can dividend payouts and future earnings be predicted ...322339/fulltext01.pdf · stock market...

Can dividend payoutsbased on

Nordic IT Companies dividend policy analysis

Master Thesis, 15 hpSpring 2010Supervisor: Owe R. HedstrmAuthor: Aziz MirzabekovSeminar date: May 10, 2010













Can dividend payoutsbased on stock market liquidity and capital structure


Master Thesis, 15 hp

Supervisor: Owe R. HedstrmAuthor: Aziz MirzabekovSeminar date: May 10, 2010

Can dividend payoutsstock market liquidity and capital structure
















Supervisor: Owe R. Hedstrm

Seminar date: May 10, 2010



Supervisor: Owe R. Hedstrm



and future earnings be predictedstock market liquidity and capital structure


























and future earnings be predictedstock market liquidity and capital structure?

and future earnings be predicted?

and future earnings be predictedand future earnings be predicted

ii

I am far from underestimating the importance of dividends;but I rank dividends below human character

Theodore Roosevelt26th President of the United States

iii

ACKNOWLEDGMENT

I would like to thank my parents heartily for their invaluable countenance andheartening my studies, providing me necessary means and support in finishing myMaster programme and giving me wonderful opportunity of being a part of world classinstitute, my alma mater.

I would like to thank my study advisor, Owe R. Hedstrm, for his patience,understanding, practical assistance and knowledge he gave me through this MasterThesis. Without his great and tremendous support it would be impossible to finish mygraduation project.

I also would like to express my gratitude towards NASDAQ OMX team, especiallysales director Ulla Vanhakangas for their assistance in processing the financial data.

Special thanks go to Umea University Library staff for helping with access to thearticles, books and Thompson Reuters DataStream.

Furthermore, I want to thank Dzmitry Pechko, my fellow student in Master programme,who helped me with solutions for many complex issues in my thesis. He supported meand gave valuable comments on my thesis. Additionally, I thank my old friend, AkmalNiyazov, who helped me to collect my strength during my studies.

Finally, I express my thanks to Malika Azamova, who had been my muse and rousingpower trough my studies.

Aziz Mirzabekov

Ume, April 2010

iv

SUMMARY

Dividend policy has significant impact on the company's capital market, in particularthe dynamics of the price of its shares. Dividends represent cash income of shareholdersand to some extent, signal them about success of the firm they have invested. From thatpoint of view dividend policy has crucial impact on investment decisions.

Numbers of valuation models based on dividend payouts exist in the financial theoryand they imply importance of dividends in making investment decisions. Alternativelysome authors argue that role of the dividends is overestimated, as investors do notseparate dividends and capital earnings. I believe that dividend policy has broadinfluence not only on share valuation, but also on capital structure of the company andits stock market liquidity.

Study intended to discover if dividend payouts and future earnings can be predictedbased on stock market liquidity and capital structure. I have analysed 72 companiesassociated with Nordic information technologies market and tried to find maincharacteristics of dividend policy adopted in those companies. I have divided myresearch question into three parts and studied hypothesises which are associated withthe research question.

I found relationship of dividend policies with future earnings growth power, firm capitalstructure and market liquidity. As a result of my study I have observed financialstatements data and obtained the following outcome: (1) with valid and approveddividend policy, payout ratio is positively related to the future earnings growth rate (2)companies that have less liquid stock markets are more likely to pay dividends (3)companies with low leverage ratios have more probability of paying dividends. Also Ihave found that historically low payout ratio is harbinger of low or even negativeearnings growth rates.

I believe that based on findings mentioned above, effective investment policy could becreated. For the investor who favours to invest in company with high earnings growthperspectives and receive high dividends in the future, results of the study could beinteresting. According to the results of the research, for dividend preferring investor,funds should be invested in the company with constantly high payout ratio, low stockmarket liquidity and debt-to-equity ratio below 1. In that case the probability of meetinginvestment expectations would be much higher.

