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Earnings Response Coefficient as a determinant of dividend policy: Testing Free Cash Flow Theory on non-financial dividend paying firms in the Pakistan Stock Exchange

Author

Listed:
  • Hamid Ullah
  • Anjum Ihsan

    (Islamia College, Peshawar-Pakistan)

Abstract

This study tests Jensen’s free cash flow theory which states that managers overinvest retained earnings in negative NPV projects. A data set of 238 firms listed on the Pakistan Stock Exchange for the period 1999 to 2016 is used. The results of the panel regression model show a significant positive association of the earnings response coefficient and dividend payout ratio, which supports the free cash flow theory in listed Pakistani firms. Moreover, the imposition of the capital gains tax and the financial crisis has further strengthened the positive relationship between ERC and dividend payout ratio.

Suggested Citation

  • Hamid Ullah & Anjum Ihsan, 2019. "Earnings Response Coefficient as a determinant of dividend policy: Testing Free Cash Flow Theory on non-financial dividend paying firms in the Pakistan Stock Exchange," Business Review, School of Economics and Social Sciences, IBA Karachi, vol. 14(1), pages 53-67, January-J.
    • Handle: RePEc:aho:journl:v:14:y:2019:i:1:p:53-67
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