Factors Affecting Dividend Payout Policy of Oil and Gas Sector in Pakistan

4865 Words Dec 5th, 2009 20 Pages

Dividend policy is the decision for the firm to pay out earnings verses retaining and reinvesting them. Dividend decision has remained one of the tough challenges for financial economists. We are yet to understand completely the factors that influence dividend decision and the manner in which these factors interact.

From the practitioner’s viewpoint dividend policy of a firm has an implication for investors, managers, lenders and other stakeholders. For investors, dividends whether declared today or accumulated and provided at a later date are not only a means of regular income, but also an important input in valuation of a firm. Similarly, manager’s flexibility to invest in projects is also dependent on the
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Lower-income shareholders, however who need dividend income will prefer a higher payout of earnings.
6. Market Considerations:
The risk-return concept also applies to the firm’s dividend policy. A firm where the dividends fluctuate from period to period will be viewed as risky, and investors will require a high rate of return, which will increase the firm’s cost of capital. So the firm’s dividend policy also depends on the market’s probable response to certain types of policies. Shareholders are believed to value a fixed or increasing level of dividends as opposed to a fluctuating pattern of dividends.
Dividend policy is at the theory core of corporate finance. It is one of the most debated topics in the finance literature and still keeps its prominent place. Many researchers have devised theories and provided empirical evidence regarding the determinants of a firm’s dividend policy. The dividend policy issue, however, is yet unresolved. Clear guidelines for an “optimal payout policy” have not yet emerged despite the voluminous literature. Yet we still do not have an acceptable explanation for the observed dividend behavior of companies. We are yet to understand completely the factors that drive dividend decision and the manner in which these factors interact. This is known as the dividend puzzle in the finance literature. Several hypotheses have been put forward to shed some light on this puzzle but in vain. More recently
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