methacrylate joined polystyrene and PVC in widespread applications. By the
1960s, plastics were within everyone's reach due to their inexpensive cost. Plastics had thus come to be
considered 'common' - a symbol of the consumer society.
http://www.plasticsresource.com/disposal/life_cycle_feature/step1.html
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Opposite Direction
Dividend payout and firm size are negatively related for 3 countries namely Korea,
Malaysia and Singapore and 9 industries namely Food & Beverage, Household Goods,
Wood Products, Chemicals Petroleum & Plastics, Entertainment & Recreation,
Healthcare Services, Pharmaceuticals, Printing & Publishing and Miscellaneous
(Services).
In Singapore, many of the larger firms are actually government-linked companies. There
are already disclosure regulations in place to prevent misuse of funds so the problem of
information asymmetry in these larger firms is in fact a smaller problem. As a result, the
dividend payout ratio may be smaller for these large firms.
Pharmaceutical firms focus on research and development and are by nature large. A
natural line of argument following this is that larger pharmaceutical firms are more
reputable and thus have a larger customer base, which includes medical centers,
universities and research centers. This may lead to more R&D projects, which generally
require large amount of financial resources. Thus, dividend payout will be lower for
larger pharmaceutical firms.
The Printing & Publishing and Chemicals, Petroleum & Plastics industries require high
start-up costs due to the large amount of fixed costs required in developing such printing
press and chemical plants. As a result, the large firms dominate and may be involved in
greater scale production, and thus distribute less cash dividends as compared to their
smaller counterparts.
The Food & Beverage industry provide products, which are basic necessities to
consumers. In our study, Food & Beverage is ranked 6 th for comprising the largest
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number of firms. This industry constitutes numerous small firms. The larger firms might
be the stronger firms, which seek further expansion and thus leads to lower dividend
payout. The mean market capitalization for Food & Beverage is USD757 million whereas
the mean market capitalization for all firms included in our sample is USD1.36 billion.
Information asymmetry may not be a deciding factor in this industry as the average size
of these firms is rather small.
Similarly for the Wood Products industry, the mean market capitalization is only
USD329 million, which is a mere fraction of the mean market capitalization of all firms.
Thus, information asymmetry of larger firms might not be a big problem as the size of all
the firms are actually rather small when discussed in absolute terms. The same reasoning
applies for Malaysia and South Korea. The mean market capitalization is only USD474
million for Malaysia and USD178 million for Koreain our sample.
The seemingly perplexing direction of relationship between dividend payout and firm
size for Household Goods, Entertainment & Recreation and Healthcare Services may be
due to the small number of firms included in this particular regression. In our sample only
32 firms are categorized under Entertainment & Recreation, 21 firms under Household
Goods and 16 firms under Healthcare Services.
Lastly, for Miscellaneous (Services), there may be certain inconsistencies in the results
due to fundamental differences in the firms categorized under this industry grouping.
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Leverage
TABLE 6: REGRESSION COEFFICIENTS OF DEBT TO ASSETS RATIO
Regression Standardized Coefficient p-value
Negative Direction (-)Footwear & Leather -0.344 0.008
Malaysia -0.151 0.000
Positive Direction (+)Construction 0.273 0.000
Transportation & Logistics 0.274 0.000
Mining 0.320 0.017
Electronics & Electrical Appliance 0.132 0.000Food & Beverage 0.182 0.000
Automobile 0.211 0.000
Apparel & Textiles 0.181 0.000Miscellaneous (Consumer) 0.215 0.017
Chemicals, Petroleum & Plastics 0.148 0.000
Machinery & Equipment 0.113 0.000
Paper Products 0.143 0.016
Metal Products 0.092 0.003
Entertainment & Recreation 0.217 0.019
Retail 0.163 0.000
Miscellaneous (Services) 0.164 0.016
Korea 0.173 0.000
Japan 0.223 0.000
Negative Direction
It was found that firms trade off dividend payments with fixed financial charges. A
highly leveraged firm with a high level of fixed financial charges would lower its payout
ratio. Jensen (1992)
Dividend payments are then substitutes for these charges. A firm with higher fixed
charges depends more greatly on costly external financing, hence other things being
equal, this firm will choose to pay lower dividends. Rozeff (1982)
However, with reference to Table 6, only the industry of Footwear & Leather and
Malaysia yield this negative relationship.
