The role of Business Group Affiliation on the Determination of Firm's Dividend Policy Decisions: Evidence from India

 

Nishant B. Labhane*

Department of School of Management, National Institute of Technology Warangal – 506004, TS, India.

 

ABSTRACT:

This research article examines the role of business group affiliation on the determination of firm’s dividend policy decisions (i.e. dividend payment decision and dividend payout level decision) for 703 National Stock Exchange (NSE) listed Indian firms during 1995-2018. In order to analyze the dividend payment decision (i.e. whether to distribute or not to distribute dividend?) a dichotomous logit regression analysis is utilized on the other hand, for the purpose of analyzing the dividend payout-level decision (i.e. how much amount of dividend to be distributed out of total earnings?) a tobit or censored regression analysis is utilized. The study finds from the comparative analysis that the dividend payout ratios of firms affiliated with the business groups are higher than that of unaffiliated firms (i.e. standalone firms). The econometric analysis indicates that the firms’ affiliation with the business groups have a direct association with the likelihood of firms paying dividends. The firms affiliated with the business groups are more likely to distribute dividends and their dividend payout levels are higher than the unaffiliated firms (i.e. standalone firms). The dividend policy decisions of business group affiliated firms are less sensitive to size, profitability, investment opportunities, financial leverage and firm’s life-cycle stage on the other hand, they are more sensitive to free cash flow and business risk.

 

 

INTRODUCTION:

The payout policy which a firm adopts in order to determine the pattern and size of cash distributed to equity shareholders over a period of time is referred to as corporate dividend policy. Since the emergence of dividend irrelevance theorem put forward by¹ the research on corporate dividend policy has gained the utmost attention from the financial economists.

 

The dividend irrelevance theorem based on a set of perfect capital market assumptions such as no taxes, no transaction and agency costs, and the information freely and fully available to investors, contends that the corporate dividend policy do not have any role to determine the firm’s value and the sole determinant of the value of a firm is it’s investment policy.

 

For the purpose of explaining the firms’ corporate dividend policy over the period of time, several researchers have relaxed the unrealistic perfect capital market assumptions of¹ and put forward a number of competing corporate dividend policy theories such as tax clientele theory, signalling theory, agency theory, firm’s life-cycle theory, and catering theory of dividends^2-10.

 

In the recent years, the researchers have extended their empirical research on dividend policy to investigate the role of business group affiliation on the determination of firm’s dividend policy decisions. A business group is a set of legally independent firms and these firms are envisaged to take coordinated actions and they are bound to one another with a constellation of formal and informal ties on the other hand, the unaffiliated firms (i.e. standalone firms) are those firms that do not have affiliation with any of the business groups¹¹. The business groups are referred to as different names in different countries for example in developed capital markets like Japan they are referred to as keiretsu on the other hand in emerging capital markets like South Korea, India and Latin America they are referred to as chaebol, business houses and groups respectively.

 

In order to meet their investment outlays, need the firms affiliated with the business groups create internal capital markets¹² and are comparatively less dependent on external capital and as a result are able to regularly pay more and stable dividends as compared with the unaffiliated firms (i.e. standalone firms). In this scenario, a direct association of business group affiliation is anticipated with the firm’s dividend policy decisions. The other debate is that as the firms affiliated with the business groups are less dependent on external capital for funding their investment outlays need, they do not need to distribute stable dividend to signal high earnings to the investors and as a result have lower payout vis-à-vis unaffiliated firms (i.e. standalone firms).

 

The present research article investigates the role of business group-affiliation on the determination of firm’s dividend policy decisions of 703 National Stock Exchange (NSE) listed Indian firms during the period from 1994-95 to 2017-18. We find that the dividend payout ratios of the firms affiliated with the business groups are higher in comparison to the unaffiliated firms (i.e. standalone firms). The findings of the present research article reveal that in spite of the fact that the business groups shield their member firms from imperfections in market and create internal capital markets, they might suffer from agency problems due to the expropriation of outside shareholders by controlling shareholders and also, from the other problems of information asymmetry due to their complex structure.

 

The rest of the research article is organized in the following manner: the empirical literature on the role of business group affiliation on the determination of firm’s dividend policy decisions is discussed in Section 2; Section 3 highlights the objectives of the study; the rationale of the studies is specified in Section 4; Section 5 describes the methodology; Section 6 discusses the analysis of the results and the last section concludes the research article.

 

REVIEW OF LITERATURE:

The review of literature on the role of business group-affiliation on the determination of firm’s dividend policy decisions is discussed in the present section. The empirical literature is not very large on the role of business group-affiliation on the determination of firm’s dividend policy decisions. Amongst the early research studies such as¹³ find that the Japanese keiretsu group’s member firms face few information asymmetry and agency problems as compared to independent Japanese firms. Investigates the 257 Istanbul Stock Exchange (ISE) listed firms ownership data in order to study the complex ownership and pyramidal structures within business groups, and discovers the negative effect of pyramidal and concentrated ownership structures on the performance which is reflected in lower dividend payments, market-to-book ratios, and return on assets¹⁴.

 

Investigating the aggregate patterns of dividends and earnings of different corporate organizational forms in U.K. and Japan during 1990-2001¹⁵ observe that although the Japanese firms increase dividends by 8.20% the firms affiliated with the keiretsu group reduce their dividends by 12.80%. Their results supports the contention that there is less need for the firms affiliated with the business groups to use dividend payments for the purpose of reducing the agency costs related with the free cash flow or the informational asymmetry. In order to explain why firms affiliated with the business groups increase their boards’ pay,¹⁶ analyzes the dividend policy of 157 Chilean non-financial sample firms and contends that instead of dividends the groups prefer to increase board and chair compensation when controller’s cash-flow rights decrease. On the contrary, both the board as well as chair compensation increase when controller’s cash-flow rights increase. This suggests that the controller tunnel through the board and chair compensation the firm’s resources.

