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Int. J. Business and Globalisation, Vol. 11, No. 3, 2013

Corporate leverage, financial efficiency, and the decision of Indian firms about the amount of dividends Amarjit Gill* The University of Saskatchewan, Edwards School of Business, 25 Campus Drive, Saskatoon, SK, S7N-5A7, Canada Fax: 306-966-5408 E-mail: [email protected] *Corresponding author

Nahum Biger School of Business, Carmel Academic Center, 4, ShaarParlmerStreert, Haifa, 33031, Israel E-mail: [email protected]

Harvinder S. Mand Sikh National College, Banga, District Sahid Bhagat Singh Nagar, 144505, East Punjab, India E-mail: [email protected] Abstract: This study investigates the relationships between changes in corporate leverage, changes in financial efficiency, and changes in decision of Indian firms about the amount of dividends. A sample of all top 500 companies listed on the Bombay Stock Exchange for the period 2009–2012 was selected. The findings indicate that the changes in the corporate leverage cause changes in the financial efficiency and the changes in corporate leverage and financial efficiency cause changes in the decision about the amount of dividends in the Indian firms. The findings also indicate that the corporate leverage and the financial efficiency play some role in the decision to pay the amount of dividends. This study contributes to the literature on the factors that cause changes in the financial efficiency of the firm and the decision to pay the amount of dividends. The findings may be useful for financial managers, investors, financial management consultants and other stakeholders. Keywords: debt leverage; degree of financial leverage; DFL; degree of operating leverage; DOL; financial efficiency; decision about the amount of dividends. Reference to this paper should be made as follows: Gill, A., Biger, N. and Mand, H.S. (2013) ‘Corporate leverage, financial efficiency, and the decision of Indian firms about the amount of dividends’, Int. J. Business and Globalisation, Vol. 11, No. 3, pp.258–274.

Copyright © 2013 Inderscience Enterprises Ltd.

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Biographical notes: Amarjit Gill received his PhD from Touro University International (Branch Campus of Touro College, New York), USA in 2004. He is currently a full-time Term Lecturer at the University of Saskatchewan, Saskatoon, SK, Canada. His research interests include finance and small business management. Nahum Biger received his PhD from the York University in Canada in 1974. He is a Professor of Financial Economics at the School of Business, Academic Center Carmel in Haifa, Israel. His research interests include finance and investments. Harvinder S. Mand is an Assistant Professor of Business Administration at the Sikh National College, Banga, Punjab, India. His research interests include finance and investments.

1

Introduction

Dividend payment is one of the important factors that encourage investors to invest in a firm. Corporate leverage and financial efficiencies are among most important factors that impact on the decision to pay amount dividends to shareholders. Corporate leverage, in the context of this study, is defined as the degree of financial leverage (DFL), the degree of operating leverage (DOL) (Mseddi and Abid, 2010), and the degree of debt leverage. The concept of debt leverage was developed by Modigliani and Miller (1958) and the concepts of DFL and the DOL were developed (Gahlon and Gentry, 1982). Since that time, different authors have used these concepts to conduct new studies on the capital structure. Corporate leverage impacts the financial efficiency of the firm, which in turn, impacts the decision to pay the amount of dividends. The amount of dividend payment is a decision made by the board of directors based on the recommendations of the financial managers. Baker and Powell (1999) indicate that dividend payout decision/policy is one of the most important financial decisions because it is perceived as a symbol of good financial health. The literature provides number of theories (e.g., clientele theory, bird-inhand theory, agency theory, and signalling theory) that shows that raising dividends increases the value of equity and thus investors are more attracted towards dividend paying firms (Shah et al., 2010). Although several studies (Lintner, 1956; Fama and Babiak, 1968; Joannos and Filippas, 1997) suggest that most firms have a long-term target dividend payout ratio, many firms smooth dividends by moving only partway toward the target payout in each year. Market situations force companies to consider different options and strategies, such as balance between corporate leverage, financial efficiency, and dividend payment. It follows that this is perhaps one of the major challenges faced by financial managers (Asif et al., 2011). Many studies have been conducted on dividend payout of the firm. Since Miller and Modigliani’s (1961) study, researchers have relaxed the assumption of perfect capital markets and offered theories about how dividend affects the firm value and how managers should formulate dividend policy decisions. Over time, the number of factors that were listed in the literature as being important to the dividend decision increased

