Impact of Corporate Governance Mechanisms on the Dividend Policy : Evidence from Pakistani Non-Financial Firm

Abstract

Economist and management laureate globally contributed and discussed on the corporate dividend policy, its much sought after and extremely discussed topic of the corporate finance literature ever since (Linter, 1956) put forward the most important question of finance world. He questioned "what are the choices that are made by the managers that effects the shape, size and timing of the firm dividend payments?”. Since then financial expert have been exploring and defining dividend policy. According to Black (1976) "the tougher we look deep inside the dividend picture, the more it will seem like a puzzle with pieces that do not fit together”. Dividend payout is not only one of the most obvious source of cash flow provider to the shareholders, infect it is a vital and effective mechanism to elaborate the financial picture of the firm in the current and the future prospects (Mirza & Afza, 2010).Investment purpose of the investors in any company to yield a good returns on their investments. The investment decision of investors in any individual company is mainly based on the amount of dividend paid by the company. The decision of how much dividends are allocated for the investors or shareholders is taken by the company board of directors and usually paid in the form of cash to the stakeholders. Therefore for the firm's management well suited, tailor made dividend policy for a firm is its prime and vital decision (Khan, 2011). Miller and Modigliani's (1961) radical works suggest that dividends are depreciatory or irreverent during concluding the firm's share value in a perfect market and stated investment policy. Gordon (1963) and Linter's (1962) precocious “Bird in the hand” theory explains the investor's psyche showing that they prefer a certain return on their investments rather than gambling or taking a risk on capital. As mentioned above, dividends are important cash flow providers and not only that but they are also vital instruments to show the financial health and performance of a firm, this is what the “Signaling theory” explains. (Bhattacharya, 1979; Miller rock, 1985; Bali, 2003)