 

Examining the dividend policies of the Belgian privately held firms¹⁷ encounter that the business group-affiliated firms distribute more dividends in comparison with the standalone firms because the payments of dividend between the members firms affiliated with the business groups are tax exempts which allow them to redistribute the dividends on the internal capital markets (ICMs) of the business groups.   Also, the business group-affiliated firms distribute more dividends when they have minority shareholders which is consistent with the hypothesis that in order to reduce the controlling shareholders’ expropriation risk the minority shareholders of business group-affiliated firms demand more dividends.

 

Observe that the firms affiliated with the chaebol groups have lower dividend payout ratios and stronger corporate governance practices in comparison to the independent firms as the firms affiliated with the chaebol groups have much weaker shareholders’ rights vis-à-vis the independent firms¹⁸. They encounter that the positive correlation between the good corporate governance and dividend payout ratios is weaker among the firms affiliated with the chaebol groups as compared to those among the independent firms because of the weaker shareholder rights in the firms affiliated with the chaebol groups vis-à-vis the independent firms. In order to investigate the influence of business group-affiliation on the dividend policies of the Croatian firms¹⁹ study the Zagreb Stock Exchange (ZSE) listed Croatian firms and find that the likelihood of the Croatian firms to distribute dividends increases when they are not affiliated with any business groups. Their empirical results are consistent with the pecking order theory which suggest that the firms affiliated with the business groups should distribute lower dividends for the purpose of financing their investment outlays through the internally generated funds.

 

In the context of Indian companies few studies have examined the role of business group affiliation on the determination of firm’s dividend policy decisions. In this context²⁰, detect a considerable difference in the dividend policy decisions of the independent firms vis-à-vis the firms affiliated with the business groups where the dividend payout ratios of firms affiliated with the business groups are higher as compared with the independent firms. Their empirical results suggest that the firms affiliated with the business groups have higher dividend payout-levels and are more likely to distribute dividends as compared with the non-affiliated firms but the business group-affiliated firms are not reinforced to do so as corroborated from the regression analysis findings.

 

Look into the costs of internal transfers vis-à-vis external transfers by utilizing a large Indian listed firms data set and hint that the firms affiliated with the business groups distribute higher dividends in comparison with the non-group firms as per external transfers hypothesis on the contrary the internal transfers hypothesis anticipates the opposite²¹. Also, the external transfers hypothesis better explains the dividend policies of the firms affiliated with the business groups as compared to the internal transfers hypothesis. Utilizing the data of all the Indian stock exchanges listed firms during 2001-2005²² observe that on an average the firms affiliated with the business groups distribute 5.7 percent higher dividends in comparison with the standalone firms during all the years of their study. Also, during bad times the business group-affiliation of those firms which cut their dividend matters moderately for the dividend payout-level decisions.

 

Examining the dividend smoothing behavior of 240 National Stock Exchange (NSE) listed sample Indian firms during 1995-2013²³ notice that as compared with the unaffiliated firms the firms affiliated with the business groups tend to smooth their dividend payments more and the target as well as the actual dividend payout ratios of the business group-affiliated firms are higher vis-à-vis the standalone firms. Examines the dividend policy decisions of 781 sample Indian firms enlisted on the National Stock Exchange (NSE) by comparing the business group-affiliated firms with the standalone firms and finds that the dividend policy decisions of the firms affiliated with the business groups differ considerably than that of the standalone firms²⁴. The firms affiliated with the business groups have higher dividend payout-levels and are more likely to distribute dividends despite the fact that they have high business risk, high financial leverage and high investment opportunities as compared with the standalone firms.

 

After reviewing the empirical literature on the studies available on this issue, the present study finds some research gaps regarding the corporate dividend policy and the firm’s affiliation with a particular corporate organizational form. While it is true that few studies²⁵ have examined the role of corporate dividend policy on the determination of firm’s value in an Indian context whereas, other studies^{26, 27, 28, 29} have tried to investigate the different factors affecting the corporate dividend policy in India. These empirical studies do not specifically interrogate the corporate dividend policy of the business group affiliated firms vis-à-vis standalone firms (i.e. unaffiliated firms).

 

Further, the emerging capital markets like India differ significantly from the developed capital markets where the developed capital markets are generally saturated on the other hand there are prospects of growth in the emerging capital markets like India³⁰. The present study tried to fill these research gaps by specifically investigating the role of business group affiliation on the determination of firm’s dividend policy decision in an emerging capital market like India.

 

OBJECTIVES:

The objectives of this study are (i) to analyze the characteristics of 703 sample firms utilized in this study with respect to dividend policy decisions (ii) to examine the role of business group affiliation on the determination of firm’s dividend policy decisions (i.e. dividend payment decision and dividend payout level decision).

 

RATIONALE OF THE STUDIES:

Business groups reduce the problem of asymmetric information by regularly monitoring performance of their member firms and by helping in sharing the information within the group. The dividend policy decisions of the firms affiliated with the business groups are anticipated to be less sensitive to the dependency on the different factors taken from the several dividend policy theories. Accordingly, we attempt to examine in the present research article the likely impact the business group-affiliation would create on the dividend policy decisions of a firm. The existence of different forms of corporate organizational structure in India enables us to examine the impact of business group-affiliation on the dividend policy decisions of a firm. The reasons for investigating the dividend policy decisions of business groups vis-à-vis unaffiliated firms (i.e. standalone firms) in India are first, there are about 400 business groups in India differing across the group diversification and size³¹; second, in the emerging markets they are the representative of most of the business groups; and third, it is not difficult to determine the status of firms affiliation with the business groups in India unlike the case in other capital markets.