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substantially (Anil and Kapoor, 2008). However, only few studies investigated the impact of changes in corporate leverage and in financial efficiency on the decision to pay amount of dividends. The present study concentrates on the changes in corporate leverage, changes in financial efficiency, and the changes in the decision to pay amount of dividends. The study explicitly evaluates the relationship between changes in corporate leverage, changes in financial efficiency, and the changes in decision about the amount of dividends. This paper provides insights for inventors as to the importance of financial efficiency in influencing their wealth maximisation in Indian Top 500 Firms. The findings indicate the importance of corporate leverage in improving financial efficiency of the firm, and the impact of changes in corporate leverage and in financial efficiency on the decision about the amount of dividends. Thus, this study adds empirical substance to existing theory.

2

Literature review

2.1 Corporate leverage affects financial efficiency Corporate leverage (debt leverage, the DOL, and the financial leverage) is among important factors that impact the financial efficiency. The higher degree of corporate leverage, the higher the level of risk for the firm (Mseddi and Abid, 2010). The higher level of risk in turn impacts the financial efficiency of the firm. The empirical studies on the relationship between corporate leverage and financial efficiency are as follows: •

Roden and Lewellen (1995) studied 107 leveraged buyout US companies for the period of 1981–1990 and found a positive relationship between profitability and total debt as a percentage of the total buyout-financing package.



Wald (1999) used the 1993 Worldscope data set to collect data from approximately 40 countries and found a negative correlation between debt leverage and profitability.



Chiang et al. (2002) studied data related to 18 developers and the other 17 contractors from Hong Kong by using DataStream (an electronic financial database) and found that profitability and debt leverage are interrelated.



Abor (2005) sampled 22 firms listed on Ghana Stock Exchange over a five-year period (1998–2002) and found a positive relationship between debt leverage and profitability. The author also found a positive relationship between firm size and profitability.



Mendell et al. (2006) conducted a cross sectional study by using a sample of 20 forest industry firms traded on a US stock exchange for the years 1994–2003 and found a negative relationship between profitability and debt leverage.



Gill et al. (2011), studied a sample of 272 US firms listed on New York Stock Exchange (NYSE) for the period 2005–2007 and found a positive relationship between debt leverage and profitability.

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In summary, literature review shows that corporate leverage affects financial efficiency of the firm.

2.2 Financial efficiency affects the decision about the amount of dividends The financial efficiency of the firm impacts the decision about the amount of dividends. The financial efficiency in the form of corporate profitability and operating cash flow have been considered as the primary indicators of a firm’s capacity to pay amount of dividends (Gill et al., 2010). Lintner (1956) and Baker et al. (1985) indicate that the dividend payment pattern of a firm is influenced by the current year’s earnings and previous year’s dividends. Anil and Kapoor (2008) indicate that profitability and cash flow have always been considered as primary indicators of dividend payout ratio. Alli et al. (1993) also argue that dividend payments depend on cash flows, which reflect the company’s ability to pay dividends, than on current earnings, which are less heavily influenced by accounting practices. They claim that current earnings do not really reflect the firm’s ability to pay dividends. The empirical studies on the relationship between financial efficiency and the decision about the amount of dividends are as follows: •

Baker et al. (1985) surveyed officers from three broad groups of firms (utilities, manufacturing, and wholesale/retail) by using data from NYSE and found that the anticipated level of future earnings is an important determinant of dividend payment.



Pruitt and Gitman (1991) studied data of 114 US financial managers and found that current and past years’ profits are important factors in influencing dividend payments.



Baker and Powell (2000) obtained information from 603 chief financial officers of US firms listed on the NYSE and concluded that industry specific and anticipated level of future earnings were the major determinant of dividend payment.



Eriotis and Vasiliou (2003) sampled 149 Greek companies listed in the Athens Stock Exchange between 1996–2001 and found that companies distribute dividends according to their performance and are reluctant to change their dividend policy frequently.



