Impact of Dividend Policy on Firm’s Performance: Evidence from Pakistan

Abstract

By getting ownership, shareholders are entitled to share the profits of the company in the form of dividends which becomes dividend income for them. In case of dividend announcements, preferred stockholders are always paid dividends even if the company goes in loss while common stock holders might face the effect of a high retention ratio. To payout dividends, companies adopt dividend policies, that protect shareholder’s interests and fiscal benefits of its employees. First opinion is that the proportion of payout is irrelevant as the financial verdicts taken by the outsiders are not prejudiced by the payout yields while those in favor rate the dividend policy as an effective indicator to the outside world as it enhances the investor’s trust with a view of providing a safe investment platform. Companies adopt different dividend policies which include Constant dividend payout, Compromise policy, Stable dividend per share and Residual policy. Dividend distribution is one of the four fiscal management decisions, three of which are Investment, Financing and Working Capital Management decisions. Dividend payout decisions depends upon firm’s profits, that’s why it can be rationally assumed that profitability acts as a propellant variable in the dividend payout decisions of the firms. The fact that dividends are less uncertain than capital gains, firms must have a dividend payout ratio and dividend yield to keep the stock price at peak. This study intends to check the Impact of Dividend policy in context of Pakistan. Dividend policy is the independent variable that is measured through Payout Ratio, Dividend Yield, Retention Ratio, Dividend Cover, Dividend Growth and Dividend per Share. Firm’s performance is dependent variable that is measured through Return on Assets and Return on Equity (ROE). This study concludes that Dividend policy has a significant impact on firm’s performance. Keywords: Dividend Policy, Firm’s Performance, Return on Assets, Return on Equity, Dividend Cover, Dividend Growth, Dividend per Share, Dividend Yield, Retention Ratio, Payout Ratio.