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44
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1
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The pecking order hypothesis suggests that firms finance investments first with the
internal finance, and if external financing is necessary, firms prefer to issue debt
49
December 2007
the firms growth and investment opportunities, as measured by market-tobook ratio (MBR), to be negatively related to dividends payouts (see, for
instance, Deshmukh, 2003, and Aivazian et al., 2003).
Moreover, mature companies are likely to be in their low-growth phase
with less investment opportunities (see Barclay et al., 1995, and Grullon et
al., 2002). These companies do not have the incentives to build-up reserves
as a result of low growth and few capital expenditures, which enable them to
follow a liberal dividend policy. On the contrary, new or young companies
need to build-up reserves to face their rapid growth and financing
requirements. Hence, they retain most of their earnings and pay low or no
dividends. Therefore, the age of the firm (AGE) is used as a second proxy
for the firms growth opportunities. Several studies have related firm growth
to age (Farinas and Moreno, 2000, and Huergo and Jaumandreu, 2004,
among others). Other things held constant, as a firm gets older its investment
opportunities decline leading to lower growth rates, consequently reducing
the firms funds requirements for capital expenditures. Therefore, dividend
payout should be positively related to the firms age. Yet, we do not expect
the impact of age to always be linear. Thus, we allow the effect of age to be
non-linear by including the age squared (AGESQ). If the coefficient on
AGESQ appears to be negative, then our assumption of a quadratic
relationship between age and dividends is true.
Hypothesis 5: The firm size is positively associated with dividend
payouts
A large firm typically has better access to capital markets and finds it
easier to raise funds with lower cost and fewer constraints compared to a
small firm. This suggests that the dependence on internal funding decreases
as firm size increases. Therefore, ceteris paribus, large firms are more likely
to afford paying higher dividends to shareholders. In this study the firms
market capitalization of common equity (MCAP) is used as a measure for
size (see, for example, Deshmukh, 2003). Based on the above discussion and
consistent with previous research the size variable is expected to have a
positive relationship with dividend payouts.
Hypothesis 6: The firm debt is negatively associated with dividend
payouts
before issuing equity to reduce the costs of information asymmetry and other
transactions costs. (Myers 1984, and Myers and Majluf, 1984).
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51
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This law was again amended in 2001 and implemented as of January 2002
removing the 10 percent tax on dividends.
4
The list of companies used in the analysis is available upon request.
52
December 2007
(1)
where the variables are defined in Table 1 below. The table also provides a
summary of the research hypotheses and identifies the dependent variable
used in the regressions.
Table 1
Summary of Research Hypotheses and Proxy Variables
H1: Agency
costs
H2: Ownership
structure*
53
Positive
Negative
Negative
Positive
Positive
Positive
H3: Signaling
H4: Investment
opportunities
H5: Size
H6: Financial
leverage
H7: Profitability
H8: Taxes
Control variable
December 2007
Negative
Negative
Positive
Negative
Positive
Negative
Positive
Negative
Negative/
Positive
Dependent
variable
* The 10% threshold level of ownership is used to identify the ultimate owner of the
firm.
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December 2007
= yit ,
if yit 0 ,
*
if yit > 0 .
*
6
7
See StataCorp (2003) and Verbeek (2000) for the likelihood function.
The coefficient of variation CV is defined as the standard deviation over the mean.
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December 2007
Table 2
Descriptive Statistics for the Dependent and Independent Variables
Variable
Mean
Std. Dev.
0.027
0.035
DYLD
3.068
0.746
STOCK
0.289
0.246
INSD
0.303
0.460
FAML
0.210
0.408
STATE
0.539
0.499
INST
0.368
0.483
MULT
15.738
13.533
AGE
430.717
703.841
AGESQ
1.290
1.025
MBR
2.143
6.939
DER
0.299
0.671
TURN
0.500
0.500
DTAX
15.731
1.403
MCAP
0.282
1.774
EPS
0.738
0.440
NONFIN
Note: Variables are defined in Table 1.
Min
0
1.114
0
0
0
0
0
0
0
-0.020
-177.242
0
0
11.156
-8.388
0
Max
0.400
5.407
0.945
1
1
1
1
70
4900
12.670
69.270
7.993
1
21.356
28.299
1
CV
1.282
0.243
0.851
1.517
1.941
0.926
1.311
0.860
1.6341
0.795
3.238
2.243
1.000
0.089
6.285
0.597
Obs.
1316
885
936
1181
1181
1181
1182
1598
1598
1382
1511
1491
1592
1320
1514
1920
The likelihood ratio (LR) test reported at the bottom of table of the results
(presented below) provides a formal test for the pooled (Tobit) estimator
against the random effects panel estimator. For all estimated regressions, the
results of the LR test indicate that the panel-level variance component is
important and, therefore, the pooled estimation is different from the panel
estimation. The reported coefficient of Rho ( ), which is the panel-level
variance component, provides a similar test.