 

METHODOLOGY:

DATA SOURCE:

The data is primarily collected from PROWESS database maintained by the Centre for Monitoring Indian Economy (CMIE) which contains the information on the financial performance of all listed and large set of unlisted Indian companies. At the beginning all the firms enlisted on a leading stock exchange in India i.e. National Stock Exchange (NSE) are targeted for the empirical study. The reasons for selecting sample firms from National Stock Exchange (NSE) are that first, it is established during post-reforms period in India and second, all the NSE listed firms need to comply with the financial reporting and regulatory standards fixed by the Securities and Exchange Board of India (SEBI).

 

SAMPLE FRAME:

The period of the empirical study is from the fiscal year 1994-95 to the fiscal year 2017-18 (i.e. 1995 to 2018). The chief reasons for selecting this time frame as the study period are that first, this time frame concerns to the post-economic reforms period i.e. the period of liberalization, privatization and globalization (LPG) in India and second, maximum possible information relating to sample firms is available in the database during this time period. The 1^st April midnight to 31^st March midnight is considered as the financial year by the government of India (GOI). Thenceforth, the financial year 1994-95 is mentioned as 1995 and the financial year 2017-18 is noted as 2018. The present study also investigate the dividend policy decisions of the firms affiliated with business groups vis-à-vis unaffiliated firms (i.e. standalone firms) during two sub-periods i.e. 1995-2003 and 2004-2018 which implies the first post-reforms period and second post-reforms period in India respectively.

 

At present the total number of firms enlisted on National Stock Exchange (NSE) are 1946 firms. There are 236 financial services, 19 utilities sector and 58 public sector undertaking firms out of total 1946 firms.  In the present study we exclude the financial services, utilities sector and public sector undertaking firms from the sample after following the³² and various other succeeding studies sample selection procedure. As the accounting practices and the regulatory norms followed by the financial services and utilities sector firms are significantly different in comparison to non-financial services and non-utilities sector firms they are excluded from the sample. And since the social obligations and government financial considerations highly influence the dividend policy decisions of public sector undertaking firms they are excluded from the sample.

 

The maximum possible financial information is obtained for the 703 sample firms out of remaining 1633 non-financial services, non-utilities sector and non-public sector undertaking firms during entire study period. Therefore, for the empirical study a sample of 703 firms are considered as the final sample firms. The 703 final sample firms comprise of the 443 firms affiliated with the business groups and 260 unaffiliated firms (i.e. standalone firms). A business group is a form of corporate organizational structure where the firms belonging to business groups are legally independent and are anticipated to take coordinated actions and are bound to one another with formal or informal ties on the contrary, the unaffiliated firms (standalone firms) are those firms that do not have affiliation with any of the business groups¹¹.

 

EMPIRICAL MODEL:

DETERMINANTS OF DIVIDEND POLICY DECISIONS:

This sub-section is concerned with the variables i.e. the apriori determinants of firm’s dividend policy decisions i.e. the dividend payment decision (whether to distribute or not to distribute dividend?) and the dividend payout-level decision (how much amount of dividend to be distributed out of total earnings?) utilized in this study.

 

Since, large sized firms comparatively have benefit to raise funds externally from capital markets they are less dependent on internally generated funds³³. Additionally, the large sized firms face agency problem between managers and shareholders as they are more difficult to monitor as compared to small sized firms. In such situation, it is more likely for the large sized firms to distribute dividends. The profitability of a firm is logically considered as the significant factor influencing the dividend payment decision of a firm as the dividends are directly distributed from the net profit after tax. After conducting survey contends that the crucial factor that have impact on the firm’s decision to pay dividend is the net profits³⁴. In addition, the firm-specific characteristics like profitability affect the firm’s decision to pay dividend significantly positively³².

 

In order to meet the positive NPV projects investment outlays need a firm rather than raising funds from costly external sources such as capital markets prefers to depend more on internally generated cheaper reserve and surplus^35,36. As a result, the firms having higher investment outlays need because of higher investment opportunities are more likely to pay less dividend to the equity shareholders so that the dependency on the capital markets to raise costly external funds get reduced. The firm commits itself for paying fixed charges including interest and principal amount when it borrows fund from debt source of finance. The firm might face the risk of insolvency and bankruptcy if it is unable to meet the obligation of fixed charges payment. Further, contend that the financial leverage of a firm has a negative impact on the firm’s dividend policy in the Banking Sector in India³⁷.

 

Any firm has a well-defined life-cycle stages as suggested by the life-cycle theory³⁸ and the decision to pay dividend differs during the various life-cycle stages of the firm. The firms mature in age are more likely to pay dividend as they have more accumulated earnings, less systematic risk and fewer investment opportunities^{39, 8,9}. Contrary, the firms young in age are less likely to pay dividend as they have low earnings, more investment opportunities and face considerable hurdles to raise funds from external capital markets for meeting their investment outlays needs which lead them to conserve internally-generated profits. 

 

The managers by paying dividend to the investors signal the future prospects of the firm to the outsiders thereby, reducing the information asymmetry between the managers (insiders) and the shareholders (outsiders)^3,4,40. The business risk is considered as the proxy for the uncertainty between the present and future earnings of a firm. The higher business risk entails that the expected association of the present earnings with the future earnings is more uncertain. It is evident from previous research studies⁴¹ that there is significant positive influence of the liquidity position on the firm’s decision to pay dividend. When a firm distributes dividend to the equity shareholders this leads to the outflow of cash for a firm. For announcing dividend a firm might have enough profits but the cash in hand held by the firm might not be sufficient to pay dividend.

 

When the managers take actions such as enlarging the size of the firm above its optimum level or overinvesting in the projects that have negative NPV or expending richly on perk in their own self-interest the agency conflicts between the shareholders (principal owner) and the managers (agent) arises. The agency conflicts get alleviated when the surplus free cash flow available in the hands of managers are distributed in the form of dividend to the equity shareholders^5,6,7. There is also the possibility of agency conflicts between the bondholders and shareholders. Indicate that the agency conflicts between the bondholders and shareholders are reduced when the firm possesses a high proportion of collateralizable or tangible assets in its total assets because it assures high level of protection to the bondholders⁴².

