Determinant Agents Analysis of Dividend Policies

Practiced by Companies Listed in Great Britain and

France
Assistant teacher Raluca-Georgiana MOSCU, PhD Student
Dimitrie Cantemir Christian University, Bucharest

Abstract
Dividend policy is one of the most intriguing topics in financial research. Even
now, economists provide considerable attention and thought to solving the dividend puzzle,
resulting a large number of conflicting hypotheses, theories and explanations.
This paper aims to determine the dividend policies for 209 listed on London Stock
Exchange and Paris Stock Exchange in 2010 and to explain their dividend payment
behavior. So this paper investigates why companies in different countries have established
different dividend policies using firm level data from U.K. and France. The models
considered the impact of firm profitability, return on assets, firm size, previous year's
dividend, free cash-flow, total shareholder return, corporate tax, dividend yield and
ownership structure on dividend payout ratios.
Key words: dividend policy, corporate governance, determinants, agency theory,
ownership

1. Introduction
Dividend policy has a front place in financial literature and arises enough debates
both on developed markets, as within emergent ones. Many authors have attempted to
explain why some companies distribute or they should distribute dividends and why others
dont pay out, building empirical models to explain the dividend policy.
The vast majority of studies rely on a number of determinants of dividend policy
from a certain country. Travlos et al. (2001), Wang et. al. (2002), Adaoglu (2000), Manos
(2002) have studied the issue of dividend policy and factors influencing dividend
distribution rate. An analysis of dividend policy of a certain country requires research of as
many theoretical and practical determinants as possible that may have impact on the rate of
dividend distribution.
The objective of this study is to identify those factors that influence the rate of
dividend distribution in the United Kingdom and France. Thereby it will be analyzed the
dividend policy practiced by the companies listed in two different countries in terms of tax
rates applied, of the shareholding structure, of preference for financing through banks or by
appeal to the capital market. The choice of these two states is not accidental. In the EU
countries there are two models of governance that have different characteristics: the Anglo
American model, particular to companies in the UK, U.S. and Continental model, which
characterizes companies from countries like France, Germany and most countries from
Continental Europe.

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The work is structured as it follows: Section 2 presents the main determinants of
dividend policy, in Section 3 it is described the variables used and the work methodology,
and Section 4 contains the results of empirical testing. The last part is dedicated to
conclusions.

2. Literature review
Dividend policy is one of the key elements of financial management and
represents a responsibility for company managers. By dividend policy we mean the method
of managers to decide the dimension and the distribution of dividends to the shareholders.
Often subject of debates, dividend policy still remains a "puzzle" whose parts do not fit
(Black, 1976). Many researchers have identified a variety of determinants of dividend
policy including: profitability, taxation, debt, costs of agent, company size or free cash
flow.
Profit is the main explanatory variable of the company's ability to distribute
dividends. Managers give importance to this indicator, since it provides an overview of how
that company evolves. Lintner (1956) considers that the main determinants of dividend
policy are profits and dividends from the previous year. Adaoglu (2000) and Wang et al.
(2002) note that the only factor explaining the dividend policy in Turkey, China, Malaysia
is profit.
A variable that explains the policy of distributing dividends is free cash flow.
Firms with low growth opportunities and a higher free cash flow would have to pay higher
dividends to prevent the situation in which managers invest under capital cost or lose cash
flow investing it in projects ineffective. Amidu and ABOR (2006) have observed a positive
relationship between free cash flow and dividend distribution rate.
The investigations of some authors like Manos (2002), Fama & French (2001)
conclude that between company size and dividend rate there is a positive relationship.
Lloyd et al. (1985) noted that large firms are less sensitive to financial problems, being able
to pay higher dividends to shareholders. Lloyd et al. (1985) demonstrated that large firms
that have a financial maturity have easier access to capital markets, which reduces their
dependence on internal funds and thus they are able to offer higher dividends.
Another variable that may explain the dividend policy is the tax level. The
relationship that it is established between the real rate of taxation and distribution rate is a
negative one. If a country has higher tax level, profit is reduced, so the amount distributed
as dividends is reduced.
Companies where the major shareholder has a large percentage of social capital of
the company offers distributed dividend rates lower than other companies. Ownership
concentration problem was discussed by authors such as La Porta et al. (2000). Within
countries which practice Continental governance model, the concentration level of
ownership is high and protection of minority investors is low. Agent problems between
minority shareholders and the majority shareholders can be reduced by dividends
(Easterbrook, 1984; Shleifer & Vishny, 1997; Jensen, 1986).
Debt to Equity Ratio is also a significant variable in explaining the policy of
distributing dividends. Pruitt and Gitman (1991) indicate that risk affects policy of
companies regarding granting of dividends. High-risk companies will pay lower dividends.
Rozeff (1982), Lloyd (1985), Collins et al. (1996) prove that there is a negative relation
between the rate of distribution of dividends and debt.

