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Archives of Business Research – Vol. 9, No. 12
Publication Date: December 25, 2021
DOI:10.14738/abr.912.11100. Ahmad, N., Nisar, F., Iqbal, T. (2021). Behavior of Company Performance in Response to Dividend Policy: An Analysis of Textile
Sector Listed in Pakistan Stock Exchange. Archives of Business Research, 9(12). 1-24.
Services for Science and Education – United Kingdom
Behavior of Company Performance in Response to Dividend
Policy: An Analysis of Textile Sector Listed in Pakistan Stock
Exchange
Dr. Nisar Ahmad
Lahore College for Women University
Lahore-Pakistan
Faiqa Nisar
Lahore College for Women University
Lahore-Pakistan
Tahir Iqbal
Hailey College of Commerce
University of the Punjab, Lahore-Pakistan
ABSTRACT
The current study explains the relationship of dividend payout policy on the
business performance of companies that exist in textile of Pakistan. 100 companies
are selected from textile sector. Relationship of dividend payout policy and
business performance was controlled with four variables based on relevant
theories. These variables include size of company, growth of company, leverage
(debt to equity ratio) and corporate governance index. Panel data is collected from
2012-2017 (six years) and then analyzed with unit root, descriptive statistics,
correlation analysis, OLS regression, Lagrange multiplier, Huasman test, Fixed
effect and Random effect models. Following key findings for each research objective
were obtained by applying the adopted research method on the data through the
adopted method of analyses: The results of the study show that in textile companies,
a negative relationship occurs between dividend payout policy and their
profitability. Furthermore, size of the firm according to the pecking order theory
and leverage as per the agency cost theory came out to have a significant controlling
effect on this negative relationship.
Keywords: Dividend Policy, ROE, EPS, Tobin’s Q, Size, Growth, Leverage, Corporate
Governance Index.
INTRODUCTION
Privatization, globalization and liberalization in Pakistan economy along with the growing
integration of information technology in business have caused intense competitive
environment in every industry and business. On the other hand, this situation has also confused,
dazed and bewildered Pakistani corporate stakeholders because they know that in order to
thrive in this competitive environment, it is crucial for them to increase the value of their firms
(Farrukh et al., 2017). In order to do so, finance managers of companies have to deal with the
decisions related to the basic budgetary of business so they can meet the goal of increasing their
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Archives of Business Research (ABR) Vol. 9, Issue 12, December-2021
Services for Science and Education – United Kingdom
firms’ value by expanding the engagement of shareholders along with increasing the
performance and profitability of their firms (Adediran and Alade, 2013). Profitability of a
business is the major economic drive for companies and they can attribute their profit towards
two main heads. Either they can go for retained earning i-e can hold their earning in the firm to
use it in future investment for growth purposes or they can distribute this earning to
shareholders (Yegon et al., 2014). The distribution of profit is mainly done as dividends, this is
why, it is crucial for firms to design a dividend payout policy to determine that whether to pay
dividends and if yes then what should be the percentage of payouts or if it is more suitable for
the financial benefits of business to invest the profit in future growth (Khan, et al. 2016).
It is evident that financial performance is very important and financial behavior of a firm
revolves around number of key decisions including management of working capital,
investments and dividend policy, among which dividend distribution holds a key position
(Younis and Javid, 2014). Jaffe, Westerfield & Ross (2002) stated that the importance of
dividend decision greatly lies in the fact that it helps the finance managers to forecast the fund
amount that they can distribute in shareholders as dividend payouts and the remaining amount
to be reserved for making investments in future time period. This policy also helps the
stakeholders to obtain the information associated with the performance of a company because
the major interest of an investor in investing his or her savings in a business is to gain profit on
them. The common source of income is seen in a dividend by the investors who are averse to in
a setting where businesses operate in very competitive era and maintain its performance and
quality to maintain their statuesque. All these matters make the making of dividend payout
policy a very important decision as it helps in maintaining the attractiveness of an organization
(Bhattacharyya, 2007). The dividend plans in corporate world varies according host country on
the firm being industrialized or unindustrialized and other financial situations such as earning
patterns, size and growth of the firm. It was found out that dividend payout policy varies from
company to company based or internal situation and market pressure (Ramcharan, 2001).
The relevancy or irrelevancy of dividend payout policy for financial decisions in developed and
developing countries has been studied in previous literature (Rahman, 2018; Hasan, 2015; Lai
et al., 2016; Chauhan et al., 2019). Currently the focus has shifted to the determinants and
control predictors to decide dividend policies and their significance to the business
performance. It is evident that dividend policies in Pakistani stock market has a different
behavior with performance of companies from that in other stock market including developed
countries and other developing countries, even the behavior is different at industrial level
(Khan et al, 2016). Therefore current study aims to further extend the debate related to
dividend payout policy in Pakistan’s industries with regards to the fact that which controlling
predictors for the dividend payout ratio affects the dividend payout policy and how these
predictors influence the financial performance at industrial level in terms of asset returns i-e
generally abbreviated as ROA, earning per share or EPS and Tobin’s Q. Textile Sector of Pakistan
are taken under study to explore and investigate the predictors related to dividend payout
policy that can define the behavior of company performance mainly in these industries.