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Investment opportunities, corporate finance, and dividend payout policy: Evidence from emerging markets

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  • Joshua Abor
  • Godfred A. Bokpin
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    Abstract

    Purpose – The purpose of this paper is to investigate the effects of investment opportunities and corporate finance on dividend payout policy. Design/methodology/approach – This issue is tested with a sample of 34 emerging market countries covering a 17-year period, 1990-2006. Fixed effects panel model is employed in our estimation. Findings – A significantly negative relationship between investment opportunity set and dividend payout policy is found. There are, however, insignificant effects of the various measures of corporate finance namely, financial leverage, external financing, and debt maturity on dividend payout policy. Profitability and stock market capitalization are also identified as important in influencing dividend payout policy. Profitable firms are more likely to support high dividend payments to shareholders. However, firms in relatively well-developed markets tend to exhibit low dividend payout policy. Originality/value – The main value of the paper is in respect of the fact that it uses a large dataset from emerging market countries. The results generally support existing literature on investment opportunity set and dividend payout policy.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

    Volume (Year): 27 (2010)
    Issue (Month): 3 (August)
    Pages: 180-194

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    Handle: RePEc:eme:sefpps:v:27:y:2010:i:3:p:180-194

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    Related research

    Keywords: Corporate finances; Dividends; Emerging markets; Investments;

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    References

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    1. Masulis, Ronald W. & Trueman, Brett, 1988. "Corporate Investment and Dividend Decisions under Differential Personal Taxation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(04), pages 369-385, December.
    2. Varouj Aivazian & Laurence Booth & Sean Cleary, 2003. "Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms?," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 26(3), pages 371-387.
    3. Mohammed Amidu & Joshua Abor, 2006. "Determinants of dividend payout ratios in Ghana," Journal of Risk Finance, Emerald Group Publishing, vol. 7(2), pages 136-145, March.
    4. Jorge Farinha, 2003. "Dividend Policy, Corporate Governance and the Managerial Entrenchment Hypothesis: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(9-10), pages 1173-1209.
    5. Healy, Paul M. & Palepu, Krishna G., 1988. "Earnings information conveyed by dividend initiations and omissions," Journal of Financial Economics, Elsevier, vol. 21(2), pages 149-175, September.
    6. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    7. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
    9. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
    10. Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier.
    11. Sanjay Kallapur & Mark A. Trombley, 1999. "The Association Between Investment Opportunity Set Proxies and Realized Growth," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(3-4), pages 505-519.
    12. Anderson, G J, 1983. "The Internal Financing Decisions of the Industrial and Commercial Sector: A Reappraisal of the Lintner Model of Dividend Disbursements," Economica, London School of Economics and Political Science, vol. 50(199), pages 235-48, August.
    13. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-88, June.
    14. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
    15. Gul, Ferdinand A & Kealey, Burch T, 1999. " Chaebol, Investment Opportunity Set and Corporate Debt and Dividend Policies of Korean Companies," Review of Quantitative Finance and Accounting, Springer, vol. 13(4), pages 401-16, December.
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