In attempting to test for heteroskedasticity, a two-stage test procedure is
employed. An important test for heteroskedasticity is the Lagrange
Multiplier test devised independently by Breusch and Pagan (1979) and
Godfrey (1978). The results of the test show that our models do not suffer
from a heteroskedasticity problem. For example, in the general model
(Model 1 of Table 3) the observed Chi-square value of 2.581 is not
significant at the 5 percent level (the 5 percent critical value from a Chisquare distribution with 1 degree of freedom is 3.841). Therefore the null
hypothesis of homoskedasticity (or no heteroskedasticity) is not rejected.
Table 3 gives the results of the maximum likelihood estimation (MLE) of
the random effects Tobit model. The table shows three models in which
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December 2007
8
9
For computing the marginal effects see, for example, Greene (1999).
Using US data, Alli et al. (1993) obtained a similar result.
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Table 3
MLE Results for Random Effects Tobit Model
Dependent Variable = DYLD
Model 1
Model 2
Independ.
Variables
Coefficient
Estimates
Constant
-0.266***
(-4.10)
-0.008
(-1.01)
-0.060***
(-2.61)
-0.004
(-0.43)
0.024*
(1.93)
0.008
(0.76)
0.004
(0.37)
0.004***
(4.52)
-0.00006***
(-3.67)
0.00015
(0.04)
-0.003**
(-2.59)
-0.0002
(-0.02)
-0.007
(-1.52)
0.016***
(3.62)
0.005**
(2.52)
-0.017
(-1.30)
0.597***
(10.46)
STOCK
INSD
FAML
STATE
INST
MULT
AGE
AGESQ
MBR
DER
TURN
DTAX
MCAP
EPS
NONFIN
Rho ()a
No. of obs.
Log LKHD
Wald test
Marginal
Effects
(%)
Model 3
Marginal
Marginal
Coefficient
Effects Coefficient Effects
Estimates
Estimates
(%)
(%)
-0.278***
-0.300***
(-5.43)
(-6.25)
-0.241
-1.795
-0.041**
-1.237
-0.043**
-1.273
-0.130
0.770
0.021*
(1.90)
0.672
0.019*
(1.83)
0.610
0.237
0.118
0.131
0.004***
0.128
0.004***
0.117
-0.002
(-2.04)
(3.93)
-0.00006***
(-3.64)
0.005
-0.090
0.479
0.136
-1.686
759
272.33
-0.003***
(-2.95)
-0.006
-0.224
-0.002
-0.090
(-2.29)
(3.83)
-0.00006***
(-3.83)
-0.002
-0.002***
(-2.61)
-0.066
-0.006
(-1.40)
0.015***
(4.72)
-0.194
0.464
0.005***
0.149
0.006***
0.167
(2.84)
-0.017
(-0.97)
0.588***
(10.46)
-0.532
759
270.47
2 (15)=85.75
2 (9)=78.26
0.016***
(5.34)
0.480
(3.36)
0.578***
(11.77)
759
269.15
2 (7)=78.03
P-value
0.000
0.000
0.000
LR testb
152.83
175.15
202.85
P-value
0.000
0.000
0.000
Notes: See Table 1 for definitions. t-statistics are in parentheses. *, ** and ***
denote significance at the 10, 5 and 1 percent levels, respectively. a proportion of
total variance contributed by panel level variance component. b provides a test for
pooled (Tobit) estimator against the random effects panel estimator.
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59
December 2007
possible explanation for this result is that the proxy for information
asymmetry is weak10.
Hypothesis 4 predicts that firms with high growth and investment
opportunities tend to retain their income to finance those investments, thus
paying less or no dividends. The variables MBR and AGE are used as
proxies for growth and investment opportunities. From the regression results
(Model 1) in Table 3, contrary to expectations, the coefficient of MBR is
positive and insignificant, whereas, as predicted, the coefficient of AGE is
positive and significantly different from zero. These findings indicate that
the market-to-book value ratio is not related to dividend yield, while firm
age is positively related to dividend yield. The positive coefficient on MBR
is analogous to that reported by Aivazian et al (2003) for Jordanian firms;
however, they obtain a significant coefficient in their results.
However, the hypothesized relationship between dividends and growth
and investment opportunities could not be rejected since the other proxy
variable for growth (AGE) is highly significant with t-statistics of 4.52, 3.93
and 3.83 in models 1, 2 and 3, respectively. The age of the firm is
consistently significant at the 1 percent level, suggesting that mature firms
tend to pay higher levels of dividends. From Model 3, as a firm becomes one
year older, the estimated increase in DYLD is 0.117 percent, ceteris paribus.
These results, reported in Table 3 , are consistent with prior research of
Manos and Green (2001) who found that the age of the firm and the payout
level are positively related for independent (non-group affiliated) Indian
firms. The result also provides empirical support for the maturity hypothesis
proposed by Grullon et al. (2002). That is, as firms become mature their
growth opportunities tend to decline resulting in lower capital expenditure
needs, and thus more cash flows are available for dividend payments. When
a mature firm has little or no investment opportunities, a high level of
dividends will reduce the discretionary resources available to managers that
could be wasted in perquisites or unprofitable projects. In other words,
dividends reduce the agency costs associated with free cash flow. The results
hence also provide support for the free cash flow hypothesis (Easterbrook,
1984, and Jensen, 1986).
