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Monetary policy restriction and dividend behavior of Pakistani firms: an empirical analysis

  • Mohsin, Hasan M
  • Ashraf, Muhammad Shahzad

Studies upon impact of macro variables on firm’s dividend policy are very limited and specifically rare in Pakistan perspective. Main purpose of this research paper is to observe impact of restricted monetary policy on dividend behavior of Pakistani firms. During restricted monetary policy, cost of external funds increases and firms prefer to utilize internal funds leading to reduction in dividend payout. Behaviour of 100 listed firms, selected purposefully, has been observed for the period from 2001 to 2009 by using Lintner’ modified model.. During the research period of nine years, monetary policy has been gone through both loose and tight phases. Proposed model is dynamic one as lagged dependent variable has been used as explanatory variable. Due to certain limitations with selection of monetary policy instrument, overall stance of State Bank of Pakistan (SBP) in its annual reports has been used as a dummy variable in the model. Results of all the three estimations reveal almost same results. First lagged dividend has been proved to be most deterministic factor of dividend policy followed by current earnings. Monetary policy and lagged dividends interactive variables provide mixed results. First interactive variable has negative coefficients in all three, fixed effect, random effects and GMM, models but with insignificant p values. Second monetary policy interactive variable has positive coefficients with significant values in random effects and GMM model. Firms seem to follow relatively stable dividend policies with lower adjustment factor. As model is dynamic, GMM estimation is preferred. Monetary policy has not been observed as significant determinant of dividend policy of Pakistani firms.

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File URL: http://mpra.ub.uni-muenchen.de/34052/1/MPRA_paper_34052.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34052.

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Date of creation: Aug 2011
Date of revision: Oct 2011
Handle: RePEc:pra:mprapa:34052
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  1. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert Vishny, 1998. "Agency Problems and Dividend Policies Around the World," NBER Working Papers 6594, National Bureau of Economic Research, Inc.
  2. Garrett, Ian & Priestley, Richard, 2000. "Dividend Behaviour and Dividend Signaling," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 173-189, June.
  3. John Goddard & David G. McMillan & John O.S. Wilson, 2006. "Dividend smoothing vs dividend signalling: evidence from UK firms," Managerial Finance, Emerald Group Publishing, vol. 32(6), pages 493-504.
  4. I.M. Pandey & Ramesh Bhat, 2007. "Dividend behaviour of Indian companies under monetary policy restrictions," Managerial Finance, Emerald Group Publishing, vol. 33(1), pages 14-25.
  5. N. Bhattacharyya, 2007. "Dividend policy: a review," Managerial Finance, Emerald Group Publishing, vol. 33(1), pages 4-13.
  6. Nalinaksha Bhattacharyya & Amin Mawani & Cameron K.J. Morrill, 2008. "Dividend payout and executive compensation: theory and Canadian evidence," Managerial Finance, Emerald Group Publishing, vol. 34(8), pages 585-601.
  7. Rashid Ameer, 2008. "Product market competition, regulation and dividend payout policy of Malaysian banks," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 16(4), pages 318-334, November.
  8. Omneya Abdelsalam & Ahmed El-Masry & Sabri Elsegini, 2008. "Board composition, ownership structure and dividend policies in an emerging market: Further evidence from CASE 50," Managerial Finance, Emerald Group Publishing, vol. 34(12), pages 953-964.
  9. Malcolm Baker & Jeffrey Wurgler, 2004. "A Catering Theory of Dividends," Journal of Finance, American Finance Association, vol. 59(3), pages 1125-1165, 06.
  10. 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.
  11. Khaled Hussainey & Jinan Aal-Eisa, 2009. "Disclosure and dividend signalling when sustained earnings growth declines," Managerial Auditing Journal, Emerald Group Publishing, vol. 24(5), pages 445-454, May.
  12. Doron Nissim, 2001. "Dividend Changes and Future Profitability," Journal of Finance, American Finance Association, vol. 56(6), pages 2111-2133, December.
  13. Ahmed, Hafeez & Javid, Attiya Yasmin, 2008. "Dynamics and determinants of dividend policy in Pakistan (evidence from Karachi stock exchange non-financial listed firms)," MPRA Paper 37342, University Library of Munich, Germany.
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