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Introduction
Dividend policy behavior is one of the most debated issues of corporate sector. Many studies have been conducted to determine and explain this behavior in terms of financial and non-financial characteristics of firms. But still no general characteristics have been identified which can acceptably explain the behavior of dividend policy. In 2005 Brealy and Myers listed the dividend policy in top ten important issues of corporate finance (cited by Hafeez Ahmed and Attiya Javid, 2009). There is incomplete literature and an on-going debate on the issue of dividend policy behaviors. There is wider gap specifically in the case of growing economies like Pakistan, because most of the research done is based on the data from developed economies. The purpose of this study is to empirically investigate the factors contributing towards dividend policy decisions including ownership structure, profitability and size of the firm in Pakistan. It is important to conduct this study in Pakistan because it is a growing economy and there are a lot of differences in the situation faced by firms in developed and developing economies. Firstly, the difference of corporate governance affects the dividend policy. Weak corporate governance leads to ownership concentration ultimately increasing the power of owners to influence the policy decisions. Secondly, tax environment differences can lead to different investor behavior regarding the return. In Pakistan stock price appreciation is preferred mostly, but now capital gain tax has also been imposed which has lead to a slight change in the investor interests.
Effects of various factors on dividend behavior are firm specific. This study will contribute to the limited literature on determinants of dividend policy in Pakistan. It is also one of the first studies to use panel data to examine dividend policy in Pakistan.
JEL Classification Codes : L1, L2, C5
Literature Review
1. Dividends
Dividends are the amount of earnings distributed among the share holders of the company. Dividends can be in the form of cash or stock. Stock dividend has no effect on shareholder wealth except for the losses transaction costs associated with stock. However stock dividends are not very popular or controversial and decisions of dividend policy mostly revolve around cash dividends. Dividend decisions are very important because allocation of cash flow is a primary source...