 

We have utilized the firm-specific characteristics variables such as Firm’s size (Size), Profitability (Profitability), Investment opportunities (Investment), Financial leverage (Leverage), Life-cycle stage (LifeCycle), Business risk (Risk), Firm’s liquidity position (Liquidity), Free cash flow (FreeCashFlow), and Tangibility of asset (Tangibility) as the apriori factors affecting the firm’s dividend policy decisions. After considering above discussion it is anticipated that the Firm’s size (Size), Profitability (Profitability), Life-cycle stage (LifeCycle), Firm’s liquidity position (Liquidity), Free cash flow (FreeCashFlow), and Tangibility of asset (Tangibility) have positive impact whereas, Investment opportunities (Investment), Financial leverage (Leverage), and Business risk (Risk) have negative impact on the firm’s dividend policy decisions i.e. the dividend payment decision (whether to distribute or not to distribute dividend?) and the dividend payout-level decision (how much amount of dividend to be distributed out of total earnings?).

 

In the present study, we have assumed that the business group affiliation have influence on the dividend policy decisions of a firm and thereby, we have utilized some other variable such as business group dummy variable i.e. Group_(dummy) apart from above discussed firm-specific characteristics variables. It is expected that the business group affiliation have positive association with the firm’s dividend policy decisions since, the firms affiliated with business groups create internal capital market and are less dependent on external finance to meet their investment outlays need which allow them to distribute more amount of dividend²⁰. When the firm is affiliated with any business group the business group dummy variable i.e. Group_(dummy) is equal to one and otherwise it is equal to zero. Because of the presence of internal capital market the financing activities of the firms affiliated with business groups are not affected by the imperfections present in the capital market as contended by the value enhancing theory. As a result the dividend policy decisions of the firms affiliated with business groups are less sensitive to the information asymmetry, reliance on external finance and life-cycle considerations vis-à-vis unaffiliated firms (i.e. standalone firms).   

 

Also, as the firms affiliated with business groups are not greatly dependent on external agents like large external equity holders and more debt holders, they face fewer agency conflicts as argued by the¹³. Therefore, this study hypothesizes that the firms affiliated with business groups are less sensitive to agency cost consideration too. In order to investigate this, in our model the business group affiliation dummy variable i.e. Group_(dummy) is interacted with the firm-specific characteristics variables i.e. exogenous variables (Group_(dummy)*Size, Group_(dummy)*Profitability, Group_(dummy)*Investment, Group_(dummy)*Leverage, Group_(dummy)*LifeCycle, Group_(dummy)*Risk, Group_(dummy)*Liquidity, Group_(dummy)*FreeCashFlow, and Group_(dummy)* Tangibility). It is expected that the coefficients on all the interaction terms of business group dummy variable i.e. Group_(dummy) with the firm-specific characteristics variables would bear opposite signs of those on the coefficients on the original firm-specific characteristics variables. 

 

MODEL SPECIFICATION:

The present study employs the regression analysis as well as the comparative analysis procedures in order to investigate how the association of dividend policy decisions differs between the unaffiliated firms (i.e. standalone firms) and the firms affiliated with the business groups. For the purpose of analyzing the dividend payment decision (i.e. whether to distribute or not to distribute dividend?) a dichotomous logit regression analysis is utilized. We utilize tobit regression analysis also referred to as the censored regression analysis with the intention of studying the dividend payout-level decision (i.e. how much amount of dividend to be distributed out of total earnings?). In both the logit as well as the tobit regression analysis nevertheless, the same underlying dividend policy decisions model is utilized with some specific modifications.  

 

In order to investigate the role of business group affiliation on the determination of firm’s dividend policy decisions i.e. whether the firms affiliated with business groups are more likely to distribute dividend and their dividend payout-levels are greater in comparison to unaffiliated firms (i.e. standalone firms) we estimate the following dividend policy decisions model:  

 

 

where,  Y_i,t is the dichotomous or binary response variable utilized for logit regression analysis which is equal to one if firm i distributes dividend in time t, and zero otherwise or Y_i,t is the dividend payout ratio of a firm utilized for tobit or censored regression analysis which is equal to the actual value of dividend payout ratio if firm i distributes dividend in time t, and zero otherwise; and the dividend payout ratio is defined as the annual dividend paid per share divided by the earnings per share; Group_(dummy)i,t is the business group affiliation dummy variable which is set to one when the firm is affiliated with any business group and zero otherwise; Size_i,t is the firm’s size variable defined as natural logarithm of market capitalization for firm i in time t; Profitability_i,t is the firm’s profitability variable defined as return on assets (ROA) i.e. the ratio of earnings before interest and taxes to the total assets for firm i in time t; Investment_i,t is the firm’s investment opportunities variable defined as the ratio of market value of equity to book value of equity for firm i in time t; Leverage_i,t is the firm’s financial leverage variable defined as the ratio of total debt to total capital employed for firm i in time t; LifeCycle_i,t is the firm’s life cycle variable defined as the retained earnings divided by the total equity for firm i in time t; Risk_i,t is the firm’s risk variable defined as the ratio of standard deviation of first difference of operating income to the total assets for firm i in time t; Liquidity_i,t is the firm’s liquidity variable defined as the current ratio i.e. the ratio of current assets to the current liabilities for firm i in time t; FreeCashFlow_i,t is the firm’s free cash flow variable defined as the ratio of net operating cash flow to the total assets for firm i in time t; Tangibility_i,t is the firm’s asset tangibility variable defined as the net fixed assets divided by the  total assets for firm i in time t; α is an intercept term, βs are the unknown parameters to be estimated, ε_i,t is the random disturbances for firm i in time t.