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Positive Direction
Our results support the positive relationship between dividend payout and leverage.
About half of the industries (47%) yielded this positive relationship. Increased
indebtedness or leverage leads to increased contacts with external financiers, which
results in closer monitoring and an increased dividend payout. Greater external
monitoring pressures managers away from the consumption of perquisites and to use
corporate assets more efficiently. In this way, more cash is disgorged, and dividends
increase with indebtedness. Robert (1999)
The industries whose leverage is positively related to dividend payout are Construction,
Transportation & Logistics, Mining, Electronics & Electrical Appliance, Food &
Beverage, Automobile, Apparel & Textiles, Miscellaneous (consumer), Chemicals,
Petroleum & Plastics, Machinery & Equipment, Paper Products, Metal products,
Entertainment & Recreation, Retail, Miscellaneous (Services). The countries whose
leverage is positive related to dividend payout are Korea and Japan.
Cash Flow Adequacy
TABLE 7:
REGRESSION COEFFICIENTS OF FREE CASH FLOW TO ASSETS RATIO
Regression Standardized Coefficient p-value
Expected Direction (+)Machinery & Equipment 0.072 0.009
Entertainment & Recreation 0.343 0.000
Miscellaneous (Services) 0.110 0.064
Japan 0.051 0.000Singapore 0.068 0.074
Taiwan 0.105 0.035
Chemicals, Petroleum & Plastics 0.051 0.016
Electronics & Electrical Appliance 0.077 0.000
Building Materials 0.138 0.001
Utilities 0.140 0.039
Opposite Direction (-)Apparel & Textiles -0.058 0.056
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Expected Direction
Cash flow adequacy is vital in deciding the dividend payout as a firm will not distribute
cash dividends without the means to do so. [Brigham and Daves, 2002] With reference to
Table 7, our study further affirms this logic.
Firms involved in Machinery and Equipment usually require high non-recurring fixed
costs in the acquirement of the assets but low daily cash requirements. If these firms have
no intention of acquiring new fixed assets in the near future, they may be left with large
amount of idle cash, which generally yield low returns. Firms can reduce their cash
balances by distributing cash dividends. This will lower the occurrence of the
management using idle cash in non value-adding investments, thus reducing agency
costs. [Mollah, Keasy and Short, 2000]
For the Entertainment & Recreation and Miscellaneous (Services) industries, the daily
cash exchanges are high, as most of these services are cash settled at the point of
purchase. Thus, there will be idle cash balances if these firms have more cash inflows
than outflows. Following the argument for Machinery and Equipment, these firms will
then choose to distribute cash dividends if they have no specific use for these cash to
prevent misuse of funds.
The same logic follows for the rest of the countries and industries that exhibit a positive
relationship between dividend payout and cash flow adequacy. There may not be a need
to pinpoint any special reason specific to the country or industry to explain this typical
relationship between dividend payout and cash flow adequacy, which adheres to past
literature.
Opposite Direction
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Firms in the Apparel & Textiles industry requires large variable expenses, which includes
wages, costs of materials etc to meet with their daily production. When the need arises,
these firms may need to temporarily increase working scale and time to meet with the
demand of customers especially during peak. Thus this is an industry which requires a lot
of flexibility. In light of this, the free cash flow to asset ratio may mean the firms are
intentionally pursuing such a high cash flow policy to maintain flexibility and meet with
customer demands. In order to maintain a high level of free cash, the firms distribute
fewer cash dividends. In the case of a positive relationship, our argument is based on the
assumption that there is no specific use for the free cash on hand which then increases the
likelihood of misuse of funds. However for the case of the Apparel & Textiles, a possible
conjecture is that there is a need for high free cash on hand and thus low dividend payout
is reasonable for firms with high cash flow adequacy.