De Angelo et al. (2004), observing US firm found a significant correlation between the dividend payment decision and the ratio of earned capital to total controlling capital.



Amidu and Abor (2006) collected data from firms listed on the Ghana Stock Exchange during a six-year period and found a positive relationship between corporate profitability and dividend payout ratios.



Asif et al. (2011) used data of 403 companies listed with Karachi Stock Exchange during the period 2002–2008 and found that change in earnings has no significant impact on dividend policy.



Charitou and Vafeas (1998) studied data from US firms between for the period 19811991 and found a positive relationship between cash flows and dividend changes.

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Amidu and Abor (2006) used data from firms listed on the Ghana Stock Exchange during a six-year period and found a positive relationship between cash flow and dividend payout ratios.



Khan (2009) collected data from UK firms listed on the London Stock Exchange and found no significant association between cash flows and dividend changes.



Hashemi and Zadeh (2012) studied 74 firms listed on Tehran stock exchange between 2003–2010 and found



1

a negative relationship between financial leverage and dividend policy

2

positive relationships between operating cash flow, firm size, and dividend policy.

Alam and Hossain (2012) collected data from Bangladesh and UK, and found: 1

liquidity and profitability as the main determinants of dividend payout ratio in Bangladesh

2

profitability in UK.

In summary, literature review shows that financial efficiency affects the decision to pay the amount of dividends.

2.3 Corporate leverage affects the decision about the amount of dividends Debt leverage, measured as the debt-to-equity ratio, is a financial ratio that indicates the relative proportion of debt and equity used to finance a company’s assets. This ratio is also known as risk, gearing or debt leverage. Pruitt and Gitman (1991) indicate that risk determines firms’ dividend policy. The empirical studies on the relationship between corporate leverage and the decision about the amount of dividends are as follows: •

Dhillon (1986) studied data of 1,765 US firms and found conflicting evidence for dividend payouts and leverage. The author also found that while in some industries payout and leverage ratios are positively related, in other industries the relationship is negative.



Rozeff (1982) used value line investment survey to collect data from 64 different industries of US and found a negative relationship between firm’s risk and dividend payout ratios.



Collins et al. (1996) collected data from US firms by using value line investment survey dated December 22, 1989 through March 16, 1990 and found a negative relationship between firm’s risk and the dividend payout ratios.



D’Souza (1999) studied data from US firms and found a negative relationship between risk and dividend payout.

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Asif et al. (2011) collected data from 403 companies listed with Karachi Stock Exchange during the period 2002–2008 and found that the level of corporate debt (leverage) significantly affects the dividend policy of the Pakistani firms. The authors also found a negative relationship between financial leverage and dividend payout, indicating less dividend payments by high-debt firms.



Alam and Hossain (2012) collected data from Bangladesh and UK, and found leverage as the main determinant of dividend payout ratio in both the Bangladesh the UK.

In summary, literature review shows that corporate leverage impacts the decision to pay the amount of dividends.

3

Methods

The study applied co-relational and non-experimental research design.

3.1 Measurement Measures pertaining to: 1

DFL and DOL were taken from Mseddi and Abid (2010)

2

firm size were taken from Gill et al. (2011)

3

corporate profitability, cash, debt leverage, and operating cash flow were taken from Gill et al. (2010)

4

decision about the amount of dividends was taken from Gill and Obradovich (2012).

Table 1 shows the measurements of the dependent, independent, and control variables that were used in regression analysis. Table 1

Proxy variables and their measurements

DPO = β + β1ΔDRi ,t + β2 ΔDFLi ,t + β3ΔDOLi ,t + β4 ΔREVi ,t + β5 ΔPM i ,t + β6 ΔOCFi ,t + β7 ΔCASH i ,t + β8ΔFSi ,t + β9 Industry + μit PM = β + β1ΔDRi ,t + β2 ΔDFLi ,t + β3ΔDOLi ,t + β4 ΔREVi ,t + β5 ΔPM i ,t + β6 ΔFSi ,t β7 Industry + μit OCF = β + β1ΔDRi ,t + β2 ΔDFLi ,t + β3ΔDOLi ,t + β4 ΔREVi ,t + β5 ΔPM i ,t + β6 ΔFSi ,t β7 Industry + μit Dependent variables

Measurement

Decision about the amount of dividends (∆DPOi,t) Profit margin (∆PMi,t) Operating cash flow (∆OCFi,t)

Percentage change in amount of dividends paid to shareholders Percentage change in net income Percentage change in operating cash flow

Notes: μi,t = the error term. Percentage change (∆) = (Current year – Previous year) / Previous year.