 

For the purpose of investigating whether in comparison to unaffiliated firms (i.e. standalone firms) the dividend payment decision and the dividend payout-level decision of the firms affiliated with the business groups are less sensitive to size of a firm, profitability, investment opportunities, financial leverage, life-cycle stage, business risk, liquidity position of a firm, free cash flow, and tangibility of asset, a business group affiliation dummy variable Group_(dummy)i,t enters into equation (1) as an interaction term with the firm-specific characteristic variables i.e. exogenous variables. As a result, equation (1) now becomes: -

 

 

It is hypothesized that the estimated coefficients on the interaction terms (i.e. δ₁ to δ₉) in equation (2) to bear opposite signs of those on the estimated coefficients (i.e. β₁ to β₉) on the original firm-specific characteristics variables i.e. exogenous variables. Thus, it is anticipated that the coefficients δ₃, δ₄, and δ₆ to bear positive sign on the other hand, the coefficients δ₁, δ_2, δ_5, δ₇, δ_8, and δ₉ to bear negative sign.  

 

The probability that a firm distributes dividend to equity shareholders is referred to as the dividend payment decision. A firm has two options while taking into account the dividend payment decision i.e. either to distribute or not to distribute any dividend to the equity shareholders. In a country like India, many firms do not distribute any dividend or pay zero dividend to the equity shareholders. Further, the firms distributing dividend do not distribute dividend regularly. Consequently, the endogenous variable i.e. dividend payout ratio in this case assumes two outputs, and it is equal to one when a firm distributes dividend in a given time t, and zero otherwise. The study follows the methodology of³² and numerous other succeeding research studies such as^{43, 20} and employs logit regression model to investigate the role of business group affiliation on the determination of firm’s dividend payment decision.

 

Consider the following binary response models⁴⁴:-

where, H is a function that takes the values for all real numbers z between zero and one strictly i.e. 0 < H(z) < 1. This assures that the probabilities of estimated response are between zero and one strictly. G is the logistic function in the logit model:-

For all real numbers z, H is between zero and one. For a standard logistic random variable this is the cumulative distribution function.

 

The maximum likelihood estimation (MLE) methods are indispensable for estimating limited dependent variable models. For the observation j the log-likelihood function is a function of the parameters and the data (x_j, y_j) and it is expressed in the following way:-

 

For all values of γ,   is well defined as the H(•) is between zero and one strictly for logit. By summing equation (5) across all observations the log-likelihood for a sample size of m is obtained as: ℒ . The MLE of γ maximizes this log-likelihood which is denoted by . The  is the logit estimator for H(•) which is the standard logit cumulative distribution function (cdf). The value of coefficients in the logit regression results indicates the log of odds ratio on the other hand the value of dy/dx i.e. marginal effects denotes the rate of change in the likelihood that a firm pays dividend in relation to a unit change in one exogenous variable while holding other exogenous variables constant. 

The decision concerning how much amount of dividend a firm distributes to the equity shareholders from its total profits is referred to as the dividend payout-level decision. In each year in our sample some firms distribute dividend or pay positive dividend on the other hand other firms do not distribute any dividend or pay zero dividend. Thus, in each year t the information regarding the dividend payout ratio of the firms that do not distribute any dividend or pay zero dividend is unavailable. Such a sample is referred to as a censored sample because the information on the endogenous variable in each year t is available only for some observations. The tobit regression model also referred to as a censored regression model is the most suitable model in this case to investigate the firm’s dividend payout-level decision i.e. the decision concerning how much amount of dividend to be distributed from its total profits by a firm? Since, the values taken in the censored sample by the endogenous variable are restricted some authors also refer the tobit regression model as the limited dependent variable (LDV) regression model.

 

Generally, the observed response y is expressed in relation to an inherent latent variable by the Tobit model⁴⁴ in the following way:-

 

The latent variable  particularly has a normal, homoscedastic distribution with a linear conditional mean and it satisfies the classical linear model assumptions. Equation (7) indicates that the observed variable y is equal to  when  ≥ 0 whereas, y is equal to zero when  < 0. The observed variable y has a continuous distribution around positive values strictly as is normally distributed.

 

The density of y_j given x_j is expressed in the following way when (x_j, y_j) is a random draw from the population:-

 

 

where, ϕ is the standard normal density function. The log-likelihood function is obtained from equations (8) and (9) for each observation j in the following way:-

 

By summing equation (10) across all j the log-likelihood for a random sample of size m is obtained. We can obtain the maximum likelihood estimates (MLE) of γ and σ is obtained by maximizing the log-likelihood which requires the numerical methods even though in mostly cases this can be easily done by utilizing a packaged routine.

ANALYSIS:

SAMPLE CHARACTERISTICS:

This section offers an overview of the total numbers of 703 all sample Indian firms as well as 260 unaffiliated firms (i.e. standalone firms) and 443 business group-affiliated firms utilized in this study. Table 1 presents the trends in a number of dividend paying firms and non-dividend paying firms among the unaffiliated firms (i.e. standalone firms) and business group-affiliated firms during the entire period of study i.e. 1995-2018.  The dividend paying firms are the firms that distribute dividend or pay a positive dividend in time t, whereas, non-dividend paying firms are the firms that do not distribute any dividend or pay zero or no dividend in time t.

 

It is observed from Table 1 that the dividend paying firms among the standalone as well as business group-affiliated firms do not show any consistent trend i.e. either increasing or decreasing but instead depicts a volatile trend throughout the study period i.e. 1995-2018. Also, the percentage of dividend paying firms among the business group-affiliated firms are higher as compared to

 

 

those among standalone firms for almost all the years during the entire study period i.e. 1995-2018.