Collateralizable Assets
TABLE 8: REGRESSION COEFFICIENTS OF
NET FIXED ASSETS TO ASSETS RATIO
Regression Standardized Coefficient p-value
Expected Direction (+)Transportation & Logistics 0.168 0.000
Electronics & Electrical
Appliance
0.045 0.058
Food & Beverage 0.081 0.003Apparel & Textiles 0.135 0.000
Chemicals, Petroleum &
Plastics
0.057 0.015
Machinery & Equipment 0.052 0.067
Entertainment & Recreation 0.274 0.002
Hotel & Travel Services 0.143 0.047
Retail 0.083 0.013
Miscellaneous (Services) 0.120 0.052
Conglomerate 0.086 0.030
Taiwan 0.169 0.006
Korea 0.078 0.000
Thailand 0.077 0.046
Malaysia 0.167 0.000Singapore 0.091 0.055
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Indonesia 0.126 0.077
Japan 0.075 0.000
Opposite Direction (-)
Paper Products -0.098 0.095
Expected Direction
The above results support the positive relationship between dividend payout and
collateralizable assets. If a firm holds more collateralizable assets, they have fewer
agency problems between their bondholders and stockholders because these assets may
serve as collateral against borrowing and consequently pay more dividends. Mollah,
Kevin and Helen (2000)
Fixed assets are long-term tangible assets held for business use and not expected to be
converted to cash in the current or upcoming fiscal year, such as manufacturing
equipment, real estate and furniture.
With reference to Table 8, the industries whose dividend payout are positively related to
collateralizable assets are Transportation & logistics, Electronics & Electrical Appliance,
Food & Beverage, Apparel & Textiles, Chemicals, Petroleum & Plastics, and Machinery
& Equipment. The above industries largely belong to the manufacturing sector. Their
fixed assets are mostly in manufacturing equipment.
The other industries which yield significantly positive relationship between
collateralizable assets and dividend payout are Entertainment & Recreation, Hotel &
Travel Services, Retail, Miscellaneous (Services). This category of industries has a high
level of fixed assets in real estate Hotel properties, amusement parks, retail stores,
servicing centers.
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As for the last industry conglomerate, which comprises of holding companies and
companies which deal with many businesses, would generally have a much higher level
of fixed assets due to their nature of multi-business.
Seven out of the eight countries except Hong Kong, under our study show similar
significantly positive relationship with collateralizable assets and dividend payout.
Opposite Direction
Only one industry shows a negative relationship between dividend payout and
collateralizable assets which is the Paper Industry.
Systematic Risk
TABLE 9: REGRESSION COEFFICIENTS OF BETA
Regression Standardized Coefficient p-value
Expected Direction (-)Healthcare Services -0.569 0.003
Hong Kong -0.068 0.020
Opposite Direction (+)Finance 0.057 0.006
Construction 0.128 0.000Transportation & Logistics 0.122 0.000
Electronics & Electrical
Appliance
0.070 0.001
Food & Beverage 0.055 0.048
Automobile 0.153 0.000
Apparel & Textiles 0.093 0.005
Chemicals, Petroleum &
Plastics
0.142 0.000
Machinery & Equipment 0.129 0.000
Metal Products 0.191 0.000
Pharmaceuticals 0.122 0.040
Korea 0.034 0.063Indonesia 0.108 0.052
Japan 0.096 0.000
Expected Direction
Higher betas are a reflection of the presence of high operating and financial leverage. A
firm with higher operating and financial leverage would have higher transaction costs.
They pay lower dividends to avoid the costs of external finance. Rozeff (1982) With
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reference to Table 9, only Healthcare services and Hong Kong yielded this negative
relationship.