Keywords: dividend policy, stock market liquidity, capital structure, earnings, Miller

and Modigliani, dividend signalling theory, Nordic IT Market, dividend payout.

v

TABLE OF CONTENTS

1. INTRODUCTION .................................................................... 1

1.1 BACKGROUND.................................................................................................................... 11.2 RESEARCH PROBLEM FORMULATION ................................................................................ 31.3 PURPOSE............................................................................................................................ 31.4 LIMITATIONS OF THE THESIS.............................................................................................. 41.5 DISPOSITION ...................................................................................................................... 5

2. THEORETICAL METHODOLOGY ............................................. 6

2.1 EPISTEMOLOGY.................................................................................................................. 62.2 THEORETICAL PERSPECTIVE ............................................................................................... 72.3 SCIENTIFIC METHODOLOGY............................................................................................... 82.4 METHODS .......................................................................................................................... 92.5 CRITIQUE OF SOURCES OF THE DATA ACCESSED ............................................................. 10

3. LITERATURE REVIEW........................................................... 11

3.1 DO DIVIDENDS ASSOCIATED WITH FUTURE EARNINGS? ................................................. 113.1.1 THEORETICAL EXPLANATIONS AND THEORIES.......................................................... 113.1.2 THE DIVIDEND IRRELEVANCE THEORY ...................................................................... 123.1.3 THE BIRD IN THE HAND THEORY............................................................................ 123.1.4 THE TAX-PREFERENCE EXPLANATION ....................................................................... 133.1.5 THE SIGNALLING EXPLANATION................................................................................ 143.1.6 THE AGENCY EXPLANATION...................................................................................... 163.1.7 FORMULATION OF THE HYPOTHESIS 1 ..................................................................... 18

3.2 DOES STOCK MARKET LIQUIDITY DETERMINE DIVIDEND PAYMENTS?............................ 183.2.1 THEORETICAL BACKGROUND AND STUDIES.............................................................. 183.2.2 FORMULATION OF THE HYPOTHESIS 2 ..................................................................... 20

3.3 IS THERE ANY CONNECTION BETWEEN CAPITAL STRUCTURE AND DIVIDENDS? ............. 203.3.1 THEORETICAL OVERVIEW.......................................................................................... 213.2.2 FORMULATION OF THE HYPOTHESIS 3 ..................................................................... 22

4. DATA COLLECTION AND VARIABLES.................................... 23

4.1 DATA COLLECTION ........................................................................................................... 23

4.2 BIASES .............................................................................................................................. 234.2.1 DATA MINING BIAS ................................................................................................... 234.2.2 SURVIVORSHIP BIAS .................................................................................................. 244.2.3 TIME-PERIOD BIAS .................................................................................................... 24

vi

4.2.4 LOOK-AHEAD BIAS .................................................................................................... 24

4.3 VARIABLES........................................................................................................................ 244.3.1 VARIABLES USED IN HYPOTHESIS 1 TESTING ............................................................ 254.3.2 VARIABLES USED IN HYPOTHESIS 2 TESTING ............................................................ 264.3.3 VARIABLES USED IN HYPOTHESIS 3 TESTING ............................................................ 27

5. DATA ANALYSIS AND HYPOTHESES TESTING....................... 29

5.1 HYPOTHESIS 1 TESTING.................................................................................................... 295.1.1 FORMULATION OF THE NULL HYPOTHESIS ............................................................... 305.1.2 DEFINITION OF TEST STATISTIC................................................................................. 315.1.3 SPECIFYING THE SIGNIFICANCE LEVEL ...................................................................... 325.1.4 ALTERNATIVE HYPOTHESIS ....................................................................................... 32

5.2 HYPOTHESIS 2 TESTING.................................................................................................... 335.2.1 FORMULATION OF THE NULL HYPOTHESIS. .............................................................. 345.2.2 DEFINITION OF TEST STATISTIC................................................................................. 345.2.3 SPECIFYING THE SIGNIFICANCE LEVEL ...................................................................... 355.2.4 ALTERNATIVE HYPOTHESIS ....................................................................................... 35

5.3 HYPOTHESIS 3 TESTING.................................................................................................... 375.3.1 FORMULATION OF THE NULL HYPOTHESIS ............................................................... 375.3.2 DEFINITION OF TEST STATISTIC................................................................................. 385.3.3 SPECIFYING THE SIGNIFICANCE LEVEL ...................................................................... 385.3.4 ALTERNATIVE HYPOTHESIS ....................................................................................... 38