 

Table 2 represents the trends in dividend payout ratio (DivPayout) and dividend yield (DivYield) for dividend paying firms among the unaffiliated firms (i.e. standalone firms) and business group-affiliated firms during the entire period of study i.e. 1995-2018. The dividend payout ratio (DivPayout) of a firm is defined as the ratio of annual dividend paid per share to earnings per share. The dividend yield (DivYield) of a firm is defined as the ratio of annual dividend paid per share to market price per share.

 

It is noted from Table 2 that the average dividend payout ratio (DivPayout) and dividend yield (DivYield) of the firms affiliated with the business groups are higher than that of unaffiliated firms (i.e. standalone firms) during the entire study period i.e. 1995-2018 as well as during the first post-reforms period i.e. 1995-2003 and the second post-reforms period i.e. 2004-2018.

Table 1 Dividend Paying Firms and Non-Dividend Paying Firms among Standalone Firms (SAF) and Business Group Affiliated Firms (BGAF)

Source: Prowess database maintained by the Center for Monitoring Indian Economy Pvt. Ltd. (CMIE).

Note: Dividend Paying Firms are the firms that distribute dividend or pay a positive dividend in time t, whereas, Non-Dividend Paying Firms are the firms that do not distribute any dividend or pay zero or no dividend in time t.

 

Table 2 Trends in Dividend Payout Ratio (DivPayout) and Dividend Yield (DivYield) for Standalone Firms (SAF) and Business Group-Affiliated Firms (BGAF)

Source: Prowess database maintained by the Center for Monitoring Indian Economy Pvt. Ltd. (CMIE).

Note: The Dividend Payout Ratio (DivPayout) of a firm is defined as the ratio of annual dividend paid per share to earnings per share. The Dividend Yield (DivYield) of a firm is defined as the ratio of annual dividend paid per share to market price per share.

 

Table 3 exhibits the trends in the dividend payout ratio (DivPayout) across unaffiliated firms (i.e. standalone firms) and business group-affiliated firms according to the different firm’s characteristics. The sample firms are sub-divided into small and large, low and high, young and old according to the firm’s characteristics such as firm’s size (Size), profitability (Profitability), investment opportunities (Investment), financial leverage (Leverage) and life-cycle stage (LifeCycle) by taking into account the threshold value. The average of annual median value of the firm’s characteristics is utilized as a threshold for the sub-division. The firms having market capitalization, return on equity, market-to-book ratio, debt-to-equity ratio, and retained earnings to total equity ratio higher than the threshold value are termed as the larger, more profitable firms, firms with high investment opportunities, high financial leverage and old firms respectively and vice-a-versa. It is observed from Table 3 that the dividend payout ratio (DivPayout) of larger, more profitable firms, firms with low investment opportunities, low financial leverage and old firms are comparatively higher and vice-a-versa for all sample Indian firms as well as for two corporate organizational structure forms during the entire study period i.e. 1995-2018 and two sub-periods i.e. 1995-2003 and 2004-2018. 

EMPIRICAL RESULTS:

SUMMARY STATISTICS AND CORRELATION MATRIX:

Table 4 shows the descriptive statistics of the dependent variable as well as all the independent variables utilized in the study. The mean and median dividend payout ratio (DivPayout) is 0.23 and 0.17 respectively with the standard deviation of 0.27. The skewness values for the dependent and all the independent variables are between -3 and +3 whereas, the kurtosis values for the dependent and all the independent variables are between -10 and + 10 which are within the acceptable range indicating that the data is normalized⁴⁵.

 

Table 5 exhibits the correlation matrix and variance inflation factor (VIF) of all the explanatory variables utilized in the study. It is observed from Table 5 that in spite of the fact that the correlation coefficients between some of the explanatory variables are significant, they are either of lower degree or of moderate degree which indicate that the multicollinearity problems between the independent variables are absent. Also, as per the rule of thumb for all the explanatory variables the estimated variance inflation factor (VIF) values are very small i.e. much less than five, suggesting that the multicollinearity problems between the explanatory variables are absent. 

 

Table 3 Dividend Payout Ratio (DivPayout) across Standalone Firms (SAF) and Business Group-Affiliated Firms (BGAF) according to Firm Characteristics

Source: Prowess database maintained by the Center for Monitoring Indian Economy Pvt. Ltd. (CMIE).

Note: ASF represents all sample Indian firms, SAF indicates standalone firms, BGAF implies business group-affiliated firms, Market capitalization is defined as market price per share multiplied by numbers of shares outstanding, Return-on-equity is defined as earnings before interest and tax divided by total equity, Market-to-book ratio is measured as market value of equity divided by book value of equity, Debt-to-equity ratio is defined as total debt divided by total equity, Firm’s maturity is measured as the ratio of retained earnings to total equity.

 

 

Table 4 Descriptive Statistics

Source: Author’s calculations.

 

Note: This table presents descriptive statistics for all the variables used in the study. DivPayout is a firm’s dividend payout ratio which is defined as the ratio of annual dividend paid per share to earnings per share, Size is firm’s size measured as natural log of market capitalization, Profitability is a firm’s profitability measured as earnings before interest and taxes divided by total assets, Investment is a firm’s investment opportunities measured as market value of equity divided by book value of equity, Leverage is a firm’s financial leverage defined as total debt divided by total capital employed, LifeCycle is a life-cycle stage variable for a firm defined as the ratio of retained earnings to total equity, Risk is a firm’s business risk defined as the standard deviation of first difference of operating income divided by total assets, Liquidity is firm’s liquidity position which is measured as current assets divided by current liabilities, Free Cash Flow is free cash flow defined as net operating cash flow scaled by total assets, Tangibility is the tangibility of assets measured as the ratio of net fixed assets to total assets. 

 

 

Table 5 Correlation Matrix and Variance Inflation Factor (VIF)

Source: Author’s calculations.