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Table 1

Proxy variables and their measurements (continued) DPO = β + β1ΔDRi ,t + β2 ΔDFLi ,t + β3ΔDOLi ,t + β4 ΔREVi ,t + β5 ΔPM i ,t + β6 ΔOCFi ,t + β7 ΔCASH i ,t + β8ΔFSi ,t + β9 Industry + μit

PM = β + β1ΔDRi ,t + β2 ΔDFLi ,t + β3ΔDOLi ,t + β4 ΔREVi ,t + β5 ΔPM i ,t + β6 ΔFSi ,t β7 Industry + μit OCF = β + β1ΔDRi ,t + β2 ΔDFLi ,t + β3ΔDOLi ,t + β4 ΔREVi ,t + β5 ΔPM i ,t + β6 ΔFSi ,t β7 Industry + μit Independent variables Debt leverage (∆DRi,t) Degree of financial leverage (∆DFLi,t) Degree of operating leverage (∆DOLi,t) Revenue (∆REVi,t)

Measurement Percentage change in total debt / Percentage change owners’ equity Percentage change in net income / Percentage change in earnings before interest and taxes Percentage change in earnings before interest and taxes / Percentage change in sales Percentage change in sales revenue

Control variable Cash (∆CASHi,t) Firm size (∆FSi,t) Industry

Percentage change in total cash Percentage change in total assets Assigned 0 for service industry and 1 for manufacturing industry

Notes: μi,t = the error term. Percentage Change (∆) = (Current year - Previous year) / Previous year.

3.2 Data collection Top 500 service and manufacturing companies (http://www.prowess.cmie.com) listed on Bombay Stock Exchange (BSC) between January 1, 2009 and December 31, 2012 were used to collect data. The cross sectional yearly data was used in this study. Thus, 500 financial reports resulted to 2,000 total observations. \

3.3 Descriptive statistics Table 2 shows descriptive statistics of the collected variables. The explanation on changes in each variable is described as follows: 1

change in decision about the amount of dividends (∆DPO): 2010: 50%; 2011: 32%; 2012: 19%

2

change in profit margin (∆PM) = 2010: 38%; 2011: 36%; 2012: –19%

3

change in operating cash flow (∆OCF) = 2010: 44%; 2011: –36%; 2012: –21%

4

change in debt leverage (∆DR) = 2010: –16%; 2011: –5%; 2012: 160%

5

change in DFL (∆DFL) = 2010: 137%; 2011: 119%; 2012: 104%

6

change in DOL (∆DOL) = 2010: 147%; 2011: 95%; 2012: 64%

7

change in sales revenue (∆REV) = 2010: 23%; 2011: 32%; 2012: 5%

Corporate leverage, financial efficiency, and the decision of Indian firms 8

change in firm size (∆FS) = 2010: 8%; 2011: 10%; 2012: 6%

9

change in cash (∆CASH) = 2010: 63%; 2011: 80%; 2012: 37%.

Table 2

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Descriptive statistics Changes from 2009 to 2010

∆DPO10 ∆PM10 ∆OCF10 ∆DR10 ∆DFL10 ∆DOL10 ∆REV10 ∆FS10 ∆CASH10

Minimum

Maximum

Mean

SD

–0.80 –16.00 –18.06 –4.55 –20.04 –18.39 –3.01 –0.91 –0.99

8.66 17.20 27.21 3.88 20.46 19.81 9.36 0.66 11.75

0.50 0.38 0.44 –0.16 1.37 1.47 0.23 0.08 0.63

0.97 2.14 4.00 0.79 4.59 4.49 0.84 0.11 1.70

Changes from 2010 to 2011 ∆DPO11 ∆PM11 ∆OCF11 ∆DR11 ∆DFL11 ∆DOL11 ∆REV11 ∆FS11 ∆CASH11