To the best of the authors knowledge, this paper provides the first
attempt to document that the age of the firm is quadratically negatively
related to dividend yield as shown by the significant positive coefficients on
AGE and the significant negative coefficients on AGESQ (age squared) in
10
El-Khouri and Almwalla (1997) provided weak or no support for the signaling
hypothesis for Jordanian firms.
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December 2007
all regressions. This non-linear relationship between the age of the firm and
dividend yield (negative sign of AGESQ) may imply changes in a firms life
cycle, that is, movement from a lower growth phase to a higher growth
phase. In other words, when a firm finds new investment opportunities
(growth phase) it will pay less or no dividends because paying dividends is
no longer optimum. Again, this evidence reinforces the interpretation above
that the positive association between the age of the firm and dividend yield is
consistent with Grullon et al.s (2002) maturity hypothesis, and accordingly
with the free cash flow hypothesis of Easterbrook (1984) and Jensen (1986).
Another variable found to be a determinant of corporate dividend policy
in Jordan is the firm size (Hypothesis 5). As expected, Table 3 reports that
the coefficients on size (MCAP) are robustly positively correlated with
dividend yield. The t-statistics of the coefficients on MCAP for models 1, 2
and 3 are 3.62, 4.72 and 5.34, respectively, which are highly significant at
the 1 percent level. Firm size as measured by market capitalization is
positively related to DYLD with marginal effects of 0.480 percent. If for
example a firms market capitalization increases from JD 10 million to JD 15
million, the expected increase in its DYLD would be 0.195 percent11.
The positive and significant correlation between dividend yield and size
suggests that large firms are more able to pay dividends. This finding lends
support to the agency costs explanation. The intuition here is that the larger
the firm, the more difficult (costly) is the monitoring (i.e. the greatest the
agency problem). Thus, dividends could play a role in helping to alleviate
the agency problem. Also, the positive relation between dividend yield and
size supports the generally accepted view proposed by many finance scholars
that larger firms have easier access to capital markets (see, among others,
Lloyd et al., 1985, Holder et al., 1998, and Fama and French, 2002), and
have lower transaction costs associated with acquiring new financing as
compared to small firms (Alli et al., 1993).
Hypothesis 6 predicts a negative relationship between a firms financial
leverage and dividend yield. Table 3 shows that the coefficients on debt-toequity ratio (DER) are negative and statistically significant at the 5 and 1
percent levels. The t-statistics of the coefficients on DER for models 1, 2 and
3 are 2.59, 2.95 and 2.61, respectively. This suggests that firms with high
debt ratios tend to pay fewer dividends, and the level of dividend payments
11
[(LN 15,000,000 LN 10,000,000) * 0.480], see Washer and Casey (2004) for a
similar calculation.
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December 2007
Another variable (for non-financial firms) that was found to be significantly and
negatively related to dividend policy in Jordan is the asset tangibility. The results are
not reported here in order to save space but are available upon request.
13
It is worth mentioning here that when we performed the Wilcoxon test to see
whether dividend payout ratios differ between pre-tax (1989-1995) and post-tax
(1996-2000) periods, the null hypothesis that payout ratios for both periods have the
same distribution is rejected. The Wilcoxon test statistic yields a Z-statistic of 7.84
(P-value = 0.000).
62
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63
December 2007
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68
INSD
STOCK
-.166
-.362
1.000
.484
.107
1.000
.013
1.000
-.161
-.144 1.000
1.000
STOCK INSD FAML STATE INST MULT AGE AGESQ MBR DER TURN DTAX MCAP EPS TANG
FAML
.405
1.000
.178 1.000
1.000
-.145
1.00
1.000
-.151
-.156
.434
1.000
-.074
-.073
STATE
.017
.014
-.160
INST
.151
.037
-.060
.545 1.000
.039
-.102
-.009
-.171
.121
-.294
-.075
.388
.031
-.095 -.097
.306
.480
-.058
.007 -.004
.094
-.236
.018
.368
MULT
.012
.042
1.000
-.090 -.160
.315
.157
.117
.080
.068
-.017
.040
.129
.016
.402
-.062
-.160
-.030
-.024
-.053
-.092
-.055 -.056
.241
.215
-.053
.244
.038
1.51
-.090
.098
.079
.058
.112
1.21
AGE
-.148
-.216
-.202
.094
1.11
.946 1.000
-.007
.047
-.069
.014
1.45
.104
MBR
.085
.085
-.113 -.023
1.81
-.084
DER
-.087
-.022
-.037 -.100
1.42
.365
TURN
.178
.003
2.34 2.32
-.042
DTAX
-.020
-.124
2.20
.170
MCAP
.018
1.61
.163
EPS
.010
2.35
AGESQ
TANG
1.32
1.14 1.11
VIF
69
December 2007
Journal of Economic & Administrative Sciences
Appendix 1
Correlation Matrix and Variance Inflation Factors (VIF)
for the Explanatory Variables
December 2007
:
.
-
) (panel data
1989 2000
) (Tobit
.
70
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.