Opposite Direction
Our results support the positive relationship between dividend payout and beta, which is
contrary to past literature results. It might be due to increased external monitoring, an
increase in dividends, and a reduction in agency problems.
With reference to Table 8, the industries whose beta is positively related to dividend
payout are Finance, Construction, Transportation & Logistics, Electronics & Electrical
Appliance, Food & Beverage, Automobile, Apparel & Textiles, Chemicals, Petroleum &
Plastics, Machinery & Equipment, Metal Products, and Pharmaceuticals. The countries
whose beta is positive related to dividend payout are Korea, Indonesia and Japan.
Objective 2: To investigate if there are industry-specific differences in
dividend payout.
Summary of Results
TABLE 10: ANOVA OUTPUT FOR INTER-INDUSTRY DIFFERENCES
With reference to Table 10, statistically significant differences in dividend payout are
observed between the thirty-two industries, analogous to previous studies done on inter-
ANOVA
DIVPAY
29.527 31 .952 17.299 .000
1118.676 20317 .0551148.203 20348
Between Groups
Within GroupsTotal
Sum of
Squares df Mean Square F Sig.
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industry differences2. Five industries have shown radical differences in dividend payout,
namely Utilities, Transport & Logistics, Telecommunications, Pharmaceuticals and Hotel
and Travel Services, of which three are regulated industries. In contrast, some industries
show little inter-industry difference in dividend payout. These comprise of the ten
industries that have five or less significant results. The Finance industry, contrary to our
expectations, shows only moderate inter-industry difference in dividend payout
considering the vast difference that exists between the financial and the other sectors.
With reference to the means and medians of the dividend payout of various industries,
utilities yield the highest payout of 54%. This observation yields little surprise as
previous studies3
have recognized this phenomenon and have derived various reasons to
explain it.
2 Michel (1979) finds statistically significant differences in dividend payout ratio among 13 different
industries during the late 1960s to mid-1970s. Baker (1988) updates the Michel study using data from 1977
to 1981, and finds support for industry effects on payout ratio.
3Under the Smith hypothesis [Smith, 1986], utilities possess larger payout than unregulated firms. In 1992,
Moyer, Rao & Tripathy (1992) test the Smith hypothesis and explore the reasons for the high observeddividend payout. They suggest that such high payout is due to the fact that utility companies use dividend
policy as a mechanism for controlling or responding to regulatory risk.
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Industry Mean of
dividend
Median of
dividend
No. of significant
resultsFinance 0.391806 0.337823 11
Property 0.402232 0.354947 7
Construction 0.36983 0.312274 12
Utilities 0.536339 0.564625 26
Transport & Logistics 0.482685 0.446071 18
Telecommunications 0.271076 0.227884 25Agriculture, Forestry & Fishery 0.486396 0.484776 14
Mining 0.415857 0.359001 3
Computer & Computer Services 0.356678 0.298968 7
Electronics & Electrical Supplies 0.387022 0.335267 11
Food & Beverage 0.427265 0.387466 9
Automobile 0.426454 0.389807 9
Household Goods 0.411156 0.369632 2
Apparels & Textile 0.394848 0.351105 9
Footwear & Leather Products 0.44968 0.395319 2
Wood Products 0.382669 0.283947 5
Miscellaneous (Consumer) 0.416936 0.374379 4
Chemicals, Petroleum & Plastics 0.435113 0.386351 12
Machinery & Equipment 0.397202 0.345498 9
Paper Products 0.424869 0.382442 4
Metal Products 0.386466 0.335799 11
Mineral Products 0.405554 0.384349 6
Building Materials 0.465742 0.442404 13
Miscellaneous (Industrial) 0.427362 0.408209 3
Entertainment & Recreation 0.422899 0.361752 3
Healthcare Services 0.479747 0.499024 2
Pharmaceuticals 0.280738 0.237071 29
Hotel & Travel Services 0.506741 0.477972 20
Printing & Publishing 0.375193 0.345831 6
Retail 0.415177 0.353149 8
Miscellaneous (Services) 0.418192 0.356548 5
Conglomerate 0.441585 0.417368 10
With reference to Table 11, Telecommunication and Pharmaceutical industry yields the
lowest dividend payout of 27% and 28% respectively.