Min

Max

Mean

SD

–1.27 –22.31 –25.10 –6.87 –19.42 –21.49 –12.36 –0.47 –0.97

18.00 28.10 18.38 4.24 19.74 25.10 26.07 3.50 14.54

0.32 0.36 –0.36 –0.05 1.19 0.95 0.32 0.10 0.80

1.05 2.32 3.25 0.79 3.76 4.00 1.69 0.23 2.43

Changes from 2011 to 2012 ∆DPO12 ∆PM12 ∆OCF12 ∆DR12 ∆DFL12 ∆DOL12 ∆REV12 ∆FS12 ∆CASH12

Min

Max

Mean

SD

–0.99 –14.56 –23.40 –9.08 –19.06 –23.34 –2.57 –0.20 –0.99

19.53 7.50 19.63 9.70 27.77 20.62 3.58 0.27 12.13

0.19 –0.19 –0.21 1.60 1.04 0.64 0.05 0.06 0.37

1.16 1.42 3.80 1.93 3.78 3.84 0.58 0.06 1.51

Note: SD = standard deviation

3.4 Pearson bivariate correlation analysis We studied the entire sample and also two sub-groups: companies in the manufacturing industry and companies in the service industry.

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Overall, bivariate correlation Analysis showed that change in the firm’s profitability is positively correlated with: 1

DFL10, FS11, DR12, REV12, and FS12

2

negatively correlated with DFL12.

Bivariate correlation analysis showed that change in operating cash flow is positively correlated with DR11, DOL11, and FS11. Bivariate correlation analysis showed that change in the decision to pay the amount of dividends is positively correlated with 1

PM10, PM11, PM12, CASH10, CASH11, CASH12, REV11, FS10, and FS11

2

negatively correlated with DR11, OCF11, and DOL12.

In the manufacturing industry, bivariate correlation analysis showed that change in the firm’s profitability is positively correlated with: 1

DFL10, DFL11, REV10, REV12, FS10, FS11, FS12

2

negatively correlated with DR11, DR12, DOL11, and DOL12.

Bivariate correlation analysis showed that change in operating cash flow is: 1

positively correlated with DOL11 and REV12

2

negatively correlated with PM10 and DFL11.

Bivariate correlation analysis showed that change in the decision to pay the amount of dividends is positively correlated with: 1

DOL10, PM10, PM11, PM12, OCF11, OCF12, REV10, and FS11

2

negatively correlated with DR11, DR12, and DOL12.

In the service industry, bivariate correlation analysis showed that change in the firm profitability’s is positively correlated with: 1

DFL10, DOL10, FS11, FS12, and DR12

2

negatively correlated with DFL11 and DFL12.

Bivariate correlation analysis showed that change in operating cash flow is positively correlated with DR11 and FS11. Bivariate correlation analysis showed that change in the decision to pay amount of dividends is positively correlated with: 1

PM10, PM11, CASH10, CASH11, FS10, and FS11

2

negatively correlated with DR11 and OCF11.

4

Analysis, findings, discussion, conclusions, limitations, and future research

This section presents the empirical findings on the relationship between changes in corporate leverage, changes in financial efficiency, and the changes in decision of Indian firms to pay the amount of dividends.

0.046

0.008

0.005

0.016

0.816

0.092

–0.001

0.040

–0.050

∆DR10

∆DFL10

∆DOL10

∆REV10

∆FS10

∆PM 10

∆OCF10

∆CASH10

Industry

0.101

0.030

0.013

0.025

0.541

0.057

0.011

0.011

0.068

0.093

Std. error

–0.026

0.072

–0.003

0.186

0.083

0.015

0.021

0.039

0.035

Beta

Standardised coefficientsc

–0.501

1.361

–0.062

3.625

1.507

0.287

0.419

0.777

0.678

4.018

t

0.617

0.174

0.951

0.000**

0.133

0.774

0.675

0.438

0.498

0.000**

Sig.