Note: This table reports the correlation between the independent variables used in this study and the variance inflation factor (VIF). For variable explanation see note in Table 4. *** indicates significance at 1% level, ** indicates significance at 5% level, and * indicates significance at 10% level.

 

EXAMINING THE DIVIDEND PAYOUT RATIO (DIVPAYOUT) ACROSS STANDALONE FIRMS (SAF) AND BUSINESS GROUP-AFFILIATED FIRMS (BGAF)

 

Table 6 Analyzing the differences in the Dividend Payout Ratio (DivPayout) of Standalone Firms (SAF) vis-à-vis Business Group-Affiliated Firms (BGAF) during different periods

Source: Author’s calculations.

Note: *** indicates significance at 1% level, ** indicates significance at 5% level and * indicates significance at 10% level.

 

Before discussing the empirical results we have first tried to find out the statistical significance of the differences in the dividend payout ratio (DivPayout) between the unaffiliated firms (i.e. standalone firms) and the firms affiliated with the business groups. Table 6 presents the findings of the non-parametric tests for the differences in the mean, median and mode dividend payout ratios (DivPayout) between the unaffiliated firms (standalone firms) and the firms affiliated with the business groups. 

 

 

 

GROUP AFFILIATION AND DIVIDEND POLICY DECISIONS (LOGIT AND TOBIT ESTIMATION RESULTS)

Table 7 Group Affiliation and Dividend Payment Decision (Logit Model Results)

Source: Author’s calculations.

Note: The figures in parentheses are the z-statistics. *** indicates significance at 1% level, ** indicates significance at 5% level, and * indicates significance at 10% level. Group_(dummy) is a dummy variable which is equal to 1 if the firm is affiliated with the business group and 0 otherwise. For variable explanation see note in Table 4.

 

It is observed from the Table 6 that the mean and median dividend payout ratios (DivPayout) of firms affiliated with the business groups are higher than the unaffiliated firms (i.e. standalone firms) and the differences between these dividend payout ratios (DivPayout) are statistically highly significant. Also, it is noticed from Table 6 that the mode value of dividend payout ratios (DivPayout) is zero for both unaffiliated firms (i.e. standalone firms) as well as for the business group-affiliated firms irrespective of whether the firms are affiliated with the business groups or not. These findings encourage us for utilizing the dichotomous logit regression analysis and censored or tobit regression analysis procedures for analyzing the empirical results.

 

Tables 7 and 8 demonstrate the results of logit model utilized for analyzing dividend payment decision (i.e. whether to distribute or not to distribute dividend?) and tobit model employed for examining dividend payout-level decision (i.e. how much amount of dividend to be distributed out of total earnings?) respectively. The significant likelihood ratio in all the respective periods entails the overall significance of both the logit as well as the tobit model. During the entire period of study i.e. 1995-2018 as well as for two sub-periods i.e. 1995-2003 and 2004-2018 the coefficient on the business group affiliation dummy variable i.e. Group_(dummy) is positive and statistically highly significant in accordance with hypothesis of the study. These results are not in line with the findings of⁴³ who discover that the likelihood that a firm pays dividend reduces with the strengthening of its affiliation to the business groups. The results indicate that the estimated coefficients on the variables such as firm’s size (Size), profitability (Profitability), life cycle-stage (LifeCycle) and liquidity position of a firm (Liquidity) are positive and statistically highly significant for the entire study period i.e. 1995-2018. On the other hand, the estimated coefficients on the variables such as financial leverage (Leverage) and business risk (Risk) are negative and statistically significant.

 

Thus, the larger, more profitable, more mature and highly liquid firms are more likely to pay dividends on the contrary, the firms having high financial leverage and high business risk are less likely to pay dividends. The estimated coefficient on firm’s investment opportunities (Investment) is statistically highly significant for logit model during the entire study period i.e. 1995-2018 whereas, it is insignificant for the tobit model suggesting that the investment opportunities are more crucial while taking into account the dividend payment decision vis-à-vis dividend payout-level decision. The estimated coefficient on free cash flow (FreeCashFlow) and tangibility of assets (Tangibility) have a positive sign and are statistically highly significant only for the tobit model. This implies that the agency problems are more significant while determining the dividend payout-level decision (i.e. how much amount of dividend to be distributed out of total earnings). These results are in line with the pecking order, transaction cost, agency cost, signalling and firm’s life-cycle theory of dividends.

 

During the first post-reforms period i.e. 1995-2003 the variables such as firm’s size (Size), profitability (Profitability), and life cycle stage (LifeCycle) have significant direct influence on the probability of paying dividends whereas, the investment opportunities (Investment), financial leverage (Leverage), and business risk (Risk) variables affect the likelihood of paying dividends negatively and are statistically significant.

 

Table 8 Group Affiliation and Dividend Payout-Level Decision (Tobit Model Results)

Source: Author’s calculations.

Note: The figures in parentheses are the z-statistics. *** indicates significance at 1% level, ** indicates significance at 5% level, and * indicates significance at 10% level. Group_(dummy) is a dummy variable which is equal to 1 if the firm is affiliated with the business group and 0 otherwise. For variable explanation see note in Table 4.

 

Table 9 Group Affiliation, Interaction Terms of Group Affiliation with Explanatory Variables and Dividend Payment Decision (Logit Model Results)

Source: Author’s calculations.

Note: The figures in parentheses are the z-statistics. *** indicates significance at 1% level, ** indicates significance at 5% level, and * indicates significance at 10% level. Group_(dummy) is a dummy variable which is equal to 1 if the firm is affiliated with the business group and 0 otherwise. For variable explanation see note in Table 4.

 

 

During the second post-reforms period i.e. 2004-2018 the investment opportunities (Investment), financial leverage (Leverage), and business risk (Risk) variables have indirect association and are statistically significant whereas, the firm’s size (Size), profitability (Profitability), and life-cycle stage (LifeCycle) have significantly direct association with the probability of payment of dividends.