TABLE 11:
SUMMARY OF DIVIDEND PAYOUT FOR DIFFERENT INDUSTRIES
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Reasons for Vast Differences
There are certain pairs of industries, which show huge difference in their dividend
payout, and we seek to provide probable reasons for this phenomenon.
Extent of Regulation
One of the reasons proposed to explain the reasons for the radical differences in payout
policy among the various industries is the extent of regulation on the industries. A
number of studies have been conducted on dividend policies of regulated versus
unregulated firms4 and there seem to be a consensus that difference does exist between
their dividend policies. Past literature suggests that a different set of factors determine
dividend policy for regulated firms than that for unregulated firms. This is probably the
reason why the dividend payout for the three regulated industries is so radically different
from the regulated firms.
The mean dividend payout for regulated firms is significantly larger than that for
unregulated firms [Saxena, 1999], which is consistent from the results obtained where
utilities and transport & logistics yield a high payout ratio of 54% and 46% respectively.
Telecommunications, on the other hand, yield a low payout ratio of 27%.
The specific reasons for such low payout will require further research but we feel that it
may be due to the unique nature of the industry or is a result of regulations.
Investment Opportunities
4 Collins, Saxena and Wansley (1996) recognizes the potential differences in dividend policy between
regulated and unregulated firms and focus on agency-cost and monitoring explanations for the relevance of
dividend. Atul (1999) proceed further to explain the possible differences in the dividend policy of both
regulated and unregulated firms.
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Another possible reason for the difference in payout ratio between industries may be the
investment opportunities available for each industry. Michel (1979, p. 24) suggests that
investment opportunities within industries may account partially for the industry effect.
Firms or industries that have good investment opportunities typically have lower
dividend payout ratio. This phenomenon can be explained by the pecking order which
firms exhibit greater preference for retained earnings rather than external source of funds.
However, regulated firms have their growth prospects determined by regulators, who
directly or indirectly, dictate how much dividend the firm can pay [Saxena, 1998]. Since
regulated firms do not base their dividend payout in relation to their growth opportunities,
it is no surprise that their payout ratio is exceptionally different from unregulated firms.
The pharmaceutical industry is characterized by their heavy investments in R&D, which
differentiates it from other industries. Vast investment opportunities that exist in this
industry probably led to low dividend payout.
Cyclical Nature of Industry
The cyclical movements of investment opportunities and earnings also affect the dividend
policy of firms. [Dempsey, Laber and Rozeff, 1993] Firms in the Hotel & Travel Services
industry operate in a cyclical environment, which involves peaks and off-peak periods in
their demand. Hence, this probably explains the reason behind the industrys vast
difference in dividend payout.
Reasons for Homogeneity
On the other hand, certain industries maintain typical payout ratios which are not
significantly different from other industries when pairwise comparisons are made.
Number of Firms in Category
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Certain industries that exhibit minimal inter-industry differences in dividend payout may
be due to the fact that the firms included in these industries are relatively small and may
not be representative of the industry. Five out of the ten such industries comprises of less
than 30 firms in each category, with Healthcare and Mining firms not even exceeding
twenty. Thus, the mean dividend payout of the industry is likely to be of a typical range,
not too different from the rest of the industries.
Fundamental Differences of firms within industries
For the three miscellaneous categories, namely for consumer, industrial and services, the
minimal inter-industry differences in their dividend payout with respect to other
industries may be due to the fundamental differences in firms classified under such
categories. Since firms of the firms categorized under these categories might have a
mixture of characteristics of other industries, there is unlikely to be huge inter-industry
differences.