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3. Database and methodology

Financial information necessary for testing of dividend policy from Great Britain
and France were collected from several sources: the site of the London Stock Exchange,
site of the Paris Stock Exchange and financial information website Cofisem. To investigate
dividend policy there have been analyzed companies from the indexes composition
considered representative for the countries mentioned: FTSE 100 for UK and SBF 120 for
France. Main criteria which were the basis of this selection were notoriousness and size of
companies on each index.
Multiple regression model that will be used to test the links between variables is:
Y = + 1X1 + 2X2 + + kXk +
where k = number of independent variables, Y dividend payout ratio (RDIV), Xk
independent variables, k estimated parameters for variables EPS, ROA, DIVt-1, FCF,
LN_CPB, D/E, TAX, DUM, coefficient expressing the impact of factors not included in
the model, considered with constant influence and it - error variable.
In the previous section there have been mentioned some relationships drawn from
the literature, relationships that are established between the rate of distribution of dividends
and some determinants of dividend policy. Thereby in table No.1 it is listed the variables
used in the research and positive / negative sign associated to the regression coefficient.

Table no. 1 Definition of used variables and influences over dividend distribution rate
Variable Definition Sign
EPS Earnings per Share +
ROA Return on Equity +
DIVt-1 Dividend distributed in the previous year +
FCF Free Cash Flow +
LN_CPB Firm size 1 +
D/E Debt to Equity Ratio 2 -
TAX Corporate tax / Gross profit -
DUM Dummy variable for ownership structure: 1 majority -
shareholders, 0 - minority shareholders

To identify the size and connection sense that is settled between independent
variables mentioned previous and dividend distribution rate from Great Britain it will be
estimated regression coefficients k for each of the following equations:

Eq (1): RDIV = i + 1*EPS + 2 * ROA + 3* DIVt-1+ 4 * FCF + 5* LN_CPB + 6*

D/E+ 7* TAX + 8 *DUM + it
Eq (2): RDIV = i +1* DIVt-1+ 7* TAX + 8*DUM + it
Eq (3): RDIV = i + 4 * FCF + 7* TAX + it

1
Calculated as natural logarithm from the market capitalization of each company.
2
Total liabilities/Shareholders equity

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For the analysis of practiced distribution dividend policy by companies listed in
France it will be used the following regression equations:

Eq (1): RDIV = i + 1*EPS + 2 * ROA + 3* DIVt-1+ 4 * FCF + 5* LN_CPB +

6* D/E + 7* TAX + 8* DUM + it
Eq (2): RDIV = i + 1*EPS + 3* DIVt-1+ 6* D/E + it

4. Empirical results
By means of financial data held to their disposal for companies listed in UK, in the
year 2010 it was tested links between the rate of dividend distribution (RDIV) and a
number of determinants of dividend distribution policy, the results being summarized in
table no. 2.

Table no. 2. The results of regression equations (OLS method) on the determinants of
dividend policy for UK listed companies in 2010
Equation Eq. (1) Eq. (2) Eq. (3)
Independent Regression Prob. Regression Prob. Regression Prob.
Var. Coefficients Coefficients Coefficients
X1 (EPS) -0.0005 0.303
X2 (ROA) 0.0004 0.907
X3 (DIVt-1) 0.003 0.025 0.003 0.017
X4 (FCF) 0.240 0.384 0.42 0.11
X5 (LN_CPB) 0.009 0.806
X6 (D/E) -0.025 0.869
X7 (TAX) -0.001 0.020 -0.259 0.043 -0.001 0.007
X8 (DUM) -0.212 0.126 -0.001 0.024
R2 0.1874 0.168 0.10
F-statistically 2.56 6.35 4.79

If UK companies in Eq (1), regression equation containing all independent

variables, show that there are two statistically significant factors (prob <10%), namely
dividend from previous year (DIVt-1) and the actual tax rate (TAX).
In case of DIVt-1 determining factor (dividend from previous year) it shows a
positive regression coefficient (1 = 0.003), demonstrating that an increase in dividend per
share in 2009 led to an increase of the dividend distribution rate in year 2010. In these
circumstances we can say that in the last two years UK companies try to pay increased
attention to investors by distributing an incoming dividend rate. Thus UK companies rely
on attracting new investors and while they can also provide current shareholders confidence
for the investment already made.
Effective rate of tax (TAX) is a significant variable in the three regression models.
Note that this variable has assigned a low but negative regression coefficient (7 = - 0.001).
For the UK, corporate tax rate is lower than in France, in the year 2010 it is equal to 28%.
An increase in the effective tax rate will determinate a decrease of net income and hence of
dividends paid.

