The study makes use of the financial data on Pakistani listed firms for 2001-2008 to look at the objective behind distribution of cash dividends. Based on the analysis it is found that poorly performing firms listed on Karachi Stock Market (KSE) having larger portion of non-tradable shares pay cash dividends. Because the holders of non-tradable shares (directors and block-holders) do not/cannot realize capital gains from positive change in the price of their holdings. The study finds that cash dividend distribution behavior of the poorly-performing firms is subjected to what the directors and block-holders prefer. The result advocates the findings of Faccio, Lang and Young (2006), Chen, Fung and Leung (2007) regarding cash channeling hypothesis.
Key words: non-tradable shares; cash dividends; cash channeling hypothesis
Dividend policy for a firm means whether to pay or not pay; whether to pay in cash, in stocks or both in cash and stocks and how frequently to pay. Why do firms distribute cash dividends when they observe a decline in their earnings? Why not stock repurchases? Why not stock dividend? To look at this research issue, the research will evaluate the cash dividend distribution behavior of firms in light of different ownership structures having trading restrictions.
KSE is a developing market of the region with not a sound regulatory framework. There is a shortage of managerial talent in the firms listed on the market. So it is reasonable to say that as compare to firms listed on the developed markets of United States and Europe, the firms listed on KSE do not observe good corporate governance practices generally. Louis Cheng, Fung Leung (2004). Moreover, to protect shareholders from bad effect non-tradable shares held me directors and their spouses, financial institutions and external block-holders, good corporate governance is necessary.
This study includes only poorly-performing firms to reduce the signaling effects of cash dividends (John and Williams (1985); Miller and Rock (1985)) and will focus on the corporate governance effect through cash-channeling of dividend payment. Whenever the earnings of a firm fall down, the distribution of cash dividend does not serve to be long-term growth in the bottom line. The advantage of using poorly performing firms for the study will be to reduce and neutralize signaling effects of future earnings growth through cash dividend payment by well-performing firms (Benartzi, Michaely, and Thaler (1997) and DeAngelo, DeAngelo, and Skinner (1992)). Therefore, we will limit our sample to firms that have a decrease in earnings so as to have a new perspective on the distribution of cash dividend behaviors that have not been examined before.
Why do firms listed on Karachi Stock Market pay cash dividends when they have a decline in earnings? An interesting characteristic of the firms listed on Karachi stock Market is the existence of different types of...