Individual firms in the Paper Products and Wood Products industry may be very different
with regards to their range of products and/or the type of customers they serve. Thus, the
mean dividend payout of the industry will not be too extreme after the averaging of the
dividend payout of all the firms in that industry. The pairwise comparisons of such
countries with the rest of the industries will naturally show insignificant results.
Conclusions
In conclusion, our results show that differences in dividend payout among industries do
exist. However, it is not possible to go into details to account for the differences among
each and every industry. We have identified those industries either exhibit vast
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differences or minimum differences and did a closer examination to propose some
reasons resulting in the two extremes.
The main reasons we proposed that cause the vast differences are the extent of
regulations, investment opportunities and the cyclical nature of industry. As for the
industries that show little difference in dividend payout, the reason may be that the firms
included these industries are relatively small in number or have fundamental differences
among them.
Objective 3: To investigate if there are country-specific differences in
dividend payout.
Summary of Results
Significant inter-country differences in dividend payout are found between the countries
at 5% level of significance. Table 12 summarizes the mean difference of the dividend
payout between the various countries.
TABLE 12: SUMMARY OF MEAN DIFFERNCE BETWEEN COUNTRIES
Significance of Mean Difference
Taiwan Korea Thailand Malaysia Hong Kong Singapore Indonesia Japan
Taiwan 0.000 0.043 0.001 0.613 0.097 0.000 0.132
Korea 0.000 0.000 0.000 0.000 0.000 1.000 0.000
Thailand 0.043 0.000 0.000 0.000 0.000 0.000 0.000
Malaysia 0.001 0.000 0.000 0.024 0.925 0.000 0.036
Hong Kong 0.613 0.000 0.000 0.024 0.777 0.000 0.945
Singapore 0.097 0.000 0.000 0.925 0.777 0.000 0.974
Indonesia 0.000 1.000 0.000 0.000 0.000 0.000 0.000
Japan 0.132 0.000 0.000 0.036 0.945 0.974 0.000
With reference to Table 13, Thailand displayed interesting results, having the highest
mean dividend payout ratios among all the countries in our study. Also, its dividend
payout ratio is significantly different from all the other countries at 5% level of
significance.
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TABLE 13: SUMMARY OF DIVIDEND PAYOUT OF DIFFERENT COUNTRIES
Country Mean of dividend payout Median of dividend payout
Indonesia 0.312 0.269
Korea 0.313 0.266
Malaysia 0.406 0.357
Singapore 0.420 0.378
Japan 0.429 0.374
Hong Kong 0.436 0.407
Taiwan 0.460 0.423
Thailand 0.503 0.497
Indonesia and South Korea exhibit homogeneity in their dividend payout ratios. The two
countries have the lowest mean dividend payout ratios. Also, their dividend payout ratios
are significantly different from all other countries except between themselves.
Tax Structures
In order to explain the differences in dividend payout of these different countries, it is
essential to look at the tax structures of these 8 countries. [Table 14]
TABLE 14:
SUMMARY OF APPROXIMATE TAX RATES OF DIFFERENT COUNTRIES
Tax RatesCountry Capital Gains Tax Dividend Taxes
Taiwan Ordinary Income(
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In South Korea, capital gains are tax-free. Dividends are taxed at a flat rate of 21.5%.
Thus, investors in South Korea will definitely favour capital gains over dividends. [Table
15]
In Indonesia, deemed gains on sale of shares traded on Indonesian Stock Exchange are
subject to 0.1% of the transaction value. On the other hand, dividends are not taxed.
Although this might suggest a higher dividend payout, the difference in tax rates between
dividends and capital gains is rather insignificant. Moreover, capital gains are taxed only
when the shares are sold. Thus, with a long-term horizon, capital gains might still be
preferred over dividends, which constitute current income. Investors will need to re-
invest their dividend income and might even incur more transaction costs than it would
be if the dividends are not distributed and used to generate long-term capital gains which
will only be taxed at the end of the investment horizon.