6. RESULTS DISCUSSION AND CONCLUSION............................ 40

6.1. POSITIVE RESULTS........................................................................................................... 406.2. SUGGESTIONS FOR FURTHER RESEARCH ........................................................................ 426.3. CONTRIBUTION TO THE SCIENCE FRAMEWORK ............................................................. 42

7. REFERENCES ....................................................................... 43

vii

LIST OF TABLES

TABLE 1: REPRESENTATIVE SAMPLING OF RESEARCH CATEGORIES 12

TABLE 2: GROUPS FORMATION BASED ON LIQUIDITY LEVEL, HYPOTHESIS 2 40

TABLE 3: GROUPS FORMATION BASED ON LEVERAGE RATIO, HYPOTHESIS 3 43

LIST OF FIGURES

FIGURE 1: PAYOUT RATIO AND SUBSEQUENT 10-YEAR EARNINGS GROWTH 20

FIGURE 2: SCATTERGRAM OF PAYOUT RATIO VS. SUBSEQUENT 10-YEAR REALEARNINGS GROWTH

21

FIGURE 3: DIVIDEND PAYING STOCKS OUTPERFORM NON-DIVIDEND PAYING STOCKS 22

FIGURE 4: LITERATURE REVIEW RESULTS ON DIVIDEND RELATED HYPOTHESISES 23

FIGURE 5: DIVIDEND PAYERS AND STOCK MARKET LIQUIDITY 25

FIGURE 6: SUMMARY OF RATIOS USED IN RESEARCH 34

FIGURE 7: NUMBER OF COMPANIES INCLUDED IN THE SAMPLE, HYPOTHESIS 1 35

FIGURE 8: 2-YEAR SUBSEQUENT EARNINGS GROWTH BY GROUPS 39

FIGURE 9: TRADE VOLUME, DIVIDEND PAYERS AND NON-DIVIDEND PAYERS 42

FIGURE 10: DIVIDEND PAYMENT BY GROUPS 42

FIGURE 11: AVERAGE DIVIDENDS BY GROUPS 45

FIGURE 12: DIVIDEND PAYMENT BY GROUPS, HYPOTHESIS 3 45

APPENDIX

APPENDIX 1: LIST OF COMPANIES INCLUDED IN THE STUDY 47

Aziz Mirzabekov

In this chapter empirical, practical and theoretical background of the chosen researchproblemoutlined and determined. The background of the research question will beresult main goal of the thesisquestion,

1.1

In 161661 the first dividends onpaying dividends on shares continues in our timesmajor studies andStatespublished in 1956. In his research he examined 28 US companies in the period from1947 to 1953 and identified the pattern according to which the studied companies spentrelatively constquestion which is still relevant in our times:the size, shapeby1961. Authors scrutinized the effects of dividend paymentdividend puzzle is the finance concept in which dividends do affectinvestors prefer dividend paying companiesviewtried to explain this puzzle as a result of uncertairelated matters

Even half a centuryfactors which determine the choice of parameters ofstochastic influencethesis tries to explain the effects of manager decisions on dividend policypoint the impact of dividend payment decisions oncapital structure

Dynamically developingfurther development, expansion and modernization of production, development of newtechnologies and products. In order to attract new investments companies shouldcontinue improving investment adividend policy plays a major role in achieving this goal. Withoutthere cannotwhere

Aziz Mirzabekov


1.1

In 161661 the first dividends onpaying dividends on shares continues in our timesmajor studies andStatespublished in 1956. In his research he examined 28 US companies in the period from1947 to 1953 and identified the pattern according to which the studied companies spentrelatively constquestion which is still relevant in our times:the size, shapeby Miller1961. Authors scrutinized the effects of dividend paymentdividend puzzle is the finance concept in which dividends do affectinvestors prefer dividend paying companiesviewtried to explain this puzzle as a result of uncertairelated matters


Dynamically developingfurther development, expansion and modernization of production, development of newtechnologies and products. In order to attract new investments companies shouldcontinue improving investment adividend policy plays a major role in achieving this goal. Withoutthere cannotwhere

Aziz Mirzabekov


1.1 Background

In 1613 the first joint1661 the first dividends onpaying dividends on shares continues in our timesmajor studies andStates. Intensive apublished in 1956. In his research he examined 28 US companies in the period from1947 to 1953 and identified the pattern according to which the studied companies spentrelatively constquestion which is still relevant in our times:the size, shape