0.949

0.890

0.975

0.934

0.821

0.935

0.982

0.962

0.936

VIF

1.054

1.124

1.026

1.070

1.218

1.069

1.018

1.039

1.069

Collinearity statistics Tolerance

Notes: a dependent variables: ∆DPO b independent variables: ∆DR, ∆DFL, ∆DOL, ∆REV, ∆FS, ∆PM , ∆OCF, ∆CASH, and Industry c linear regression through the origin. SEE = standard error of the estimate ∆DPO = change in decision to pay the amount of dividends ∆DR = change in debt leverage ∆DFL = change in the DFL ∆DOL = change in the DOL ∆REV = change in sales revenue ∆FS = change in firm size ∆PM = change in profit margin after tax ∆OCF = change in operating cash flow ∆CASH = change in cash and cash equivalent. *correlation is significant at the 0.05 level (two-ailed) **correlation is significant at the 0.01 level (two-tailed). ***correlation is significant at the 0.10 level (two-tailed). That a test for multicollinearity was performed. All the variance inflation factor (VIF) coefficients are less than 5 and tolerance coefficients are greater than 0.50.

0.373

(Constant)

B

Unstandardised coefficients

Table 3

Corporate leverage, financial efficiency, and the decision to pay the amount of dividends (year 2010: entire sample) R2 = 0.065; adjusted R2 = 0.042

Corporate leverage, financial efficiency, and the decision of Indian firms OLS regression estimates on factors affecting the decision to pay the amount of dividendsa,b

267

–0.373

–0.017

0.026

–0.101

2.517

0.106

–0.052

0.060

–0.274

DR11

DFL11

DOL11

REV11

FS11

PM 11

OCF11

CASH11

Industry

0.101

0.022

0.016

0.032

0.463

0.039

0.013

0.015

0.079

0.089

Std. error

–0.122

0.135

–0.146

0.170

0.355

–0.156

0.090

–0.051

–0.218

Beta

Standardised coefficientsc

–2.717

2.813

–3.211

3.266

5.430

–2.553

1.931

–1.126

–4.728

1.755

t

0.007***

0.005*

0.001*

0.001*

0.000**

0.011*

0.054*

0.261

0.000**

0.080***

Sig.

0.987

0.868

0.969

0.732

0.466

0.532

0.924

0.972

0.938

VIF

1.013

1.152

1.032

1.367

2.146

1.880

1.082

1.029

1.067

Collinearity statistics Tolerance

Notes: a Dependent variables: ∆DPO b Independent variables: ∆DR, ∆DFL, ∆DOL, ∆REV, ∆FS, ∆PM , ∆OCF, ∆CASH, and Industry c Linear regression through the origin. SEE = standard error of the estimate ∆DPO = change in decision to pay the amount of dividends ∆DR = change in debt leverage ∆DFL = change in the DFL ∆DOL = change in the DOL ∆REV = change in sales revenue ∆FS = change in firm size ∆PM = change in profit margin after tax ∆OCF = change in operating cash flow ∆CASH = change in cash and cash equivalent. *correlation is significant at the 0.05 level (two-ailed) **correlation is significant at the 0.01 level (two-tailed). ***correlation is significant at the 0.10 level (two-tailed). That a test for multicollinearity was performed. All the variance inflation factor (VIF) coefficients are less than 5 and tolerance coefficients are greater than 0.50.

0.156

(Constant)

B

Unstandardised coefficients

Table 3

Corporate leverage, financial efficiency, and the decision to pay the amount of dividends (year 2010: entire sample) R2 = 0.065; adjusted R2 = 0.042

268 A. Gill et al.

OLS regression estimates on factors affecting the decision to pay the amount of dividendsa,b (continued)

–0.088

0.002

–0.042

0.100

–1.089

0.231

0.043

0.109

0.031

∆DR12

∆DFL12

∆DOL12

∆REV12

∆FS12

∆PM 12

∆OCF12

∆CASH12

Industry

0.138

0.047

0.018

0.049

1.334

0.189

0.017

0.019

0.040

0.144

Std. error

0.012

0.126

0.127

0.272

–0.048

0.030

–0.135

0.007

–0.125

Beta

0.222

2.323

2.333

4.754

–0.817

0.527

–2.503

0.121

–2.193

2.630

t

0.825

0.021*

0.020*

0.000**

0.415

0.599

0.013*

0.904

0.029*

0.009***

Sig.