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In the regression equation Eq (2), with variables DIVt-1 and TAX, DUM is a
significant variable in explaining the policy of distributing dividends. This variable takes
the value 1 if the shareholding is a majority one. Of the 99 companies constituting the
FTSE 100 index, over 90% have a minority shareholding. Between variables DUM and
RDIV it is established a negative, strong and backwards relationship compared to the
connection between the same two variables for companies listed in France (the regression
coefficient is equal to 0.0091 for France). UK financial system is one of "Market Driven"
type, based on liquid capital markets and well developed, companies often prefer to seek
financing through the capital market. In countries using Anglo-American model, most
companies have an independent governing (management) board, which monitories closely
the activities of managers so that they act in the interests of minority investors. Minority
shareholding prefers to obtain a gain as high as possible from dividends at the expense of a
gain from capital growth.
In Eq (3), the free cash flow variable (FCF) is significant in explaining the
dividend policy from Great Britain if it is accepted the 11% probability. Sign of regression
coefficient (4 = 0.42) is positive. Alli et al. (1993) believes that cash flow is very
important in explaining the dividend policy, the profit can be influenced by accounting
practices and may not accurately reflect the company's ability to distribute dividends.
For companies from France selected factors explain a relatively low dividend
policy practiced by companies listed in the SBF 120 index. Table No. 3 shows that for the
first regression equation, the one that contains all the determinant variables of dividend
policy used in this study only EPS DIVt-1 and TAX are significant.
Negative relationship between EPS and RDIV shows that an increase in earnings
per share results in granting of some decreasing dividends. In France, most companies have
concentrated ownership, offering less protection to minority investors (La Porta et al.,
2000). Majority shareholders want the profits to be reinvested in projects that bring them
private benefits. They want to earn from potential capital growths, as opposed to minority
investors who prefer benefits in the form of dividends.

Table no. 3 Regression equations results (OLS method ) regarding determinant of dividend
policy for companies listed in France in year 2010

Equation Eq. (1) Eq. (2)

Independent Var. Regression Prob. Regression Prob.
Coefficients Coefficients
X1 (EPS) -0.043 0.0012 -0.032 0.0016
X2 (ROA) 0.675 0.163
X3 (DIVt-1) 0.182 0.001 0.176 0.0000
X4 (FCF) 0.301 0.350
X5 (LN_CPB) 0.036 0.305
X6 (D/E) 0.1643 0.194 0.163 0.08
X7 (TAX) -0.000001 0.349
X8 (DUM) 0.014 0.870
R2 0.2260 0.1938
F-statistically 2.99 8.01

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Although the tax rate applied to companies in France is higher than for the UK
shows that an increase in actual tax rate for French companies has a smaller impact on the
rate of distribution of dividends. The explanation may be in the majority of investors which
prefer not to pay dividends, but to use profit to fund projects that will result in increased
capital. Such obtained gains are exempted of tax in France3.
In Eq (2), we see the positive impact of debt to equity ratio. Variable D / E has
associated a regression coefficient (6 = 0.163) significantly in accepting a probability of
8%. In French the financial system is one of "Driven Bank" type, although banks dont
have portfolios in companies, monitor and control efficiently the firms activities. Corporate
governance codes contain articles relating to the protection of minority shareholders. In
order to meet their interests it is necessary for a company to distribute dividends. When
cash is not enough, companies turn to external financing and the need for external financing
leads to increased monitoring within the company due to the existence of creditors.

5. Conclusions
This study aims to answer through empirical analysis to the following question:
which are the main determinants of dividend policy practiced by the companies listed in
Great Britain and France in 2010? Explanatory variables of dividend policy practiced by the
companies listed in the UK are free cash flow, dividend from the previous year, the actual
rate of taxation and DUM variable of dummy type, that takes value 1 when ownership is a
major one. So UK companies pay high dividends if ownership is a more dispersed one and
cash from basic activity (free cash flow) is enough to be allocated to equity holders.
However, for France, the determinants of dividend policy are earnings per share, dividend
from the previous year and indebtedness.
Along with these factors it is likely that dividend policy from these two countries
to be explained by some differences in macro-economic environment, by transaction costs,
rate of development and by other institutional factors.

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