Miller1961. Authors scrutinized the effects of dividend paymentdividend puzzle is the finance concept in which dividends do affectinvestors prefer dividend paying companiesview ittried to explain this puzzle as a result of uncertairelated matters


Dynamically developingfurther development, expansion and modernization of production, development of newtechnologies and products. In order to attract new investments companies shouldcontinue improving investment adividend policy plays a major role in achieving this goal. Withoutthere cannotwhere stable extra dividends paid

Aziz Mirzabekov

In this chapter empirical, practical and theoretical background of the chosen researchproblem woutlined and determined. The background of the research question will beresult main goal of the thesisquestion, limitations

Background

13 the first joint1661 the first dividends onpaying dividends on shares continues in our timesmajor studies and

Intensive apublished in 1956. In his research he examined 28 US companies in the period from1947 to 1953 and identified the pattern according to which the studied companies spentrelatively constquestion which is still relevant in our times:the size, shape

Miller-Modigliani as a result dividend puzzle was introduced and evolved in 19591961. Authors scrutinized the effects of dividend paymentdividend puzzle is the finance concept in which dividends do affectinvestors prefer dividend paying companies

it should not mattertried to explain this puzzle as a result of uncertairelated matters


Dynamically developingfurther development, expansion and modernization of production, development of newtechnologies and products. In order to attract new investments companies shouldcontinue improving investment adividend policy plays a major role in achieving this goal. Withoutthere cannot

stable extra dividends paid

Aziz Mirzabekov

In this chapter empirical, practical and theoretical background of the chosen researchwill be introduced. As well as gaps in understanding the problem will be

outlined and determined. The background of the research question will beresult main goal of the thesis

limitations

Background


Intensive apublished in 1956. In his research he examined 28 US companies in the period from1947 to 1953 and identified the pattern according to which the studied companies spentrelatively constquestion which is still relevant in our times:the size, shape

Modigliani as a result dividend puzzle was introduced and evolved in 19591961. Authors scrutinized the effects of dividend paymentdividend puzzle is the finance concept in which dividends do affectinvestors prefer dividend paying companies

should not mattertried to explain this puzzle as a result of uncertairelated matters


Dynamically developingfurther development, expansion and modernization of production, development of newtechnologies and products. In order to attract new investments companies shouldcontinue improving investment adividend policy plays a major role in achieving this goal. Withoutthere cannot be a reasonable investment policy

stable extra dividends paid

Aziz Mirzabekov

In this chapter empirical, practical and theoretical background of the chosen researchill be introduced. As well as gaps in understanding the problem will be


limitations

Background


Intensive apublished in 1956. In his research he examined 28 US companies in the period from1947 to 1953 and identified the pattern according to which the studied companies spentrelatively constant share of the profits to pay dividends.question which is still relevant in our times:the size, shape and timing of dividend payments?

Modigliani as a result dividend puzzle was introduced and evolved in 19591961. Authors scrutinized the effects of dividend paymentdividend puzzle is the finance concept in which dividends do affectinvestors prefer dividend paying companies

should not mattertried to explain this puzzle as a result of uncertairelated matters.


Dynamically developingfurther development, expansion and modernization of production, development of newtechnologies and products. In order to attract new investments companies shouldcontinue improving investment adividend policy plays a major role in achieving this goal. Without

be a reasonable investment policystable extra dividends paid

Aziz Mirzabekov



limitations

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Aziz Mirzabekov

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Aziz Mirzabekov



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Aziz Mirzabekov




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All important factors mentioned above determined the research question of the thesis.Thesis intends to describe the influence of dividend payments on other key elements of

mpany, for example, if high dividends harmful for future earnings orif dividend payments somehow determine the capital structure of the company.choice of the theme of this study was influenced by the increased interest in theproblems of formation an

In order to study the effects of dividend policyresults could differ for various industries,industry, and results Iconsidered as one of the world largest IT spending countries thus IT Market isinteresting to examine (Research

Information Technology sector remained as a source of steadyough recession period

Calahong, 2009,period without recessionary impact.


differences of the shares. Developbe conducted in close connection with the dividend policy.

research is tcompanys activities, dimensions, shape, nature and

can dividend payouts and future earnings be predicted ...322339/fulltext01.pdf · stock market...

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