0.973

0.965

0.958

0.865

0.809

0.884

0.976

0.944

0.869

VIF

1.028

1.036

1.043

1.156

1.236

1.131

1.025

1.059

1.151

Collinearity statistics Tolerance

Notes: a Dependent variables: ∆DPO b Independent variables: ∆DR, ∆DFL, ∆DOL, ∆REV, ∆FS, ∆PM , ∆OCF, ∆CASH, and Industry c Linear regression through the origin. SEE = standard error of the estimate ∆DPO = change in decision to pay the amount of dividends ∆DR = change in debt leverage ∆DFL = change in the DFL ∆DOL = change in the DOL ∆REV = change in sales revenue ∆FS = change in firm size ∆PM = change in profit margin after tax ∆OCF = change in operating cash flow ∆CASH = change in cash and cash equivalent. *correlation is significant at the 0.05 level (two-ailed) **correlation is significant at the 0.01 level (two-tailed). ***correlation is significant at the 0.10 level (two-tailed). That a test for multicollinearity was performed. All the variance inflation factor (VIF) coefficients are less than 5 and tolerance coefficients are greater than 0.50.

0.378

(Constant)

B

Standardised coefficientsc

Table 3

Unstandardised coefficients

Corporate leverage, financial efficiency, and the decision to pay the amount of dividends (year 2010: entire sample) R2 = 0.065; adjusted R2 = 0.042

Corporate leverage, financial efficiency, and the decision of Indian firms OLS regression estimates on factors affecting the decision to pay the amount of dividendsa,b (continued)

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4.1 Corporate leverage and financial efficiency Overall, ordinary least square (OLS) showed that changes in profitability of the firm is positively related to changes in DFL10, FS11, FS12, and DR12, and negatively related to changes in DR10, DR11, DOL11, and DFL12. OLS (OLS) also showed that changes in profitability of the firm is positively related to changes in DFL10, DFL11, FS11, and FS12, and negatively related to changes in DR10, DR11, DR12, DOL10, DOL11, DOL12, and REV11 in the Indian manufacturing industry. In addition, OLS also showed that changes in profitability of the firm is positively related to changes in DFL10, DOL10, REV11, FS11, FS12, and DR12, and negatively related to changes in DFL11 and DFL12 in the Indian service industry. OLS showed that the change in operating cash flow of the firm is positively related to changes in DR10, DR11, DOL11, FS11, and negatively related to changes in REV11, REV12, and PM12 in India. OLS also showed that change in operating cash flow of the firm is positively related to changes in DOL11 and REV12, and negatively related to changes in DFL11in the Indian manufacturing industry. In addition, OLS also showed that change in operating cash flow of the firm is positively related to changes in DR10, DR11, FS11, and REV12 in the Indian service industry.

4.2 Corporate leverage, financial efficiency, and the decisions about the amount of dividends Overall, OLS showed that changes in the decision about the amount of dividends of the firm is positively related to changes in PM10, PM11, DOL11, FS11, CASH11, PM12, OCF12, and CASH12 and negatively related to changes in DR11, REV11, OCF11, Industry, DR12, and DOL12 in India (see Table 3). OLS showed that changes in the decision to pay the amount of dividends positively related to changes in DOL10, REV10, PM10, REV11, PM11, OCF11, PM12, OCF12, and CASH12, and negatively related to changes in DR11 and DOL12 in the Indian manufacturing industry. OLS also showed that changes in the decision to pay the amount of dividends s positively related to changes in PM10, CASH10, FS11, PM11, and PM12, and negatively related to changes in DR11, REV11, and OCF11 in the Indian service industry.