TABLE 15: RELATIVE ADVANTAGE OF CAPITAL GAINS OVER DIVIDENDS
Tax Korea Indonesia
Dividend (Max) 21.5% 0%
Capital Gains (Min) 0% 0.1%
Advantage 21.5% -0.1%
Dividend (Min) 21.5% 0%
Capital Gains (Max) 0% 0.1%
Advantage 21.5% -0.1%
In Thailand, there is no tax imposed on dividends. With the exception of Hong Kong and
Indonesia, the tax-free dividends are very much favourable as compared to all the other
countries. Thus, higher dividend payout observed in Indonesia is justifiable.
Hong Kongs mean dividend payout is significantly different from that of Malaysia.
Hong Kong is a tax haven with no taxes on both dividends and capital gains. Whereas in
Malaysia, capital gains are not taxed but dividends are taxed as normal income. Thus,
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higher dividend payout observed in Hong Kong is a logical outcome with comparison of
the various tax rates on relative grounds.
TABLE 16: APPROXIMATE MAXIMUM TAX RATES
Country TH HK ID KS TW SG MY JP
Dividend Taxes [max] 0% 0% 0% 21.5% 25% 26% 28% 35%
Subscribing to the same reasoning, the significant difference in dividend payout between
companies in Taiwan and Malaysia is due to the different tax rates on dividends. In
Malaysia, the maximum tax rate on dividends is 28% whereas in Taiwan, a flat rate of
25% at the corporate level is imposed. [Table 16]
Block Holdings
Another probable reason behind the difference in dividend payout ratio might be due to
the difference in ownership structure in these various countries. As such information is
considered proprietary, they may not be readily available especially when there is no
regulation for the companies to disclose such information. We have thus chosen to take a
closer look at the available information summarized by the various sources.
TABLE 17: CONTROL OF PUBLICLY LISTED COMPANIES IN 1996
Percentage of Control
Countries No. of
sample
companies
Family Widely
Held
The State Widely Held
Financial
Institutions
Widely Held Non-
Financial
Corporations
Indonesia 178 67.3 6.6 15.2 2.5 8.4
Korea 345 24.6 51.1 19.9 0.2 4.3
Malaysia 238 42.6 16.2 34.8 1.1 5.3Thailand 167 51.9 8.2 24.1 6.3 9.5Weighted by market capitalization
As shown in Table 17, many of +the public listed companies in East Asia are family-
held. It is especially so in Indonesia with 67.3% held by family and only 6.6% widely
held. Since shareholders are made up of family members, they are most likely to be the
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management of the companies as well. Assuming there is no expropriation and moral
hazard, it can be argued that there will be little agency problem. These companies will
have a lower dividend payout, which constitutes current income and focus more on long-
term growth, which comes in the form of capital gains. Thus, the low dividend payout in
Indonesia might be due to the high concentration of family owned corporations.
TABLE 18: OWNERSHIP CONCENTRATION
Concentration Ratio(Percent)
Country Largest
Shareholder
Top Five
Shareholders
As of End of the
Year
Company Coverage
Indonesia 48.2 67.5 1997 All PLCs
Korea 20.4 38.5 1998 81 non-financial PLCs
Malaysia 30.3 58.8 1998 All PLCsThailand 28.5 56.6 1997 All PLCsConcentration ratio is defined as the percentage of total outstanding shares of an average PLC owned by
the largest or top five shareholders. The percentages are not weighted by market capitalization
Also, the ownership is highly concentrated with top shareholders owning a large
proportion of the companies. Thus, this further illuminates the high decision power of the
family who holds ownership of these companies. [Table 18]
In the case of Singapore, the mean dividend payout is not significantly different from
other countries with the exception of Indonesia, South Korea and Thailand mentioned
earlier. Many of the large companies are actually government-linked companies. Thus,
there are reasonable monitoring tools and legislation governing such companies. With
this in mind, the dividend payout ratio may assume a more typical range and will not be
as low as that of Indonesia or as high as that of Thailand as the reasons supporting the
extreme dividend payout ratios may not be that relevant in the Singapore context.