 

The marginal effects described in Table 7 for each period suggest the change in the probability of firm’s paying dividends because of one percentage change in the exogenous variable while holding other exogenous variables as constant. On the other hand, the marginal effects reported in Table 8 for each period point out the change in the actual value of dividend payout ratio on account of the change in the other exogenous variables.

 

Tables 9 and 10 represent the findings of how much sensitive the dividend policy decisions (i.e. dividend payment decision and the dividend payout-level decision) of firms affiliated with the business groups are with the exogenous variables in comparison to the unaffiliated firms (i.e. standalone firms). The estimated coefficients on the interaction terms of the business group dummy variable Group_(dummy) with the exogenous variables such as firm’s size (Size), profitability (Profitability), investment opportunities (Investment), financial leverage (Leverage), and life-cycle stage (LifeCycle) endure opposite signs of those on the estimated coefficients on the independent original exogenous variables, with the exception of business risk. These findings indicate that the dividend policy decisions of firms affiliated with the business groups i.e. dividend payment decision (whether to distribute or not to distribute dividend?) and the dividend payout-level decision (how much amount of dividend to be distributed out of total earnings?) are less sensitive to the firm’s size (Size), profitability (Profitability), investment opportunities (Investment), financial leverage (Leverage), and life-cycle stage (LifeCycle) in comparison to the unaffiliated firms (standalone firms).

 

The estimated coefficient on the interaction term of business group affiliation dummy variable Group_(dummy) with the tangibility of assets (Tangibility) have a negative sign which indicate that the dividend policy decisions are less sensitive to the agency problems between bondholders and shareholders, but the results are inconclusive as the estimated coefficient on the interaction term is not significant.

 

 

Table 10 Group Affiliation, Interaction Terms of Group Affiliation with Explanatory Variables and Dividend Payout-Level Decision (Tobit Model Results)

Source: Author’s calculations.

Note: The figures in parentheses are the z-statistics. *** indicates significance at 1% level, ** indicates significance at 5% level, and * indicates significance at 10% level. Group_(dummy) is a dummy variable which is equal to 1 if the firm is affiliated with the business group and 0 otherwise. For variable explanation see note in Table 4.

The estimated coefficient on the interaction term of Group_(dummy) with the free cash flow (FreeCashFlow) bear the same positive sign as that on the independent original exogenous variable and is significant only for the tobit or censored model. These findings suggest that the dividend payout-level decision (i.e. how much amount of dividend to be distributed out of total earnings?) of firms affiliated with the business groups are more sensitive to the agency problem between the managers (agent) and the shareholders (principal owner).

 

In emerging capital markets such as India, the business groups are usually dominated by family, and the agency conflicts increase when the wealth of other shareholders are expropriated by these insider family dominated managements⁴⁶. The interaction term Group_(dummy)*Risk endures same negative sign as that on the estimated coefficient on the independent original exogenous variable i.e. business risk (Risk) and is significant. These results indicate that in comparison to unaffiliated firms (i.e. standalone firms) the firms affiliated with the business groups are more sensitive to information asymmetry and might suffer from other information asymmetry problems which are not in line with our hypothesis. These findings are consistent with the previous results of²⁰. This might be because of the prevailing of the business group complexity over business group visibility⁴⁷.

 

CONCLUSIONS:

In this research article, the role of business group affiliation on the determination of firm’s dividend policy decisions (i.e. dividend payment decision and dividend payout-level decision) for a sample of 703 National Stock Exchange (NSE) listed Indian firms is examined. The period of study is from 1994-95 to 2017-18 and a period-wise analysis is also carried out in order to take into account the phases of liberalization in India. The comparative analysis findings suggest that the mean and median dividend payout ratios of firms affiliated with the business groups are higher than that of unaffiliated firms (i.e. standalone firms) and irrespective of the affiliation of the firms the mode value of dividend payout ratios is zero. The empirical findings indicate that the firms affiliated with the business groups are more likely to pay dividends and their dividend payout-levels are higher as compared to unaffiliated firms (i.e. standalone firms).

 

The findings concerning the sensitivity of the dividend policy decisions of business group-affiliated firms suggest that the dividend payment decision and dividend payout-level decision of business group-affiliated firms are less sensitive to firm’s size (Size), profitability (Profitability), investment opportunities (Investment), financial leverage (Leverage) and life cycle-stage (LifeCycle) which are in line with the hypotheses of the study. The dividend payout-level decision and not the dividend payment decision of firms affiliated with business groups are sensitive to the free cash flow (FreeCashFlow) variable which indicate that the dividend payout-level decision (i.e. how much amount of dividend to be distributed out of total earnings?) of firms affiliated with the business groups are more sensitive to the agency problems. The firms affiliated with the business groups are sensitive to the information asymmetry vis-à-vis unaffiliated firms (i.e. standalone firms) which is not consistent with the hypothesis of the study. The business group-affiliated firms may suffer from other information asymmetry problems due to the prevalence of group complexity over group visibility.

 

Overall, the findings of the study reveal that in spite of the fact that the business groups shield their member firms from imperfections in market and create internal capital markets, they might suffer from agency problems due to the expropriation of outside shareholders by controlling shareholders and also, from the other problems of information asymmetry due to their complex structure.

 

MANAGERIAL IMPLICATIONS:

The present study has implications for both the corporate managers as well as for the investors. The corporate managers can consider the firm’s business group affiliation while formulating the appropriate dividend policy for a firm in India. Also, the investors can choose the firms affiliated with the business groups for investment as they pay more dividends than the unaffiliated firms (i.e. standalone firms).

 

LIMITATIONS:

The ownership structure is considered as the significant factor affecting the dividend policy decisions of a firm. Because of unavailability of ownership structure data the study is not able to investigate the influence of ownership structure on the firm’s dividend policy decisions.

 

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