4.3 Random and fixed-effects The random and fixed effects of independent variables on the dependent variables indicate that the change in the decision to pay the amount of dividends differs from sector to sector and from year to year. The changes in the decision to pay the amount of dividends may be due to the changes in economic situation of India that lead to changes in corporate leverage and financial efficiency of the Indian firms.

4.4 Discussion The main purpose of this study was to find the relationship between corporate leverage, financial efficiency, and the decision to pay the amount dividends of the Indian firms. The findings show that:

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1

changes in profitability of the firm are positively related to changes in debt leverage, DFL, and firm size in India

2

changes in profitability of the firm are negatively related to changes in debt leverage, the DOL, and the DFL in India

3

changes in profitability of the firm are positively related to changes in the DFL and firm size in the Indian manufacturing industry

4

changes in profitability of the firm are negatively related to changes in debt leverage, DOL, and revenue in the Indian manufacturing industry

5

changes in profitability of the firm are positively related to changes in the DFL, the DOL, revenue, firm size, and debt leverage in the Indian service industry.

6

changes in profitability of the firm are negatively related to changes in the DFL in the Indian service industry.

7

changes in operating cash flow of the firm are positively related to changes in debt leverage, the DOL, and firm size in India

8

changes in operating cash flow of the firm are negatively related to changes in revenue and profit margin in India

9

changes in operating cash flow of the firm are positively related to changes in the DOL and revenue in the Indian manufacturing industry

10 changes in operating cash flow of the firm are negatively related to changes in the DFL in the Indian manufacturing industry 11 changes in operating cash flow of the firm are positively related to changes in debt leverage, firm size, and sales revenue in the Indian service industry. The findings show that the impact of corporate leverage on financial efficiency of the firm differs from year to year and from industry to industry. Conceivably the impact of economic changes in India vary from year to year and from industry to industry. The findings lend some support to the findings of Roden and Lewellen (1995), Wald (1999), Chiang et al. (2002), Abor (2005), Mendell et al. (2006), and Gill et al. (2011). The findings also show that the change in the decision about the amount of dividends is: 1

positively related to changes in profitability, DOL, firm size, cash and cash equivalent, and operating cash flow in India

2

negatively related to changes in debt leverage, sales revenue, and operating cash flow in India

3

positively related to changes in DOL, sales revenue, profitability, operating cash flow, and cash and cash equivalent in the Indian manufacturing industry

4

negatively related to changes in debt leverage and the DOL in the Indian manufacturing industry

5

positively related to changes in profitability, cash and cash equivalent, and firm size in the Indian service industry

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The above findings show that the impact of corporate leverage and financial efficiency on the decision to the amount of dividends differs year to year and industry to industry. The above finding lend some support to findings of Rozeff (1982), Baker et al. (1985), Dhillon (1986), Pruitt and Gitman (1991), Collins et al. (1996), Charitou and Vafeas (1998), D’Souza (1999), Baker and Powell (2000), Eriotis and Vasiliou (2003), De Angelo et al. (2004), Amidu and Abor (2006), Asif et al. (2011), Hashemi and Zadeh (2012), and Alam and Hossain (2012). The findings of this study contradict the finding of Khan (2009). This may be because of the economic situation of two countries in which firm operate.

4.5 Conclusions The present study found that changes in corporate leverage cause changes in the financial efficiency of Indian firms. It also found that changes in corporate leverage and financial efficiency cause changes in the decision to pay the amount of dividends in the Indian firms. Corporate leverage and financial efficiency play some role in the decision about the amount of dividends. But the impact of corporate leverage on financial efficiency and the impact of corporate leverage and financial efficiency on the decision about the amount of dividends differ year to year and industry to industry.

4.6 Limitations This is a co-relational study that investigated the association between the changes in corporate leverage and financial efficiency and the changes in corporate leverage, financial efficiency, and the decision to pay the amount of dividends. There is not necessarily a causal relationship between the three although some conjectures were provided to the findings. This study is limited to the sample of Indian service and manufacturing firms. The findings of this study could only be generalised to firms similar to those that were included in this research. In addition, sample size is small.

4.7 Future research Future research should investigate generalisations of the findings beyond the Indian firms. Important control variables such as industry sectors from different countries should also be used.

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