Socio-Cultural & Political Influence
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We must bear in mind that socio-cultural has a great deal of influence on the way the
corporations are structured. In the East Asian context, political and cultural influences are
important factors that may explain the differences in dividend payout.
In Japan, there is a unique system whereby firms and banks- kereitsus have close banking
relationships. In contrast there is no such practice in Malaysia. Thus, additional financing
might be easier for companies in Japan as compared to Malaysia due to the established
banking relationships in Japan. As a result, firms in Japan are able to distribute higher
cash dividends, as there is greater ease of obtaining funds when the need arises.
Another interesting observation is that the 3 countries with extreme dividend payout
namely Thailand, Indonesia and South Korea are the worst hit countries during the Asian
financial crisis. These countries have considerable less conservative lending practices e.g.
directed loans. In the case of Thailand, due to the relaxed lending practices, the
companies might have less consideration about their ability to maintain the high dividend
payout since they will be able to get loans easily. As for Indonesia and Thailand, it will
be illogical to use the same line of reasoning since they have the lowest dividend payout.
A possible explanation might be due to the overall lack of monitoring of these
companies. Thus, the shareholders do not actually demand a higher dividend payout to
exert indirect monitoring by creditors as the indirect monitoring mechanism simply does
not work.
Thus, we conclude that there are indeed differences in the general dividend
payout adopted by firms in different countries. It is impossible to explore the differences
that lie between each and every country by the sheer number of possibilities but we seek
to summarize our findings and provide some probable explanations that generally explain
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these differences. The 3 main reasons we propose are tax structure, ownership structure
and lastly socio-cultural & political
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CONCLUSION
Summary of Findings
This study examined the relationship between dividend payout and several
variables including expected growth, historical revenue growth, firm size, indebtedness,
cash flow adequacy, collateralizable assets and market risk. Our uniqueness lies in the
East Asian context of our study. Past studies have rarely investigated dividend policy
with regards to the East Asian context and do not usually extend their sample to eight
countries as we have done in our study.
The results show that there are significant relationships between dividend payout
and the tested variables. However, the degree of significance for different variables varies
among countries and industries. Interestingly, the proxy for market risk- beta has a
positive relationship with dividend payout contrary to that found in previous studies. One
probable reason cited is that investors will demand more monitoring on firms with high
firm risk. However, it might be inequitable for each individual investors to monitor the
firm risk on their own especially if they do not own large stakes in the risky firms. Thus,
indirect monitoring tools such as a high dividend payout may prove to be useful in
serving this purpose.
Other tested variables such as firm size and cash flow adequacy showed
inconsistency in their directions of relationship with dividend payout for different
countries and industries. This seemingly puzzling observation can be explained by the
unique characteristics of these countries and industries. With respect to past literature,
indebtedness proves to have different directions of relationship with dividend payout in
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different studies. Our study has shown that indebtedness is positively related to the
dividend payout.
Our inter-industry study of dividend payout showed that there are significant
differences in the dividend payout of different industries. Inter-industry differences are
due to the different operating nature as well as degree of government surveillance of
these firms. Dividend policy has been viewed as an indirect monitoring tool and its
usefulness in serving this purpose has to be weighted against the fundamental nature of
these industries. Certain monitoring systems may be in place for certain industries. Also,
certain industries may have other more important objectives in mind, thus choose a
certain suitable level of dividend payout.
Similar tests carried out for inter-country differences also showed significant
results. Such differences are attributed to the different tax rates, institutional structures
and socio-cultural and political influences. Among the countries in our study, Indonesia
and South Korea displayed the lowest dividend payout whereas Thailand showed the
highest dividend payout. Interestingly, we have made a side remark that these three
countries with extreme dividend payout are the worst hit countries during the Asian
Financial Crisis.
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